Brexit Freeport Plan: Empty Promise Or Gateway For Tax Crime?

Brexit uncertaintiesNo. 10 argues the net result of these freeports will be “creating thousands of jobs"

European Views | In the first weeks of the United Kingdom’s official departure from the European Union, one of the most significant moves made by Boris Johnson’s government has been the launch of a “freeport” plan masterminded by Johnson’s handpicked Chancellor Rishi Sunak. Downing Street claims that its decision to create “up to ten new innovative Freeports” – special trade zones where goods can transit or be stored without having to pay taxes or customs – means “hubs of business and enterprise will be opened across the UK.”

Reflecting the Prime Minister’s usual tone when discussing Britain’s post-EU future, No. 10 argues the net result of these freeports will be “creating thousands of jobs, regenerating communities and turbocharging Britain’s post-Brexit growth.” On the other side of the Channel, however, lawmakers in Brussels and Paris know better. French foreign minister Jean-Yves Le Drian responded to the news by stating bluntly: “we are going to examine this announcement in terms of the vital stakes of fiscal transparency… and we will do it in concert with the European Commission.” As France’s top diplomat made clear: “we do not intend to watch a fiscal paradise emerge next to us.”

How Yves Bouvier’s freeport tarnished Jean-Claude Juncker’s exit

Freeports are a delicate subject for both the European Parliament and the European Commission. Almost exactly one year ago, the previous Parliament’s TAX3 committee culminated a yearlong investigation of financial crimes, tax evasion, and tax avoidance with a comprehensive report into the many loopholes undermining Europe’s move towards fiscal transparency. Freeports, and particularly the Luxembourg Freeport owned by Swiss art dealer Yves Bouvier, featured prominently in those deliberations, and the TAX3 committee’s final report – published a year ago this month and adopted by an overwhelming majority in the EP – recommended that the Commission “bring forward a proposal for the urgent phasing out of the system of freeports in the EU.”

While the report itself also called on the European Union to address a wide range of loopholes in areas pertaining corporate taxation, digital taxation, cross-border cooperation among tax authorities, and value-added tax (VAT), the subject of freeports ultimately generated the most controversy. Members of the TAX3 committee, and specifically German ALDE MEP Wolf Klinz, went public with their demands that Jean-Claude Juncker tackle the tax loopholes created by the Luxembourg Freeport, whose opening Juncker oversaw as prime minister of Luxembourg. Speaking through commissioner Pierre Moscovici, Juncker’s Commission rebuffed those claims with what Klinz described as “condescension and dismissal.”

A closer look at the Luxembourg Freeport and its CEO, Yves Bouvier, helps explain the level of public attention surrounding the facility. While freeports may be normally intended to facilitate the transit of commercial goods, Luxembourg is one of a number of facilities worldwide that have instead become highly secretive storage places for some of the world’s most valuable art. In Luxembourg, as well as in freeports such as Geneva, Singapore, and Monaco, wealthy patrons are able to store some of their most valuable possessions out of sight of tax authorities for years on end. As Austrian MEP Evelyn Regner said after a visit to  “Le Freeport” in Luxembourg: “[The owner] has basically got a black hole. It’s a real lack of transparency.”

Yves Bouvier, who was previously one of the largest tenants of the Geneva freeport, is the majority owner of the Luxembourg and Singapore freeports. Bouvier has been locked for years in a major dispute with former client Dmitry Rybolovlev, who claims the Swiss “Freeport King” defrauded him of a billion dollars over the course of 38 acquisitions. Those allegations shone a light on Bouvier and informed the TAX3 committee report’s criticism of the freeport model, in which “no one really knows exactly what is stored… as the inventory is not consistently tracked. Moreover, the beneficial owners of many of the goods are unknown.”

While the legal battle surrounding the claims of fraud remains ongoing, tax authorities in Switzerland have determined they may have been defrauded by Yves Bouvier’s transactions as well. In March 2017, the head of Switzerland’s Federal Department of Finance greenlit an investigation to determine whether Bouvier owned as much as $145 million in back taxes. Over the past several weeks, a series of explosive reports in Switzerland’s Heidi News have shed light on claims Bouvier allegedly attempted to use the services of a female associate and former escort to seduce a Swiss tax official in order to sabotage that investigation against him.

Remarkably, in spite of all the opprobrium directed against this freeport model by the European Parliament, Yves Bouvier could still open yet more facilities in other EU markets. Just weeks after leaving office, Heidi News also reports that former Maltese prime minister Joseph Muscat reached out to Bouvier to propose creating a Luxembourg-style freeport in Malta. While this was building off proposals mooted during his time in office, it is also raising the specter of yet another black mark on the island country’s reputation as an offshore tax haven within the EU.

Can Britain take a better approach?

The controversy between the EP and Juncker over the activities of the Luxembourg Freeport did not go unnoticed in the UK, where the prospect of post-Brexit freeports had already become a significant plank of pro-Leave economic proposals. Rishi Sunak has been arguing for British freeports since 2016, while both Boris Johnson and Jeremy Hunt endorsed the idea of creating free ports in Northern Ireland as they contended for leadership of the Conservative Party last year. The Labour Party has leveled harsh criticism at the proposals, with Shadow Chancellor John McDonnell saying the “super-rich” will use the facilities to “to hoard assets and avoid taxes while the rest of us feel the effects of under-funded public services.”

Does this mean that London is intentionally going in the opposite direction of Brussels, marking its independence by opening financial loopholes just as the European Union gets serious about closing them? Despite the Prime Minister’s bluster, the official “Freeports Consultation” presented to the British Parliament does provide some hope that the post-Brexit UK has retained some of the lessons learned from the intense debate in Brussels. After assuring MPs that the UK’s Border Force was studying other freeports to learn how to prevent illicit activity, the document does state for the record that the Government does not intend to issue any of the up to ten freeport designations it plans on making “for the purposes of High Value Luxury Storage.”

If Downing Street does hold to that commitment, it will only need to deal with the other economic issues posed by freeports. Trade experts warn that the new free zones, instead of stimulating new investment and economic activity, may just cause existing activity to relocate in order to take advantage of the tax and regulatory incentives.

And then, of course, there is also the broader and highly inconvenient truth that the British government is looking to freeports as a solution to reduce friction in trade just days after leaving the European Union – which did more to reduce trade barriers for British goods and businesses than any freeport ever could.

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The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.