UK government’s freeports plan raises illicit trade fears

The UK government has promised that a plan to create eight freeports with low-tax zones will boost the post-Brexit economy, but has also sparked fears that they could allow flows of illicit trade into the country.

The designated free-trade zones (FTZs) – due to be created at Felixstowe/Harwich, Liverpool, Hull, Southampton, London Gateway, Plymouth, Teesside and East Midlands airport – will attract investment and job creation in some hard-hit areas of the country, say backers of the proposal, headed by Chancellor Rishi Sunak.

Goods can be landed, stored, handled, manufactured or reconfigured and re-exported at freeports without being subjected to customs tariffs. In addition, companies operating inside the sites will be offered temporary tax breaks, mostly lasting five years.

In the other camp are those who point to the experience with FTZs in other parts of the world in facilitating the trade in things like counterfeit goods and drug trafficking.

In 2018, a report by the Organisation for Economic Co-Operation and Development (OECD) and the EU Intellectual Property Office found that FTZs were linked to a 5.9 per cent rise in the value of counterfeit goods exported from hosting countries.

“These results confirm the anecdotal evidence pointing to the misuse of FTZs to conduct illicit trade, and they should be a prompt for future actions,” it concluded.

Since then, the EU has started to pay more attention to the activities of the 82 FTZs within its borders post-Brexit, launching new rules to crack down on what the European Commission says is a “high incidence of corruption, tax evasion, [and] criminal activity.”

The UK government reckons it can move ahead with its freeport plan without the risk of stimulating illicit trade, based in part on the findings of a report published last year by independent research body the Royal United Services Institute for Defence and Security Studies (RUSI).

That study acknowledges the evidence of criminal activity taking place at freeports around the world, saying it most commonly takes the form of counterfeit goods, drug trafficking, smuggling of untaxed goods or trade-based money laundering.

Those dangers may be mitigated, it says, through careful risk assessment at each geographical location where freeports are established, making sure crime prevention measures are proportional to those risks, and close vetting of businesses wishing to operate in them.

The freeport operators should also be regularly placed under scrutiny to assess their effectiveness in “discharging their security-related responsibilities,” and recommendations laid out by the OECD should also be adhered to.

The latter includes making sure the authorities have access to goods and related documentation, ideally digital, in addition to screening of businesses operating in the FTZ.

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In its notice for the tender for freeport operators published last November, the government says operators “must adhere to the OECD code of conduct…and the specific anti-illicit trade and security measures therein,” as well as the UK’s obligations on money laundering, terrorist funding and transparent transfer of funds.

RUSI’s research has shown that a lack of oversight in freeports provides opportunities “to manufacture, assemble, tranship, relabel and repackage illegal goods, including counterfeit medicines, electronics and fashion items.”

It also notes that ‘leakage’ is common, where goods are smuggled from a freeport into a host economy, thus avoiding relevant checks on health and safety standards, import taxes and VAT.

At least seven freeports operated in the UK between 1984 and 2012, when the government stopped renewing freeport licenses and switched its attention to “enterprise zones”, which also provide tax breaks in a bid to encourage industrial growth and community regeneration.

RUSI notes that the US does seem to be able to operate FTZs without increasing the risk of illicit trade, and says it is “reassuring that, for some parts of government at least, tackling economic crime remains top of the agenda.

Critics of the UK plan, including the opposition Labour Party, think there are other downsides as well.

One viewpoint is that rather than growing the economy, the freeports will simply move it around the country, benefitting deprived areas but providing no net gain overall.

Some also argue that the net result will be even worse – a reduction in tax contributions from industry to the treasury – with businesses elsewhere undercut by those operating within freeport. Others meanwhile are concerned that the rights of people working within the FTZs will be diluted.

“If the government thinks freeports are a magic bullet that will create hundreds of thousands of new jobs, bring billions of additional pounds to the Exchequer and radically transform an area it is mistaken,” according to Professor Catherine Barnard, deputy director of UK in a Changing Europe.

“That is not to say they should not be created but the thought they’re going to transform the wealth and prosperity of this country is simply untrue. It will help the regions that get a freeport – but possibly to the detriment of those that don’t.”