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Luxury Freeports and Crime: What are the Risks?

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By Kenza Tahri

Since Boris Johnson’s 2019 inaugural speech citing freeports as a central component of the now-former prime minister’s post-Brexit economic revitalization policy[1], freeports have spurred considerable contention not only on the grounds of their economic results but, centrally, in light of evidence that these special economic zones can facilitate numerous kinds of criminal activity. The Financial Action Task Force (FATF) has signaled freeports as “a money laundering and terrorist financing threat”[2], the World Customs Organization (WCO) has published research on the dangers of freeports’ “low-level customs involvement”[3], and the European Parliament has even called for the abolishment of freeports due to their criminal vulnerability[4]. Tellingly, the UK government’s consultation outcome regarding the freeports proposal included an entire section addressing the prevention of crime in freeports, specifically as these strategies target smuggling, circumvention, trafficking, money laundering, and tax evasion among others.[5] Following the big legal dispute between an art collector and “Freeport King”, Yves Bouvier, and a Russian oligarch, Dmitry Rybolovlev, (see about the case here) over duties of agents and transparency in the art market transactions, interest in freeports and the art market dealings has been on a rise.[6] So, what is a freeport, what makes them so attractive to criminals, and what role does art play in this story?

What’s the Connection between Art and (Luxury) Freeports?

Freeports, or bonded warehouses if privately owned, were initially created on the basis of a tax exemption intended to avoid double taxation on items “in transit”[7]. In a globalized economy characterized by just-in-time manufacturing, freeports are central to facilitating trade for businesses and leading manufacturers around the globe.[8] Thus, for example, an Australian manufactured machine part destined to England, for instance, could travel untaxed between any of its stops along its journey until reaching this ultimate destination. Freeports would serve as special warehouses that would temporarily store this machine part during its stopovers around the world while awaiting reshipment.

Yet, lawyers and investors soon began exploiting another legal dimension of the tax exemption: that the amount of time an article could be “in transit” was unlimited.[9] Thus, is born the “luxury freeport”, a tax-exempted warehouse where substitute assets like art, precious raw materials, jewelry, and vintage alcohol can be stored and traded indefinitely while appreciating in value.[10] Permanent storage facilities like the Geneva, Luxembourg, and Singapore freeports opened in 2013, 2014, and 2010 respectively come to mind: highly securitized buildings with ideal humidity, temperature, and climate conditions individualized to each assets’ needs.[11] As art becomes an increasingly popular investment in a balanced portfolio,[12] and as more speculative buyers enter the market, artworks will continue to be traded without ever leaving their freeports by owners who have little interest in the art itself. The Geneva freeport is often referred to as the world’s largest art collection that no one can see, housing over an estimated million artworks according to Marie Maertens including Picasso’s, Da Vinci’s, and many more.[13] Even the MOMA’s infamously massive collection of 200,000 artworks,[14] pales in comparison to Geneva Freeport’s hidden “gallery”[15].

Tax Avoidance and Evasion

Freeports’ exemption from most kinds of taxation including duties, indirect taxes such as VAT, and user tax can facilitate aggressive tax planning and tax evasion.[16] Centrally, many freeports offer their clients a high degree of secrecy due to simplified import declarations which can easily obscure the ultimate beneficial owner of the asset.[17] It is often accepted that the declared owners of items stored in freeports are shell and letterbox companies i.e. companies registered in tax advantaged areas with little to no economic presence[18] set up for the precise goal of maximizing tax reliefs on a particular transaction. If the shell company listed as owning an item is then formally controlled by a foundation or trust with a confidential board of trustees, the ultimate beneficial owner of the stored article can easily evade wealth tax on the asset as well.[19] In 2011, Sotheby’s got into trouble in connection with Nazi-looted artwork stored by the Nahmad family precisely because the Nahmad’s were operating under the guise of a shell company, the International Arts Centre, that is reported to have nearly 5,000 works in the Geneva Freeport.[20]Not only this, but in almost every freeport, it is permitted for someone to bring goods on behalf of another person, which adds another layer of protection for individuals attempting to conceal assets and transactions from tax authorities.[21] However, in 2015 Switzerland did introduce tougher legislation on freeports requiring, among other limitations, owner identities to be declared.[22] Art and other collectibles are particularly susceptible to tax evasion risks because the subjectivity of an artwork’s value makes it easy to over or under invoice the paid amount for it in tax declarations.[23] Ultimately, items stored in freeports are, in principle, subject to tax once they leave, and operators often use this principle to disregard claims that freeports facilitate tax evasion. Nevertheless, it remains clear that loopholes in the system aren’t difficult to exploit, especially given that these luxury freeports are ideal for permanent rather than temporary storage.

Money Laundering

Many of the same risks that make freeports vulnerable to tax fraud – like the high presence of shell companies as art market participants as well as freeports’ relaxed oversight and high level of secrecy – render them equally vulnerable to money laundering (ML). Specifically, freeports are useful to a kind of ML scheme referred to as trade-based money laundering (TBML) based on the “ability of the perpetrator of the crime to distance themselves with the illicit proceeds through the creation of a network of legal entities around the world linked to financial institutions […] which are difficult if not impossible for law enforcement to follow,” according to the FATF and the Organization of Economic Cooperation and Development (OECD).[24] By buying artworks with a shell company’s illegal funds, criminal actors can easily trade high value artworks between multiple letterbox corporations they own, further distancing themselves from the initial purchase. In effect, ML risks in freeports are directly correlated to the ML risk in the substitute assets market writ large,[25] specifically in the art market.[26] Finally, ML is particularly pernicious as a terrorist and weapons of mass destructions financing threat.[27] A 2010 Case Study by the FATF and OECD reviews how a key suspect in the terrorist group Euskadi Ta Askatasuna (ETA) was able to successfully launder illicit proceeds using a bank located in a Free Trade Zone, the same zones which allow Freeports to be operational.[28]

Illicit Trafficking: Two Case Studies

Freeports can also be extremely attractive to perpetrators of illicit trafficking due to their high level of secrecy, which can keep unlawfully owned art and its owners easily hidden. Such is the high-profile case of an allegedly Nazi looted Modigliani leaked to have been stored in Geneva Freeport.[29] Maestracci v. Helly Nahmad Gallery Inc. is the legal battle over ownership of Modigliani’s Seated Man with a Cane (1918) currently valued at around 25 million USD.[30] The painting which had first been shown at the 1930 Venice Biennale was owned by French Jewish owner Oscar Stettiner before his gallery was seized by a Nazi-appointed administrator who sold much of the collection’s inventory.[31] The most recent sale of the painting occurred at a 1996 Christie’s auction, where it was purchased by an organization named the International Art Centre (“IAC”) for 3.2 million USD, disappearing shortly after.[32] In 2011, Philippe Maestracci, a descendant of the original Jewish owner Oscar Stettiner, first sued the Helly Nahmad Gallery which has long been believed to own the painting despite not being the listed owners.[33] The suspect, owner of the Helly Nahmad Gallery and art world billionaire David Nahmad, denied ownership claims to the artwork and links to the IAC numerous times in the lawsuit, until the Panama papers leaked that he and his family indeed controlled the IAC which turned out to be a mere shell corporation hiding Seated Man with a Cane in Geneva Freeport.[34]

Another famous case revolves around illicitly excavated and acquired antiquities held in Geneva Freeport by dealer Giacomo Medici.[35] Beginning in Rome in the 1960s, Medici had secured a prominent spot in the antiquities scene, his career peaking in the 1980s and 1990s during which it was rumored that Medici and his Swiss business partner, Christian Boursaud, were responsible for more antique consignments to Sotheby’s London any other dealers.[36] Nevertheless, his career was marked by a scandalous reputation as Medici was caught falsifying provenance for looted artifacts.[37] A slew of bad publicity prevented Medici from being able to deal under his own identity, and thus, he began selling works through front shell companies, creating a triangulating system wherein he would buy and sell artworks between these corporations to obscure his connections to the artifacts.[38] After acquiring a looted sarcophagus from one of Medici’s front companies, Editions Services, Sotheby’s notified the Italian gendarmerie, which soon raided Medici’s collection on the fourth floor of Geneva Freeport.[39] The findings: 3,800 stolen artifacts, more than 4,000 documentary photographs, and 35,000 sheets of provenance information. In 2003, Medici was sentenced to 10 years and a 10 million euro fine for illegal export and receipt of stolen goods, and conspiracy to traffic.[40]

New Regulations

Upon a plethora of recurring financial scandals such as the Panama Papers leak, governments have begun to introduce new regulations to fight crime in freeports. Most notably, the fifth Anti-Money Laundering Directive (AMLD5) in the United Kingdom tightens regulations on freeports, explicitly including freeport operators as ‘non-financial obliged entities’ tied to the same due diligence requirements as other art market actors under the directive.[41] With the current situation of unreliable owner records in freeports,[42] these regulations will force increased transparency and prevent art buyers from shielding themselves behind offshore trusts and shells.

In an exceptional situation, the Luxembourg freeport had already begun to incorporate anti-money laundering measures five years before its obligation to do so upon an analysis of the ML risks at the freeport.[43] This avant-garde Luxembourgish legislation has put the due diligence requirements of its freeport operators on par with those of notaries for example.[44] The new regulation also obligates Luxembourg Freeport operators to notify the financial intelligence unit (la cellule de renseignement financier) if they are solicited by a suspicious actor or transaction proposal.[45]

Conclusion

In conclusion, the same tax reliefs and other incentives that make freeports attractive to legitimate business simultaneously facilitate various crimes including tax evasion, money laundering, illicit trafficking and others not covered in this article.

At the same time, the freeports business is flourishing like never before as demand for space soars.[46] While the Geneva freeport remains the most famous freeport for the storage of art in particular, there are at least 25 more art specializing freeports in Switzerland alone[47] and hundreds more across the globe with the total free trade zone business grossing a global total turnover in the billions.[48]

Clearly, the success of freeports hinges on their opacity and subsequent criminal vulnerability. If governments truly intend to end legal tax avoidance and crime in luxury freeports, precisely designed to relieve tax burdens for their clients, the solution will likely work in detriment to freeports’ profits.

About the Author: Kenza Tahri is in the final year of her B.Arts degree in Joint Honors Art History and International Development at McGill University in Montreal.

Additional Readings:

  1. Monbiot, George, Welcome to the Freeport, Where Turbocapitalism Tramples Over British Democracy, THE GUARDIAN (Aug. 17, 2022) https://www.theguardian.com/commentisfree/2022/aug/17/freeport-turbocapitalism-tramples-over-british-democracy-teesside-plymouth
  2. UK Prime Minister’s Office, 10 Downing Speech, Boris Johnson’s first speech as Prime Minister: 24 July 2019 (2019) https://www.gov.uk/government/speeches/boris-johnsons-first-speech-as-prime-minister-24-july-2019 ↑
  3. THE FINANCIAL ACTION TASK FORCE (FATF), Money Laundering vulnerabilities of Free Trade Zones (Copyright FATF/OECD) (2010), https://www.fatf-gafi.org/media/fatf/documents/reports/ML%20vulnerabilities%20of%20Free%20Trade%20Zones.pdf ↑
  4. Anton Moiseienko et al., Briefing Paper: Free Ports, Not Safe Havens Preventing Crime in the UK’s Future Freeports (Royal United Services Institute for Defense and Security Studies (RUSI) (2020), https://www.jstor.org/stable/resrep40399 ↑
  5. Ron Kover, Ron, “Money laundering and tax evasion risks in free ports: Study at the request of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) (European Parliamentary Research Service (EPRS), European Union) (2018),” https://www.europarl.europa.eu/cmsdata/155721/EPRS_STUD_627114_Money%20laundering-FINAL.pdf ↑
  6. UK Department for International Trade and HM Treasury, Consultation outcome: Freeports consultation: boosting trade, jobs and investment across the UK (Crown Copyright) (2020), https://www.gov.uk/government/consultations/freeports-consultation/freeports-consultation ↑
  7. Crispino, Jacqueline, Book Review: “The Bouvier Affair: A True Story” (2019), https://itsartlaw.org/2019/09/25/book-review-the-bouvier-affair/ (last visited Aug. 31, 2022). ↑
  8. Murphy, Richard, “The dark reality behind the Tories’ freeport plans Left Foot Forward: Leading the UK’s progressive debate”, https://leftfootforward.org/2019/08/richard-murphy-the-dark-reality-behind-the-tories-freeport-plans/ ↑
  9. FATF, supra note 2. ↑
  10. Swiss Freeports and the Invincible Tax Evader Fee.org, https://fee.org/articles/swiss-freeports-and-the-invincible-tax-evader/ ↑
  11. Id. ↑

  12. The Purpose of Geneva Freeport and Other Facilities Storing Great Works of Art | Widewalls Widewalls, https://www.widewalls.ch/magazine/geneva-freeport-art-storage-freeports ↑

  13. Ron Kover, Money laundering and tax evasion risks in free ports: Study at the request of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3) (European Parliamentary Research Service (EPRS), European Union) (2018), https://www.europarl.europa.eu/cmsdata/155721/EPRS_STUD_627114_Money%20laundering-FINAL.pdf ↑

  14. Marie Maertens, Dans le secret des Ports Francs Connaissance des Arts (2013), https://www.connaissancedesarts.com/marche-art/dans-le-secret-des-ports-francs-11136/. ↑

  15. Geneva Free Port: The World’s Most Secretive Art Warehouse TheCollector.Com, https://www.thecollector.com/geneva-free-port-the-worlds-most-secretive-art-warehouse/ ↑
  16. Id. ↑
  17. Anton Moiseienko et al., Briefing Paper: Free Ports, Not Safe Havens Preventing Crime in the UK’s Future Freeports (Royal United Services Institute for Defence and Security Studies (RUSI) (2020), https://www.jstor.org/stable/resrep40399 ↑
  18. Jeppe Kofod & Luděk Niedermayer, REPORT- A8-0170/2019 on financial crimes, tax evasion and tax avoidance (Special Committee on financial crimes, tax evasion and tax avoidance | European Parliament) (2019), https://www.europarl.europa.eu/doceo/document/A-8-2019-0170_EN.html#_section4 ↑
  19. Kover, Ron, “Money laundering and tax evasion risks in free ports: Study at the request of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3)” (European Parliamentary Research Service (EPRS), European Union) (2018), https://www.europarl.europa.eu/cmsdata/155721/EPRS_STUD_627114_Money%20laundering-FINAL.pdf ↑
  20. Id. ↑
  21. See, Felch J. and R. Frammolino, Chasing Aphrodite : The Hunt for Looted Antiquities at the World’s Richest Museum (Boston: Houghton Mifflin Harcourt, 2011) and Roth, Monika, Kunst Und Geld – Geld Und Kunst Schattenseiten Und Grauzonen Des Kunstmarkts (Bern: Stämpfli Verlag, 2020), p. 230. ↑
  22. Kover, supra note 17. ↑
  23. Neuendorf, Henri, “Switzerland Tightens Freeport Regulations,” Artnet News (Nov. 19, 2015), https://news.artnet.com/market/switzerland-freeport-regulations-367361 (meaning “The six-month storage cap imposed by the Swiss government will likely have the greatest impact on the art market. Equally significant is the requirement to reveal the identities of the owners of goods coming in to Swiss freeports and the identities of buyers of goods going out. The days of collectors hiding their prized artworks from tax authorities could be numbered.

    Furthermore, the black market trade in illicit antiquities and stolen artworks will be significantly impacted by the requirement to reveal the contents of the crates going in and out of the duty-free warehouses.” ↑

  24. Kofod & Niedermayer, supra note 16 ↑

  25. FATF, supra note 2. ↑

  26. Kofod & Niedermayer, supra note 16 ↑
  27. ​​Poppy Kemp, Focusing on the Anti-Money Laundering regulations for the art market participants in the UK – Center for Art Law, CENTER FOR ART LAW, https://itsartlaw.org/2022/07/26/focusing-with-the-anti-money-laundering-regulations-for-the-art-market-participants-in-the-uk/ ↑
  28. FATF, supra note 2. ↑

  29. Id. ↑

  30. Swiss authorities reportedly seize Modigliani painting after Panama Papers revelation The Art Newspaper – International art news and events, https://www.theartnewspaper.com/2016/04/11/swiss-authorities-reportedly-seize-modigliani-painting-after-panama-papers-revelation ↑
  31. Case Review: Maestracci v. Helly Nahmad Gallery Inc. (2014) – Center for Art Law Center for Art Law, https://itsartlaw.org/2017/06/12/case-review-maestracci-v-helly-nahmad-gallery-inc-2014/ ↑

  32. Id. ↑

  33. Id. ↑

  34. Id. ↑

  35. Id. ↑

  36. Closing in on the archaeological underworld SWI, swissinfo.ch, https://www.swissinfo.ch/eng/free-port-problem_closing-in-on-the-archaeological-underworld/33088854 ↑
  37. Giacomo Medici « Trafficking Culture Traffickingculture.org, https://traffickingculture.org/encyclopedia/case-studies/giacomo-medici/ ↑

  38. Id. ↑

  39. Id. ↑

  40. Id. ↑

  41. Id. ↑

  42. Kover, supra note 17. ↑

  43. Anton Moiseienko et al., Briefing Paper: Free Ports, Not Safe Havens Preventing Crime in the UK’s Future Freeports (Royal United Services Institute for Defence and Security Studies (RUSI) (2020), https://www.jstor.org/stable/resrep40399 ↑

  44. LE FREEPORT Luxembourg, Lyonandturnbull.com, https://www.lyonandturnbull.com/news/article/le-freeport–luxembourg/ ↑
  45. Id. ↑
  46. Id. ↑
  47. Swiss Freeports and the Invincible Tax Evader, Fee.org, https://fee.org/articles/swiss-freeports-and-the-invincible-tax-evader/ ↑
  48. Kover, supra note 17. ↑
  49. FATF, supra note 2. ↑







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