Free Trade Zones: A Driver For Illicit Trade

Free trade zones have a long and cherished role in world trade, dating back to at least early 1700s. They provide numerous benefits to business and countries. However, lightly regulated FTZ are also attractive to parties engaged in illegal and criminal activities, such as a trade in counterfeit and pirated products or smuggling and money laundering, as these zones offer a relatively safe environment with both good infrastructure and limited oversight.

Across the world, there are around 3,500 FTZs that generate over $500 billion in trade-related added value, besides employing around 66 million people. These places have attracted multinational companies and businesses because of their ideal physical location, liberal and lenient regulations, and specialised infrastructure the combination of which brings a multitude of advantages for both host countries and businesses.

But this glossy picture skilfully masquerades the dark side of FTZs which facilitates an environment for people engaged in criminal activities. Minimum customs controls and significantly light regulations employed at FTZs allow people to carry out their operations with impunity.

Evolution in Time: From Free Ports to Free Trade Zones

For hundreds of years, governments have sought ways to facilitate international trade in their ports. The earliest mechanisms were called free ports which were the areas designated for commercial vessels destined for re-export with custom duties excemptions. These practices are still going on. But the overall operations of free trade zones have been completely changed using different business models such as: Free Trade Zones, Export Processing Zones, Special Economic Zones, and Industrial Zones

These zones allow duty-free imports of raw material for export production. Firms in these zones enjoy long-term tax incentives so that they can increase their output. While these zones are also set up to re-export the goods produced, some countries allow some of the zones’ output to be sold domestically.

The popularity, and wide acceptance, of FTZs, is mainly because of their incentives. They act as a one-stop shop for investors and traders who don’t have to go through multiple steps to acquire permits or investment applications or other related documents. This makes it easier for both domestic and foreign investors to establish their business units in a timely manner.

One of the most famous free zones was set up at Shenzen, in China, in 1979. Today, several hundred free zones have been operating across the world, providing a good opportunity for developing countries, especially, to have marked economic growth.

Benefits from Free Trade Zones

The popularity of FTZs is mainly due to the fact that it provides numerous benefits to host countries. These zones play a vital role in creating employment opportunities, especially in smaller countries. The minimum wage and other working conditions are better in these zones as compared to what an employee will get outside this special area. In addition, FTZs provide safe zones to foreign companies that hesitate to operate in the host country because of its political and security environment. This way, the host country can get access to the much-needed FDIs for its growth. These zones can also become the test labs for governments to assess the implications of different rules and regulations and then implement them at the national level. Finally, through a large-scale production, the country will also be able to diversify its exports and enjoy their benefits.

FTZs are also a perfect choice for businesses as well. First, the cost of relocating to the FTZ is not high. In some cases, it is lower than the cost required to set up the industry in the host country’s outside the FTZ territory. Depending on the zone they decide to settle in, they can save a considerable amount of money in customs duties and income taxes. They will also have a less authoritative environment to carry out their business activities. Also, since they will not have any restrictions on corporate activities, they can ship their goods to a variety of markets.

Abused by criminals

The pointers that make FTZs attractive for legit businesses are exactly what drives people with mal-intentions to abuse these spaces. FTZs have little to no restrictions and very minute supervision. Besides engaging in environmental abuses, and in some cases, poor labor practices, illicit businesses often used the space to launder money and trade counterfeit products and narcotics.

The Financial Action Task Force (FATF) in 2010 carried out a detailed analysis of the working of FTZs and found that these places had inadequate safeguards against terrorist financing and money laundering. This lack of vigilance is also the haven for counterfeiting. For a counterfeiter, FTZs are low-cost territories with tens of industries that can provide all kind of services from relabelling to repackaging.

This is why FTZs are one of the favorite zones of all counterfeiters. This sufficient evidence is enough to highlight the fact that FTZs are becoming gateways for the transnational shipping of illicit products. To quantify this claim here’s a fact: according to the OECD (Organisation for Economic Co-operation and Development) and EUIPO (European Union Intellectual Property Office) a new FTZ is linked with a 5.9% increase in the value of counterfeit exports.

Recommendations to Improve Transparency in Free Trade Zones

After thorough analysis and taking notice of the unlawful activities that being carried out through FTZs, the OECD, through its task force on countering illicit trade, has drafted a set of guidelines to enhance the transparency of FTZs. Their recommendations include:

1. Customs Access: Provide unconditional access to the customs and law enforcement agencies of the jurisdiction where they are established to carry-out unobstructed, ex officio enforcement checks of operators in support of investigations of violations of applicable law.

2. Access to Information: Ensure that economic operators active in the FTZ are required to grant access to their detailed digital records upon request of the FTZ authority, the customs authorities or any other competent public authority in the jurisdiction where the zone is established. FTZ Administrations should appoint a dedicated point of contact with the necessary skills and resources to respond effectively to such requests for information from public authorities, and to lead due diligence and compliance verifications on companies and persons operating within FTZ.

3. Information Exchange: Encourage international cooperation in the exchange of law enforcement information (financial and administrative) and consult with appropriate authorities and affected industries in investigations and other legal proceedings concerning specific cases of misuse of FTZ related to illicit trade.

4. Record Keeping: Ensure that economic operators active in the FTZ maintain detailed digital records of all shipments of goods entering and leaving the zone, as well as all goods and services produced within it, sufficient to know what is inside the zone at any given time.

5. Payments: Deter cash payments for any commercial or financial transaction of the economic operators active in the FTZ occurring inside or originating from the FTZ, and for large cash transactions, document the details and report to the customs authority.

6. Awareness: Promote awareness amongst the business community including all relevant stakeholders, from shipping lines to logistic companies, shipping agents, custom brokers and freight forwarders. (e.g. major intermediaries including shipping agents, freight forwarders, customs brokers and logistics companies) to understand the major risks related to FTZ.

7. Public-Private Partnerships: reinforcing awareness efforts to encourage the business community that makes use of FTZs, or that finances operators within FTZ, to refrain from doing business in FTZ that are not compliant with these recommendations.

Striking the Balance

The current scenario depicts a dismal picture and it looks as if the FTZs that were meant to increase global trade has ended up facilitating unlawful activities. To achieve what was intended for FTZs, there must be a balance between incentivizing economic growth and maintaining jurisdictional, border and Customs controls that prevent dishonest and harmful practices. Overregulation stifles business development, growth and profitability with adequate and proper regulation promotes it by creating a predictable environment and by discuroaging unfair and predatory acts.



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Hernan Albamonte

Passionate about Latin American politics and int. geopolitics, with solid experience in anti-illicit trade strategies, public affairs and communications.