Freeports: Innovative trading hubs or centres for money laundering and tax evasion?

Abstract

Purpose This study aims to provide a critical overview of freeports’ trading operations and consider to what extent they may present a money-laundering and tax-evasion risk. Design/methodology/approach This study reviews the literature surrounding freeports and offers an up-to-date narrative of their potential money-laundering and tax-evasion activities. The paper relies on secondary data from published sources referencing peer-reviewed papers and “grey-literature” material relating to freeports, offshore finance and anti-money laundering control. Findings This study demonstrates the attractive trading advantages offered by freeports to enable enterprise and innovation. However, the study reveals that the secretive offshore space in which freeports operate also helps to obscure beneficial ownership and illicit trade-based practices that frustrate authorities’ efforts to trace laundered monies and recover government taxes. Despite freeports’ trade offerings, stronger regulation is needed to prevent them from being abused for money-laundering and tax-evasion purposes. Originality/value This study provides an important insight into the money-laundering and tax-evasion risks presented by freeports and, in doing so, advances the contemporary debate on illicit activities occurring through offshore jurisdictions.

Reexamining the anti-money-laundering framework: a legal critique and new approach to combating money laundering

“…Money laundering operates through both street-level and highend commercial realms. Street-level business settings are ideal conduits for illicit cash to enter the financial system (Gilmour and Ridley, 2015;Gilmour, 2016), whereas, high-end commercial realms, such as offshore overseas jurisdictions and freeports, offer favourable environments for the money launderer because of their strict secrecy, limited supervision and looser trading agendas (Gilmour, 2020(Gilmour, , 2022Webb, 2020). These locations may promote crime by stimulating demand for illicit goods and services and fuelling competitive commercial practices (Passas, 1999).…”

“…Although cash is still widely used and is especially in demand in less developed nations, cash transactions remain costly and less convenient for many than electronic payments. Many money-laundering schemes, like trade-based methods avoid transacting in cash and, instead, involve practices that manipulate value within trade invoices (Gilmour, 2022; Levi and Soudijn, 2020; Naheem, 2015b). However, considering the anonymous nature of cash transactions, it is worth noting that establishing an accurate volume of payments made using cash remains difficult (G4S, 2018).…”

“…For Teichmann (2020), AML efforts have largely been ineffective in targeting PEPs directly, because of inadequate legal frameworks that allow individuals to circumvent money-laundering sanctions. Instances include unsuccessful unexplained wealth orders and inconsistent customer due diligence compliance regimes (Gilmour, 2022; Moiseienko, 2022; Stephenson, 2017). However, according to Canestri (2009, p. 366), corrupt political wealth is primarily hidden through the legal entities controlled by PEPs.…”

“…Recent offshore banking scandals have revealed the offshore space in which money laundering can flourish. They have exposed the widespread and organised scale of the banking sector to facilitate money laundering and other illicit activities through offshore jurisdictions (Gilmour, 2020(Gilmour, , 2022. These offshore spaces arise through their favourable legal frameworks that welcome overseas investment and serve to loosen cross-border trade barriers inherent in other jurisdictions.…”

Financial crime scripting: Introducing a financial perspective to the Dutch cocaine trade

“…When it comes to TBML, the payment method and money laundering scheme is considered to be a growth industry for organized crime groups (Hataley, 2020). For example, organized crime groups can use the lack of regulatory supervision in freeports to manipulate trade invoices of shipments (Gilmour, 2021). These shipments of regular goods with an underestimated value can then be used to pay for a shipment of cocaine.…”