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Growth of free trade zones presents serious financial crime risks, report finds

Goods passing through free trade zones are a growing risk in terms of organised criminal activity, including the trafficking of banned goods, money laundering and sanctions evasion, researchers warn. 

The development of free trade zones has accelerated rapidly as countries look to boost commerce and economic development. Of the 3,500 areas in operation today, including free ports and special economic zones, nearly a third were established in the last five years. 

These schemes often attempt to boost trade, investment and employment by reducing costs or friction associated with moving goods through ports. Their direct trade-related value has been estimated at over US$500bn by the International Chamber of Commerce. 

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However, according to a report by the International Coalition Against Illicit Economies (ICAIE), a non-government organisation headquartered in Washington, DC, the regulation and supervision of free trade zones has “not kept pace with the rapidly changing global supply chains and ‘just-in-time’ delivery strategies”. 

As a result, criminals are able to exploit them as a means of abusing containerised shipping to move  illicit goods or funds across international borders, it says. 

“Kleptocrats, criminal organisations, terrorist groups, and their enablers exploit networked hubs of illicit trade centred on free trade zones, ports, and other logistical channels of transportation, communications, and trade,” says ICAIE executive director David Luna.

“This allows illicit networks – such as the Chinese triads, Mexican cartels, Primeiro Comando da Capital and Hezbollah – to profit from an array of criminal activities and corrupt institutions, drain resources for economic development, and compromise the integrity of supply chains.” 

One issue is that goods passing through free trade zones are often subject to “mutations”, such as assembly, manufacturing, processing, warehousing, repackaging and re-labelling. Those goods can then be imported into the free trade zone’s host country, or re-exported elsewhere. 

Groups involved in counterfeit and pirated goods use this process to “conceal the illicit provenance of their products”, ICAIE says. It adds that as much as 3.3% of international trade involves such goods. 

The same techniques can also be used to prevent authorities from detecting the movement of contraband, such as narcotics or illicit wildlife-related goods. 

“Through illicit commerce and the abuse of maritime containerized shipping, counterfeits, illicit goods and contraband are flooding markets across the region through free trade zones,” the report says. 

In the case of the US, such goods often originate in China or other parts of Asia, while Latin America serves as a “transit point” for bringing them to the US market. 

Another issue is that criminal groups increasingly control “critical strategic infrastructure” at ports and free trade zones, the report warns, citing several case studies. 

“Ports across the Americas continue to be exploited or remain vulnerable to transnational criminal organisations that corrupt officials and strategically use maritime shipping as logistical platforms to move tens of billions of dollars worth of narcotics, precursor chemicals, opioids, counterfeits… illegally-poached wildlife, illicitly-harvested timber and other goods,” it says. 

For example, ICAIE says cocaine cartels wield influence over several seaports in Mexico, such as Lázaro Cárdenas, Manzanillo and Veracruz, enabling the movement of drugs and precursor chemicals into the US and beyond. 

The Wakeds, a powerful and well-connected family that does business in Panama’s Colón Free Trade Zone – long identified as a hotspot for illicit goods trade – has also been accused by US government authorities of facilitating criminal activity including money laundering. 

At the same time, the report warns China’s Belt and Road Initiative has created opportunities for Chinese criminal organisations to carry out trade-based money laundering through free trade zones in the Americas. 

Chinese entities controlled all or some of 37 ports across Latin America in 2019, including nine in Mexico, four in Brazil and three in Argentina, according to an investigation by IBI Consultants, an investigative consultancy focusing on the Americas. 

“​​In many cases, local law enforcement is not authorised to inspect anything in the Chinese-controlled port areas, and in multiple cases from Puerto Cortes, Honduras to Iquique, Chile ship manifests have been found to contain false declarations of items imported,” ICAIE says. 

“For example, one manifest declared that a ship was carrying four tons of tomatoes from China to Honduras in an unrefrigerated hold, something both impossible and economically irrational. In that case the ship actually carried barrels of unidentified chemicals that were offloaded without passing through customs.” 

For banks involved in facilitating trade passing through high-risk free zones, whether by handling open account transactions or through documentary trade finance, experts have called for the uptake of digital document handling systems, data sharing mechanisms and automated due diligence tools. 

The ICAIE report does not make recommendations to the banking sector but makes several policy recommendations, including the establishment of public-private partnerships “to improve the quality and availability of data, market intelligence, and evidence-based research on illicit economies”. 

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