Free Trade Areas (FTAs) have a long established role in world trade, dating back to at least the early 1700s. They offer many benefits to businesses and countries. However, lightly regulated free zones – of which there are many – are also attractive to parties engaged in illegal and criminal activities. They provide a relatively secure environment with both good infrastructure and limited surveillance, allowing the trade in counterfeit and pirated goods, smuggling and money laundering.

Globally, there are approximately 3,500 free zones which generate more than $ 500 billion in trade-related added value and employ approximately 66 million people. These areas have attracted multinational companies due to their ideal physical location, reduced red tape and specialized infrastructure – thus offering multiple benefits to both host countries and businesses.

But this brilliant image skillfully masks the dark side of free zones, which facilitate an almost perfect environment for criminal activity. The minimal customs controls and considerably reduced surveillance employed in free zones allow criminals to conduct their operations without fear.

Evolution over time: from free ports to free zones

For hundreds of years, governments have searched for ways to facilitate international trade in their ports. The first mechanisms were called free ports, which were designated areas for commercial vessels destined for re-export with exemption from customs duties. These practices are still going on today, but the overall operations of free trade zones have been completely altered using different business models such as free zones, export processing zones, special economic zones and industrial zones. .

These zones allow duty-free imports of raw materials for export production. Companies in these areas benefit from long-term tax incentives that can increase their production. If these zones are also set up to re-export the goods produced, some countries allow the sale of part of the production of the zones on the domestic market.

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

Today, several hundred free zones operate in developing countries around the world, which offers them a good opportunity to experience marked economic growth.

Benefits of free trade zones

These areas play a vital role in creating jobs with better wages and working conditions compared to other jobs, especially in smaller countries. They also attract foreign companies who are reluctant to operate in the host country, due to the political and security environment, providing a safe and designated area free of conflict. In this way, the host country can have access to the foreign direct investments essential for its growth. These areas can also become testing laboratories for governments to assess the implications of different rules and regulations before implementing them at the national level. Finally, thanks to large-scale production, countries are able to diversify their exports and reap the benefits.

Free zones are also a popular choice for businesses. First, the cost of moving to a free zone is not high. In some cases, it is lower than the cost necessary to set up the industry outside the territory of the free zone in the same host country. Depending on the area in which a business decides to locate, it can save considerable amounts of customs duties and income taxes. In addition, a business will also have a less authoritarian environment to conduct operations indoors. In addition, since it is free from restrictions on the activities of the company, a company operating in a free zone can ship its goods to a variety of markets.

Abused by criminals

The same aspects that make free zones attractive to legitimate businesses also lead criminals to abuse these zones. In 2010, the Financial Action Task Force (FATF) found that free zones did not have adequate safeguards against terrorist financing and money laundering.

Due to few or no restrictions and minimal oversight, illicit companies often use free zones to launder money and trade counterfeit goods and narcotics. Relaxed surveillance in free zones allows for counterfeiting operations as they are shipped to low cost territories with many support industries on hand that can provide essential services from relabelling to repackaging and more.

Free zones are also becoming gateways for the transnational shipment of illicit products. According to the Organization for Economic Co-operation and Development (OECD) and the European Union Intellectual Property Office (EUIPO), each new free zone results in a 5.9% increase in the value of counterfeit exports.

Recommendations for improving transparency in free trade areas

The OECD Task Force on Combating Illicit Trade has drafted a set of guidelines to improve the transparency of free zones.

His recommendations include:

  1. Customs access:Provide unconditional access to customs and law enforcement agencies in the jurisdiction in which they are established to carry out ex officio checks without obstruction of operators in support of investigations into violations of applicable law.
  2. Access to information:Ensure that economic operators active in the free zone are required to grant access to their detailed digital recordings at the request of the free zone authority, customs authorities or any other competent public authority within the jurisdiction where the zone is established. Free zone administrations should designate a dedicated point of contact with the necessary skills and resources to respond effectively to such requests for information from public authorities and to conduct due diligence and compliance checks on companies and individuals operating in free zones.
  3. Exchange of information: Encourage international cooperation in the exchange of information on law enforcement (financial and administrative) and consult with relevant authorities and relevant industries in investigations and other legal proceedings regarding specific cases of use abuse of free zones linked to illicit trade.
  4. Record keeping:Ensure that economic operators active in the free zone maintain detailed digital records of all shipments of goods entering and leaving the zone, as well as all goods and services produced in the zone, sufficient to know what is happening found inside the area at one point.
  5. Payments:Discourage cash payments for any commercial or financial transaction by economic operators active in the free zone occurring within or from the free zone, and for large cash transactions document the details and report them to the customs authority .
  6. Consciousness:Promote awareness among the business community, including all relevant stakeholders, from shipping companies to logistics companies, shipping agents, customs brokers and freight forwarders. (for example, major intermediaries, including shipping agents, freight forwarders, customs brokers and logistics companies) to understand the major risks associated with free zones.
  7. Public-private partnerships:strengthen awareness-raising efforts to encourage the business community that uses free zones, or finances operators within free zones, to refrain from doing business in free zones that do not comply with these recommendations.

Find balance

Today, free zones are too often catalysts for illegal activity, rather than achieving their intended goal of increasing world trade. A balance must be struck between trade facilitation, growth and profitability, and the maintenance of judicial, border and customs controls that prevent dishonest and harmful practices. The implementation of measures such as those recommended by the OECD is a good place to start.

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