POLITICS & INSTITUTIONS - ECONOMY

Freeport accused of shadiness, says it surpasses EU rules



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Library picture: The Luxembourg Freeport is seen during a guided tour, 8 December 2016. Photo credit: Maison Moderne 

A German MEP has accused the Luxembourg Freeport of being “fertile ground for money laundering and tax evasion”. But the company has argued that Luxembourg law is much stricter than EU rules, that it offers security not secrecy, and that politics not policy is at play.

The Luxembourg Freeport is a secure storage facility at Findel airport where owners of high value objects--such as antiques, artworks, precious metals and wine--can warehouse their goods through an intermediary called a licensed freeport operator. Currently there are five such operators. They are tenants of the freeport, which runs the site. The facility provides high security and climate controlled storage units, with safety features such as advanced fire control and backup power supplies.

Luxembourg faces competition from larger freeports inside the EU, such as those in Barcelona and Shannon, and outside the bloc, like those in Geneva and Singapore.

Wolf Klinz made the allegations in a letter--seen by Delano--to Jean-Claude Juncker, the European Commission president and former Luxembourg prime minister. Klinz is a member of the FDP, part of the same ALDE bloc as Luxembourg’s DP party, and sits on the European Parliament’s Special Committee on Finance Crimes, Tax Evasion and Tax Avoidance.

“Le Freeport Luxembourg and similar free trade zone facilities in the EU have recently been the topic of intense discussions” on the committee, Klinz wrote in the letter to Juncker, dated 8 January. “This work by the committee has raised my concerns about this enterprise and its impact on the security and reputation of the union.”

Klinz wrote to Juncker because several prominent Luxembourg political figures are “involved” with the facility. Juncker was Luxembourg’s prime minister between 1995 and 2013. The MEP asked the commission chief to subject freeports to further EU anti money laundering measures.

Customs checks

In response to the letter, a spokesman for Luxembourg’s finance ministry told Delano on 8 February that:

“Firstly, Freeport operators are in Luxembourg subject to Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) obligations. They thus have to fully comply with the obligations defined by the national AML/CFT framework. 

 

“Secondly, customs authorities verify all goods entering and exiting the Freeport and have the power to perform checks on any items held at the Freeport at any time. 

 

“The claim that the Freeport has an air of ‘operative secrecy’ is thus not justified. 

 

“The measures furthermore illustrate the continuous and coordinated commitment of the Luxembourg authorities in the fight against money laundering and terrorist financing.”

Indeed the Luxembourg Freeport disputed the allegations during a two hour interview and site visit on 11 February. “Everything coming in is checked by customs and everything going out is checked by customs,” Philippe Dauvergne, CEO and member of the board, told Delano.

Administrative fines

Klinz outlined several examples of lack of oversight in his letter to Juncker. One case was that two “licensed freeport operators have received administrative fines for compliance issues relating to client-related AML functions,” from the Luxembourg tax agency AED.

Dauvergne said the fines were levied when the operators were relatively new and setting up their AML systems. They were “not 100% compliant” when they were checked, but that companies took corrective action and AED was satisfied during a follow-on inspection two weeks later.

The names of the companies that were fined have not been made public. An AED official told Delano on 12 February that: “the administration is not allowed to give information regarding concrete cases.”

Automatic information sharing

Klinz also complained to the European Commission president that:

“the tax collection and regulatory authorities in charge of supervising Le Freeport do not have systematic information sharing mechanisms with the licensed freeport operators on assets stored and traded at the facility, [so it] remains out of regular reach of the state authorities.”

“This exists nowhere,” said Dauvergne. “There’s no law in the EU [requiring this].” The freeport records all people and merchandise entering and exiting its facility and the “data is shared in real time” with the customs service, he told Delano. “Customs knows what’s in the warehouse and who owns it.” Licensed operators provide information to the AED and to the Luxembourg financial intelligence unit CRF “on request” and “with no delay”.

Judges can inspect the items stored at the site, but not citizens or political leaders. Dauvergne reckoned this was in keeping with European civil liberties: “Do you want your neighbour to be able to see inside your kitchen cupboards?” He added: “Transparency is not advertising.”

“Dubious” reputation

Klinz wrote that the committee had heard evidence about the:

“dubious and highly problematic reputational profiles of Le Freeport’s private shareholders, namely Mr Yves Bouvier, Mr Jean-Marc Peretti and Mr Oliver Thomas.”

Bouvier faces several civil and criminal cases. In particular, Dmitry Rybolovlev, a Russian art collector, has accused Bouvier of illicitly overcharging Rybolovlev in several transactions that Bouvier helped broker. Bouvier has denied the allegations and none of the cases have been adjudicated in court. According to press reports, prosecutors have dropped some investigations and Rybolovlev has himself come under scrutiny.

Dauvergne stated that he did not have firsthand knowledge of the cases, but said that Bouvier “seems to be the victim” in the affair. In the most prominently disputed transaction, Rybolovlev reportedly bought the painting “Salvator Mundi” from Bouvier for $127m in 2015. Rybolovlev reportedly sold the work for $450m in 2017, earning a $270m profit.

The three shareholders “have no input in day-to-day business. I’m in charge of that,” said Dauvergne, formerly a senior French customs officer. “I have never received any instructions from any shareholders to be less transparent.”

Inspector shortage

Klinz further criticised Luxembourg for lax supervision:

“To illustrate the discrepancy between the laws and their practical application, note, for example, that the financial intelligence unit (FIU) in Luxembourg [the CRF] is painfully understaffed--as well are other FIUs across the union--with only 16 personnel handling 20,000 suspicious activity reports filed by Le Freeport and other financial intermediaries in 2017 alone.”

As of this writing, the CRF had not returned Delano’s message seeking comment.

Occupancy rate

Klinz, citing an EU parliament study, noted that the freeport was not a resounding commercial success:

“the occupancy rate at Le Freeport Luxembourg has been lagging behind expectations, ever since Luxembourg decided, ‘to bring free port operators under national AML law just one year after the start of [the freeport’s] operations’.”

In 2015, Luxembourg’s parliament voted to make the freeport follow the same anti money laundering rules as banks. That’s a move praised by Dauvergne. Under EU transparency directives, free zones have to conduct checks on goods valued at €10,000 or more, he explained. But there’s no minimum value in the grand duchy. “100% checks is more effective than EU law”, Dauvergne argued. When a licensed operator stocks merchandise, they have to prove ultimate beneficial ownership “regardless of price; even €1”.

While the freeport did take a commercial hit, “today we’re increasing the [amount of] rented spaces”, Dauvergne said. He did not disclose its current occupancy rate nor the cost of renting space.

“To be AML compliant, we had to educate our final customers.” Now the facility is attracting new clients, such as asset managers, that are regulated entities themselves. So being subject to strict AML rules “is not a problem; it’s a good point.”

He added that freeport clients “pay the same income [and corporate] taxes as any company in Luxembourg. We needed time to educate” customers about this.

Bonded warehouses

Referring to Klinz, the freeport chief said: “He should look at the business of bonded warehouses [where there’s] 0% of AML controls”. While there certainly is a risk of money laundering in the art market, Dauvergne admitted, “we apply AML law”.

Prospective cheaters “don’t need Luxembourg for tax evasion. A bonded warehouse is better” for that, since they don’t take names. “Why risk being identified for tax evasion by coming to the Luxembourg Freeport? It would be totally stupid.”

Many potential clients, in Dauvergne’s view, prefer bonded warehouse sites in Paris or Köln because they don’t have to document ultimate beneficial ownership. Only 1% of the contents stored at big bonded warehouses in the EU face such checks, according to Dauvergne.

“When an MEP comes and asks, can we know who owns that, [we have to say] ‘no’, you’re not a judge,” Dauvergne said. But the companies will disclose information requested by a judge. “That’s not a problem for us and not a problem for our clients.”

Some politicians “don’t understand, we’re not in charge of merchandise, we’re in charge of systems. Like a harbour operator, we’re not in charge of each ship, we’re in charge of protecting security.”

Letter passed to Moscovici

Juncker wrote back to Klinz to acknowledge the letter on 23 January, saying that “I have taken note of its contents with attention.” Juncker said he had asked Pierre Moscovici, the European finance and tax commissioner, to look into the matter. A spokeswoman for the European Commission told Delano on 7 February that Moscovici was still examining the issue. The spokeswoman also stated:

“President Juncker has established a strong track record in helping to fight tax evasion and anti-money laundering across the European Union.”

She pointed to passage of the EU’s 4th and 5th anti money laundering directives, the closing of loopholes, and commission requirements that Malta improve its financial intelligence unit. “Under his leadership, the EU has become a world leader in international tax good governance,” the spokeswoman said.

Politics at play

“It’s funny when an MEP gives a lesson, because the law he signed is less strict than Luxembourg law,” Dauvergne stated this week.

“[Of course we can] improve the system…. but why am I speaking at the OECD about best practices if Luxembourg were so dirty?”

Dauvergne told Delano that the upcoming European elections are perhaps the real motivation behind the letter. “Some people don’t like Mr Juncker. Maybe there’s a link. I don’t know. [I feel like we’re the] sacrificial lamb.”