This article is more than 1 year old

This article is more than 1 year old

The Singapore-style tax-free zones favoured by Boris Johnson have been identified as a money-laundering threat by Brussels.

In a report on money laundering, the European commission named free ports for the first time as a concept “potentially vulnerable to money laundering or terrorism financing” in the European single market. “Golden passport” schemes promoted by some EU countries, professional football and private ATM machines were also put on the commission’s watch list, which totals 47 goods and services.

Free ports are “the new emerging threat”, said the European justice commissioner, Věra Jourová. “This is something we want to focus more on.”

Johnson, due to enter Number 10 on Wednesday, has said he wants “about six” tax-free zones in ports as part of his vision for the UK after Brexit. He has yet to spell out details on the pledge, including the size and location of the free ports.

What is a free port? All you need to know about the free-trade zones Read more

EU countries and their dependencies shelter more than 80 free ports, including one on the Isle of Man, a British crown dependency which is neither part of the EU nor the UK.

Quick guide What is a free port? Show Hide What is a free port? Free ports or zones are designated by the government as areas with little to no tax in order to encourage economic activity. While located geographically within a country, they essentially exist outside its borders for tax purposes. Companies operating within free ports can benefit from deferring the payment of taxes until their products are moved elsewhere, or can avoid them altogether if they bring in goods to store or manufacture on site before exporting them again. Are they are a new idea? Free ports have existed for centuries. The medieval Cinque Ports of southern England and the northern European Hanseatic League benefited from special privileges. Ireland created the Shannon free zone in 1959 to encourage activity at its struggling airport. Britain operated several free ports as recently as 2012, when the government stopped renewing their licences. Created in the 1980s, they included Birmingham, Belfast, Cardiff, Liverpool, Prestwick and Southampton. A free port remains in operation on the Isle of Man – a crown dependency and therefore not part of the EU or UK. Does the UK need to leave the EU to establish free ports? Within the EU, there are currently 82 free ports or zones in 21 EU member states, including historic free ports such as Copenhagen and Bremen. The UK has in recent years created 61 enterprise zones – which differ from free zones but still benefit from tax breaks – including the Ceramic Valley in Stoke-on-Trent and the Dorset innovation park. Obstacles could arise, however, if the government created free zones with particularly aggressive benefits equivalent to tax havens, which could be contested under EU law. Other nations could still object at the World Trade Organisation. Would free zones benefit the UK? Free zones could help avoid tariffs in case of a no-deal Brexit. The construction group Mace argues the creation of free ports could create 150,000 new jobs and add £9bn a year to the UK economy, while narrowing the north-south divide. However, academics at the UK Trade Policy Observatory, run by Sussex University and the Chatham House thinktank and viewed as Britain’s foremost body of trade expertise, dismissed the claim and suggested there would be limited impact. Richard Partington Economics correspondent

In the report, the commission warned that the EU has “a structural problem” in preventing the financial system from being used by criminals.

Europe has been hit by a wave of scandals in recent years, including revelations that 15,000 customers were involved in suspicious transactions at Danske Bank’s Estonian branch. The €200bn (£178bn) money-laundering case at Denmark’s largest bank was described as “the biggest scandal” in Europe.

Latvia’s third-largest bank, ABLV, was wound up in 2018 after being accused by the US authorities of being part of a Russian money-laundering network and breaking sanctions on North Korea.

This year the Guardian revealed that Germany’s Deutsche Bank was implicated in a $20bn Russian money laundering scandal known as the Global Laundromat that involved shell companies in the UK.

The commission blamed banks for failing to comply with basic EU anti-money laundering rules, such as reporting suspicious transactions to national authorities. But it also faulted national regulators for only intervening when faced with repeated rule-breaking or after problems emerged.

Shortcomings were most glaring in cross-border situations, where a bank had a subsidiary in another member state or non EU country, the report found.

Valdis Dombrovskis, the European commission vice-president in charge of financial services, said: “Today’s analysis gives more proof that our strong AML [anti-money laundering] rules have not been equally applied in all banks and all EU countries.

“So we have a structural problem in the union’s capacity to prevent the financial system [being] used for illegitimate purposes. This problem has to be addressed and solved sooner rather than later.”

The commission wants tougher enforcement, but also better coordination between national authorities’ financial intelligence units.

Brussels argues some problems could be fixed if countries applied the rules they agreed as part of clampdown on financial crime. In November 2018, the commission announced it was taking Luxembourg to court for failing to implement the EU’s fourth anti-money laundering directive, while a further 20 member states were also deemed to be falling behind in upholding the law.