Luxembourg Freeport  opens; officials deny it is “no-man’s land”

Wort.lu reports on the opening of the Luxembourg Freeport on September 19th:

“Around 500 people including Grand Duke Henri gathered on Wednesday afternoon for the official opening of Luxembourg’s Freeport next to the Cargo Center at Findel airport.

They were taken on a tour of the inside of the cavernous, space-ship-like 11,000 m2 site where works of art, fine wines and vintage cars, among other luxury items, can be stored and conserved safely.

For Luxembourg, the opening provides a unique opportunity to diversify its economic services sector around art and restoration.”

Last year the Economist magazine wrote about freeports and specifically mentioned Luxembourg’s, then under construction.

The Economist article said that “Freeports are something of a fiscal no-man’s-land” and that “In many ways the art market is custom-made for money laundering: it is unregulated, opaque (buyers and sellers are often listed as “private collection”) and many transactions are settled in cash or in kind.”

These comments seem to have hit home, as wort.lu quotes the Freeport administrator saying at the opening last week:

“This is not a no-man’s land as I have read here and there. We are on Luxembourgish territory and all our laws concerning money laundering apply here as they would anywhere,”

adding

“This is not a place where one can organise illegal activities. No transaction or movement can be done without being checked by customs first.”

The Freeport website also addresses money-laundering at the end of an FAQ section:

“Accusations have been launched that Freeports, including the Luxembourg Freeport, could be used for money laundering purposes. The Luxembourg Freeport Management Company S.A., as manager of the LFP, firmly rejects these accusations. The Luxembourg Freeport is part of the Luxembourg territory and all Luxembourg laws, including the law of November 2004 regarding the combat of money laundering and funding of terrorism, apply.”

Which seemed, at first, quite reassuring. Except that a bit more digging brought up two questions:

1) Does the anti-money laundering law apply to the companies operating in the freeport?

Even if the territory hosting a freeport has an anti-money laundering law, unless the companies operating inside that freeport have any specific anti-money laundering obligations, the law is unlikely to be applied in practice.

The freeport website says that

“Goods can be introduced into the LFP only through specialised forwarders licensed by the Luxembourg Customs Authorities (“LFP Operators”) or agents or professionals represented by LFP operators.”

Looking at Luxembourg’s anti-money laundering law it is not clear whether these operators are required to comply with essential anti-money laundering obligations such as Customer Due Diligence and Suspicious Transaction Reporting.

The anti-money laundering law details a number of sectors it covers, including banks, insurance companies, notaries, lawyers, fund managers, accountants, and casinos. It does not list customs operators specifically – unless they are interpreted to fall under the “other” clauses (13, 13a, 15).

The Freeport website, meanwhile, provides a brief list of licensed operators, none of which seem to include due diligence or AML procedures among their services. One company in fact says “We ensure complete confidentiality thanks to access codes known only by the eligible parties”. It is hard to see how complete confidentiality will fit with identifying and reporting any suspicious client activities to the authorities.

2) How effective is Luxembourg’s anti-money laundering law in practice?

Having a law is not the same as having a law that works. In 2010 the global standard-setter for anti-money laundering – the Financial Action Task Force (FATF) – evaluated Luxembourg and questioned the effectiveness of its anti-money laundering regulations.

For example, it found a very low number of suspicious transaction reports and anti-money laundering convictions, noting that “…sanctions (the level of which is generally low) have been imposed in only eight cases since 2003.”

In its most recent follow-up report on Luxembourg in 2014, FATF found that the number of convictions had increased to 143 in 2012, however it also said that without further details beyond raw conviction statistics it couldn’t tell whether the deficiencies it had found previously had been addressed.

On Customer Due Diligence, even as FATF upgraded Luxembourg from “Partially Compliant” to “Largely Compliant” in 2014, it noted that several deficiencies had not yet been fully addressed, and that it again couldn’t judge the effectiveness of the country’s prevention system based on the data provided by the country’s authorities.

Finally, in 2012 dealers in high-value goods, real estate agents and economic advisors (as a group – the data is not broken down any further) filed only four of over 11 thousand Suspicious Transaction Reports that year in Luxembourg (see tables on pages 16 and 41 at link), not a promising precedent for a country now hosting a freeport designed to handle millions in high-value goods.

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