Money Laundering From Free Trade Zones And Free Ports

According to the Financial Action Task Force (FATF), over 3,000 free trade zones (FTZs) generate billions of dollars in annual turnover, accelerated by relaxed regulations, weak oversight, minimal taxes, and no duties.

The same design opens seams for money launderers. A container labeled “electronics” can conceal high-value items bought with illicit funds, slipping through light oversight and re-entering markets as clean value.

While FTZs are established to accelerate legitimate trade, weak supervision and relaxed regulatory controls can be exploited by criminals.

What is a Free Trade Zone (FTZ)?

A free trade zone is a designated area inside a country where customs duties and taxes on goods are typically suspended while the goods stay in the zone.

Procedures are simplified to support storage, processing, and re-export. Duties normally become payable if those goods enter the domestic market. This model is reflected in global customs standards.

Money Laundering and Free Trade Zone Examples

Several free trade zones around the world, including Costa Rica, the UAE, and Panama, offer businesses tax and customs advantages. However, these zones can also create opportunities for illicit activity when oversight is weak, making them vulnerable to money laundering.

A striking example of money laundering free trade zones is a case where a terrorist-financing suspect linked to ETA set up a company ‘IT’ in a Costa Rican FTZ, claiming to trade computers. In reality, the company did almost no business but received and returned €3.4 million from Spanish firms controlled by the suspect.

Friendly relationships with bank staff and weak FTZ oversight let these illicit transfers go unchecked, exposing how FTZs can be exploited for money laundering and terrorist financing.

What is a Free Port?

A free port is a type of free zone near the seaports and airports from where the goods are imported, stored, and exported without customs duties and taxes. These benefits do not remove compliance obligations if goods enter the domestic market.

Because many free zones historically had lighter oversight, they are more vulnerable to money laundering and organized crime. According to Global Financial Integrity, because FTZs’ major focus is on “less regulatory oversight, reduced paperwork, and streamlined procedures,” therefore, they haven’t been updated to advanced AML regulations.

This low scrutiny and minimal reporting requirements enable the criminals to find opportunities to attack businesses’ weak spots, a major concern for free ports’ AML compliance.

Money Laundering and Free Port Examples

Free ports in locations such as Luxembourg, Singapore, and Geneva are prized for secure storage and tax benefits, particularly for high-value assets like art and collectibles. Yet, their secrecy and minimal oversight can make them attractive channels for money laundering.

One of the money laundering free port examples is the Luxembourg “Bouvier Affair,” where artworks were reportedly massively overcharged in freeport deals. The Bouvier Affair involved Swiss art dealer Yves Bouvier, accused of inflating the prices of masterpieces sold through Luxembourg’s freeport.

By using offshore companies and secretive storage facilities, he allegedly masked ownership and manipulated valuations, which investigators linked to large-scale money laundering risks.

How Money Launderers Exploit Free Trade Zones?

As the above sections of this article have talked about the worldwide statistics of FTZs’ surge, this expansion offers duty-free regimes with minimal scrutiny, conditions that also raise flags for regulators. These conditions, according to Global Financial Integrity, help facilitate illicit activity by smugglers, money launderers, and organized criminals.

• Beneficial Ownership Opacity

Criminals usually exploit these zones by creating opaque shell companies and using the relaxed oversight to inject illicit funds via “phantom” trades. What makes this possible is that many FTZ authorities request little or no ownership information when registering new firms.

This lack of transparency increases money laundering risks, allowing illicit actors to use shell companies and evade the lax requirements for UBO disclosures. FTZs’ weak ownership checks aren’t just a loophole; they’ve been exploited.

According to FATF report on money laundering vulnerability of free trade zones, many FTZ authorities “request little or no ownership information” when registering a new firm.

• Jurisdictional Complexity

Countries may have diverse free trade zones, each operating under different regulations. Criminals exploit these regulatory gaps to shift illicit funds across borders with minimal scrutiny.

Free trade zones in one country may have strict reporting requirements, while another allows anonymous ownership and minimal oversight. This patchwork of rules creates opportunities for layering transactions and hiding the true origin of money.

Furthermore, cross-border FTZ operations make it difficult for regulators to trace movements of goods or capital, allowing illegal activities to persist undetected for extended periods. The OECD’s Council Recommendation urges transparency in FTZs through standardized record-keeping, licensing, and on-site controls.

• Trade-Based Money Laundering (TBML) and Sanction Evasion

TBML, which the FATF warns is among the most prevalent laundering techniques worldwide, moves large values across borders through misinvoicing and false shipments.

Beyond TBML, FTZs also facilitate sanctions evasion, with shipments often rerouted through loosely monitored third-country channels to obscure origin.

• High-Value Goods Laundering

High-security freeport subzones amplify these risks by allowing art and luxury assets to be stored under shell entities. There have been reports of FTZs being vulnerable to money laundering, such as Sharjah Airport’s FTZ, where traders allegedly used falsified export certificates to disguise the true origin of goods.

By reclassifying shipments, they could bypass import restrictions imposed on certain jurisdictions and make the goods appear as if they were from permitted sources.

These cases highlight how lax FTZ oversight can be weaponized for sophisticated money laundering, reinforcing the need for enhanced due diligence on FTZ-linked transactions.

Key Red-Flag Indicators in Free Trade Zones and How to Mitigate Them

In Free Trade Zones, there are several red flags that can signal money laundering or terrorist financing. The following section mentions some common red flags and mitigation strategies as identified by reports of the FATF and EU Parliamentary Research Service.

• IMO or MMSI inconsistencies, recent renaming or reflagging, undisclosed beneficial ownership changes, or a match to a sanctioned or price-cap-evading tanker fleet.

Mitigation: Cross-check vessel name and IMO against official sanctions lists and AML Watcher’s vessel screening library, then review AIS history for spoofing or unexplained gaps and any ship-to-ship events in high-risk waters.

• Prolonged AIS disablement or spoofing, frequent ship-to-ship transfers, falsified voyage docs, sudden routing changes to or via lenient hubs or free zones.

Mitigation: Escalate documentation requests, obtain full chains of title and carriage, and independently validate port calls and STS coordinates.

• Discrepancies across invoices, bills of lading, HS codes, quantities, grade, or price, especially with repeated re-invoicing through multiple zones.

Mitigation: Apply FATF/Egmont TBML indicators in onboarding and monitoring, and reconcile financial flows with trade flows.

• High-value goods held long-term with frequent changes of ownership but no corresponding physical movement.

Mitigation: Require storage records, inspection reports, and movement logs directly from free port operators.

• Shell brokers or freight forwarders with thin footprints or recent incorporation in secrecy-friendly jurisdictions.

Mitigation: Verify beneficial owners and controlling persons and test the commercial rationale for their role.

How AML Watcher Helps with FTZs Risks

• Multilingual adverse media with granular categories lets teams track relevant zone-related risks such as customs fraud, counterfeit trade, art crime, and sanctions evasion across 80+ languages and more than 415 risk categories across Adverse Media Screening, with ongoing screening to flag changes in risk posture.
• High-frequency sanctions updates help you catch re-exports and trans-shipment risks sooner. AML Watcher covers 215 plus sanctions regimes with refreshes as fast as every 15 minutes.
• Sanctioned vessel screening is part of AML Watcher’s proprietary dataset. Screening freight and shipping documents against this dataset enables institutions to identify sanctioned vessels and deceptive shipping practices before goods are re-routed through free trade zones or free ports.
• Comprehensive PEP intelligence helps surface politically exposed persons tied to zone operators, warehouse owners, trading houses, and freight brokers through a 2.6M+  global PEP database.
• Proprietary database and proactive approach reduce noise and accelerate decisions when screening dense trade ecosystems with many intermediaries.
• Ongoing monitoring: Continuously re-screens FTZ customers and shipments, alerting instantly if they later appear on sanctions lists or in adverse media.