Definition:

A special section of a port where goods may be unloaded, stored, and shipped without payment of customs duties.  [REF]

Deconstruction:

Terminology

Despite the verbiage, which can be spelled with or without a space in the middle of the compound word, these facilities don’t need to be located on the water.

In addition to being found adjacent to traditional major shipping harbors at key aquatic hubs, freeports can be positioned near airports, train stations, and even urban roadway intersections.  In this case, the “port” concept relates to a protected haven from national laws, as opposed to referencing the physical site.

Alternate names for freeports include Export Processing Zones (EPZs) and Free Trade Areas (FTAs).  Free Trade Zones (FTZs) and Bonded Warehouses (BWs) are other types of similar secure services with economic perks.  There’s no shortage of acronyms to learn in the global logistics industry.

This collective is dubbed “free economic territories”.  Regardless of the nomenclature, the local governance structure is much more important than specific placement in the city of choice.

Such regions were traditionally established in struggling areas to promote economic activity and facilitate job creation.  Which allowed companies willing to commit development resources to earn substantial tax benefits.  The modern freeport serves a much different purpose, but leverages the same duty loopholes originally intended.

In contrast to free trade zones, freeports are treated as discrete entities, completely separate and independent from the country they’re housed within.  This format promotes increased exchange of goods through waived customs fees, and industrial expansion due to higher merchandise volumes.

Over time, savvy merchants realized they could move products in and out of a site without incurring any taxes whatsoever.  What initially started as a short-term storage for perishable agricultural products eventually became a near-permanent haven for durable valuable antiquities.

Historical

Great Britain was the originator of freeports, albeit simply for their own benefit, within an island nation where aquatic transport was the primary means of goods mobility between city-states.

Dating back to the 13^th century, the “Cinque Ports”, a confederation of shipping hubs on the English Channel, including Essex, Kent, and Sussex, were established to enable movement of merchandise for the country and crown.

Frigates built at these harbors were tax-exempt, in terms of the incoming raw materials, profits from sale of the constructed vessels, and even the subsequent wares shipped out to various parts unknown.  The range of pedaled products was broad: oils and oranges, salt and sugar, textiles and timber, wine and wool.  Basically, all the essentials those affluent in society required, at the right price.

The Hanseatic League was another historic trading conglomerate across northwestern Europe, later on in the continent’s economic expansion.  Established at the end of the Middle Ages, and originating in Germany, this network expanded to 200 sites encompassing 8 countries connected via the Baltic and North Seas, over the subsequent few centuries.

Selectively facilitating comfortable storage for members, and imposing harsh blockades against adversaries, on items of interest, allowed this partnership of ships to expand its reach.  The ports located along the route were free for some, and expensive for others, explaining the original spirit of the term.

The modern freeport format materialized in Switzerland during the 19^th century, initially serving the innocuous function of grain storage, with seeds being held in limbo during the brief time between harvest and sale.  Over time, the contents and conditions of this unique warehouse changed substantially.

Also known as Port Franc, this inaugural Geneva facility is considered the globe’s oldest and biggest continually functioning freeport.  This operation is estimated to house $250 billion in assets, 40% of which is fine art.  The exact composition of holdings is unknown, leveraging the discretion and anonymity the Swiss banking sector is renowned for.

This building has also been dubbed the “world’s largest wine cellar”, with a capacity to store over 3 million bottles, in perfectly controlled climate conditions, of course.  Wine and spirits are common holdings in bonded warehouses, where the boozy bottles can age without reporting appreciation, while still allowing access as needed for a private party.

In the modern era, between 1984 and 2012, the United Kingdom facilitated a network of freeports, connecting multiple coastal points in England with Northern Ireland, Scotland, Wales, and even the tiny Isle of Man.  This was a wise strategic move for a country composed of multiple islands.

The contentious Brexit legislation decision, which went into effect in March 2021, severed trade between continental Europe and Great Britian, isolated and alone across the English Channel.   This change in posture prompted the U.K. to create a multitude of new freeports, designed to lure foreign capital for the desperately needed infrastructure improvements at both inland airports and coastal harbors.

Currently, just within the European Union, over 70 freeports have been established, encompassing nearly all 27 member states.  Globally, the count of operation facilities has recently surpassed 3,500.  With rich folks holding nearly $3 trillion in art and other collectables, they need somewhere safe to house all this loot.

Format

Over the past 15 years, the square footage of the luxurious Port Franc in Geneva has quadrupled, and is now pushing 200,000 square meters.   This is equivalent in size to the Louvre in Paris, and is 1/3^rd of the massive Pentagon footprint in Washington, DC.  And that’s just one of thousands of sites worldwide dedicated to tax mitigation.

This assortment of secure storage services now offer the ultra-wealthy substantial sheltering of assets and taxes.  Obviously, it’s impossible to ascertain the total value of artifacts held within freeports globally, as confidentiality, obscurity, and secrecy are the entire point of these facilities.

Freeports are usually positioned in tax-friendly locales, like Hong Kong, Luxembourg, Singapore, and Switzerland.  These small countries and nation states provide autonomy and anonymity, with limited likelihood of government property seizure.

It’s informative that very few rich people choose to store their merchandise in the United States, primarily due to risk of confiscation.

However, the concept is still relevant in the U.S., specifically the state of Delaware, famous for its generous Delaware Statutory Trust legislation regarding small businesses.  The close proximity to the nation’s capital, where all the affluent politicians live, keeps this discrete micro-economy thriving.

Freeports have been referenced in many American video productions of late, including the Christopher Nolan directed sci-fi movie “Tenet”, and the hit HBO drama series “Succession”.

Benefits

Keys to a productive freeport include discretion, privacy, security, and of course, effective tax sheltering across a range of formats: capital gains, import duties, sales tax, value added.  Another benefit is not having an asset, specifically artwork or antiquities, marked to market, allowing the owner to monitor pricing via comparable sales, without incurring any paper profits.

Tax relief for investment in land acquisition, new construction, and refurbishment renovations is another element of freeports which can facilitate greater societal good.  Also, these zones provide deregulation benefits in terms of administrative permitting, business audits, and governmental subsidies.  The reason for these generous administrative perks is to spur the local economy, through job creation and increased revenue.

Freeports create a contradiction between sovereign state control and global economic trade.  Nations that elect to allow freeports within their borders to entice rich clientele and lucrative transactions, must be careful not give up too much revenue generation or legal control. 

Criticisms

There are many condemnations of freeports, primarily related to the general lack of transparency regarding what’s housed within the secret facilities.  Skeptics claim these black-box operations enable money manipulation, illicit transactions, and tax avoidance.  Which, in reality, is often exactly the kind of opportunistic dealings the ultra-wealthy seek.

There have been accusations that drug money is often laundered through fine art, but since these illegal transactions rarely occur in the open, above board, with proper documentation, freeports are likely not a haven for overtly criminal activity.

As with every element of governance worldwide, there continues to be clamoring for increased visibility and accountability regarding freeports.  The libertarian mantra of freedom carries little weight in this era of administrative overreach.

The most diligent country in the world by far with regards to tax collection is the United States.  This nation aggressively enforces payroll levies for all Americans, even those living abroad, and earning their wages in other territories.  The IRS is acutely aware regarding the existence of freeports, and uses all the enforcement policies at their disposal to claim owed funds.

Global governments, specifically the E.U. and U.S., are exploring ways to monitor the assets located in freeports, including audits, disclosure, inventory, reporting, and tracking of both physical holdings and financial transactions.

Antiquities

Freeports can be used to stash all sorts of prize possessions, including art, antiquities, bouillon, jewelry, and other valuable items, without having to incur any duties, fees, or taxes.  This is because the assets are treated as being in transit, on their way from one permanent spot to another, even if the physical pieces stay in the same storage unit for an unlimited period of time.

Desirable works are procured at major auction houses, then immediately transferred to a freeport, rather than the acquirer’s country of residence, thereby avoiding any import expenses on the front end, or capital gains profits upon subsequent sale, which may occur many years later.

Considering the high cost that valuable offerings fetch at auction, and the public disclosure associated with such sales, havens like freeports offer up a beneficial intermediate rest stop for purchased property, rather than transporting the item to one’s permanent home locale, thereby incurring substantial levies.

This strategy has a twofold benefit of avoiding VAT on the purchase, and masking appreciation to an individual’s net worth, both elements which are imposed in the E.U. more often than the U.S.  Not to mention the inheritance tax, which becomes completely negated if assets are appropriately hidden.

Using multi-layered ownership contracts, like charitable benefactors, non-profit organizations, business lawyers, or family trusts, can counterintuitively mask the actual ownership structure of an asset.

The key pursuit of physical freeport storage is tax avoidance, but this approach also results in limited transparency on transactions, and distorts free market pricing mechanisms.

Antiquities have a history of retaining value in times of economic hardship and geopolitical tumult, making them a useful vehicle for generational wealth transfer.  Unfortunately, with the freeport format, none of these unique offerings are on public display, accessible for expert curator research, or, in some cases, even known to exist beyond a niche cohort of collectors.

The price stability of artwork is based on its limited supply.  While morbid, productivity and longevity are two elements the human body has yet to conquer.  Often, when a famous painter dies, thus ending their career, values for lifetime output in good condition rise.

This phenomenon of restricted supply in now being replicated by Bitcoin, and NFT imagery projects, distributed digitally over the blockchain.

As the famous saying goes, the only certainties in life are death and taxes.  Which essentially sums up the entire business model of freeports, on multiples levels.

Artwork

While the total extent of art in freeport storage is a mystery, public sale of paintings is carefully documented.  In fact, one of the largest perks for affluent buyers at auctions is having their name associated with a record-breaking acquisition in the tabloids.  2023 global art sales, the last year with complete compiled data, exceeded $65 billion.

This tally represents a very conservative of the entire market, considering how many pieces exchange hands off the official ledger.  While numerically quite small compared to other financial asset classes, this shadowy industry is a harbinger for how the ultra-rich are investing and moving their substantial monies.

Within the known transactions, there’s a roughly even split between donation-funded museum purchases for public presentation, and high-net-worth procurement for personal pride.

In fact, sometimes freeports set up their own galleries, with a very limited and elite patron invitee list.  This scheme allows privileged visitors to view, negotiate, and even purchase pieces, all without the item of interest leaving the cozy confines.

Not only does this approach avoid transport of the product, but also makes the transaction completely untaxed, while eliminating the need to report incurred change in price for either party.  Such private sales are as simple as changing the owner’s name on a digital accounting ledger, and moving the physical asset to a different locker down the hallway.

Freeports offer discretion at every level, enabling these handshake agreements.  In fact, it’s possible some of these overt exchanges mask covert ancillary dealings between the two interested parties on the backside.  Even within the transparent purchasing space, freeports play a crucial tangential role.

Often in the art market, 3^rd party private deals are made prior to a public sale.  The acquirer guarantees a minimum price, in exchange for having the painting transferred to their tax-free storage facility.

Once financially aligned, in the real auction, the buyer and seller split the additional amount needed to achieve the winning bid on assets that have already changed hands behind the scene.  This arranged 3^rd party guarantee is valuable for avoiding the risks inherent with a competitive outcry in a volatile market.

Freeports offer all manner of in-house amenities relevant to artwork preservation, like cleaning, conditioning, conservation, and chemical analysis.  Ancillary perks including authentication, framing, imaging, photography, and even tokenization, ensure the paintings are enjoyed even if they aren’t hung on living room walls.  All without the piece needed to be transported around, or viewed by anyone aside from internal employees with a high level of discretion.

Another substantial perk of freeports is that holders can take loans on their works in storage, using the funds to purchase more art, and thereby driving up the prices of the entire asset class.  While not an explicit Ponzi scheme, it’s clear some market manipulation is occurring.

Rich folks get to enjoy the value of their wealth, without having to incur the tax implications of acquiring it.  This practice is also very common when taking margin loans against a large corporate stock position, a financial scheme utilized by essentially every Fortune 500 CEO across America.

Improvements

Contrary to posh and ornate museums, freeports are non-descript and sterile.  The goal is to protect the housed artifacts’ worth as an investment, from both a financial and quality standpoint, through the application of climate control and security guards.  Most of the art owned by high-net-worth individuals as part of their diversified portfolio never sees the light of day, or the eyes of general public.

The increased proliferation of valuable works into hidden freeport vaults is directly in contrast with the concept of art as a public good, freely displayed for observation and analysis.  Researching famous paintings goes beyond an aesthetic pursuit, as it can yield information about history and civilization, a phenomenon dubbed “cultural capital”.

Societal anger is rising regarding having famous heirlooms stashed away, as opposed to available for public consumption.  There’s an ongoing debate regarding antiquities being regarded as a monetary means versus artistic achievement.

One solution to the freeport problem is to limit the time items can remain in storage.  This duration is currently essentially infinite, but reduction to decades, years, or even months could change the benefits of freeports.  However, for families who execute asset allocation on century-long timescales, such minor changes to protocols won’t affect highly strategic legacy planning.

Other improvement ideas include tax incentives to collectors who loan their pieces to museums, and public registry of key known works that have historical significance.  During many great wars throughout history, most notably the Nazis penchant for property confiscation during World War II, culturally relevant artifacts have been lost.  Lacking documentation, it’s unclear which ones were completely destroyed, or simply stashed away.

No modifications to freeport protocols will work without worldwide collaboration, as a shelter for one means a shelter for all.  Who knows what hidden treasures lay hidden behind a wall of corrugated steel and covert security.

Enforcement

The dismantling of the Bretton Woods financial system in 1971 under President Nixon completely changed the global capital landscape.  This event ushered in a period of neoliberalism that’s still ongoing, making worldwide tax avoidance, and thus independent freeports, a valuable commodity for those with substantial power and influence.

Since that pivotal date, the freeport industry has ballooned from just $70 billion to $7 trillion in holdings today, representing a 100X increase.  The International Monetary Fund also projects there’s another $12 trillion in foreign direct investment paper commitments leveraged against the massive pile of physical assets in storage.

This lending approach is akin to taking out a HELOC on one’s primary residence, but on a much grander scale, with way lower interested rates.  The uber wealthy get all the perks these days.

The freeport system grew unencumbered in relative secrecy until the 9-11 terrorist attacks in N.Y.C. during 2001, at which point the United States government initiated an aggressive global anti-money laundering law enforcement directive.  Like all elements of the complex and interconnected worldwide financial landscape, freeport activity was thrust into the spotlight.

This extensive probe discovered that looting of antiquities during recent paramilitary conflicts, specifically in the Middle East, has resulted substantial black-market activity.  However, such transactions were typically executed on even more discrete channels, like the digital Silk Road using cryptocurrency, thus above-board freeports operations were off the hook.

That doesn’t mean everything happening in their hidden halls is completely kosher.  Like the paint covering the non-descript metal walls of these warehouses, the activity occurring at freeports is decidedly grey.

As part of overarching AML compliance, in January 2020, statute MLD5 went into effect across Europe, requiring freeports to disclose an Ultimate Beneficial Owner for all assets held, to customs officials if requested.  The United States is mulling similar legislation.  Other proposals to improve transparency include mandatory reporting of any art transaction over a specific value, with €10,000 being the current suggested limit.

Conclusion

Counterintuitively, freeport operations tend to experience large reported tax losses, which is beneficial to the local balance sheet, but detrimental for foreign locales where key assets were originally valued much higher.

Meticulous research of global trade imbalances executed by Gabriel Zucman, using unique reference material like proprietary Swiss banking transactions, was published in a 2013 seminal work, “The Hidden Wealth of Nations”.

This analysis suggests that 8% of global capital, equating to $8 trillion USD, has been shaved off the ledger, via countless transferred items of interest being claimed as a liability in the country they left, but never reported as personal possessions in the freeport nation these resources ended up in.

If accurate, the Eurozone region mathematically switches from a net debtor to a net creditor on the worldwide fiscal stage, and even the massive United States liability tally is substantially reduced.  This very unique and compelling interpretation is a drastic departure from the widely held belief that most OECD nations are substantial borrowers on the global monetary balance sheet.

Recent leaks of intel regarding the banking details of the ultra-wealthy have brought the financial schemes of these affluent individuals directly into the public spotlight.  And highlighted how big a role freeports play in their money manipulation.

Most notable of late are the Panama Papers, published anonymously to the world at large in April 2016.  This treasure trove of transparency encompassed 12 million monetary documents, referencing 215,000 unique offshore entities, who transacted over a lengthy 40-year period.

Leaked by a whistleblower from the secret business archives of Panamanian offshore corporate law agency Mossack Fonseca, the files contained detailed personal account dealings of myriad wealthy individuals, including several well-known public figures.

Though most of the information was protected through attorney–client privilege, the discovery of numerous illegal shell corporations participating in fraudulent tax schemes and international sanctions avoidance brought the material into public consciousness.

Considering the massive quantity of data attained, clocking in at 2.6 terabytes, despite not including any dense media pictures or video, crowdsourcing of international journalist across 80 countries was required to hoe through the encoded data sheets and cryptic email messages.  This teamwork resulted in arrests of the sketchy law firm’s pair of founders; the duo was eventually acquitted due to evidential chain of custody issues.  Like freeports, resourceful defendants have all sorts of discrete evasion techniques at their disposal.

Regardless of their overall impact to the global economy, there’s no debate that freeports are a valuable resource for the highly affluent in society.  With this cohorts’ ability to leverage connections in the antiquities, finance, and administrative realms, it seems unlikely such operations will be forced to close down any time soon.  With riches comes resources.  And debatably responsibility.

These secretive sites truly represent the land of the free, and the home of the wealthy.

Details:

• Thorough overview of modern freeports.  [REF]

• European freeport commentary focused on the United Kingdom.  [REF]

• Wikipedia details on the famous Geneva freeport.  [REF]

• 2020 scholarly article on freeports.  [REF]

• Scathing review of freeports as money laundering avenue for art.  [REF]

• Full PDF of Gabriel Zucman’s missing wealth research piece.  [REF]

• Background on Panama Paper leaks.  [REF]