Public-Private Partnerships in Mitigating Illicit Trade in Free Trade Zones

The opinions expressed and arguments employed are those of the author and should not be reported as representing the official views of the OECD or its member countries.

Free trade carries clear economic benefits such as a greater choice of goods and economies of scale, inducing many countries to establish free trade zones (FTZs) as an additional tool to boost economic development. These zones have been instrumental in the rapid emergence of a globally integrated supply chain. On the other hand, lightly regulated FTZs also spur illicit trade, including trade in counterfeit and pirated goods. Public-private partnerships (PPPs) are a handy mechanism to develop governance frameworks that could address the lack of transparency in FTZs.

This article discusses potential ways of implementing PPPs to enhance transparency in free trade zones, and consequently to counter illicit trade that passes through FTZs. It is structured as follows. The second section introduces the existing governance challenges in FTZs. Section three characterizes governance solutions to address these issues. Section four presents the concept of PPPs, particularly in the context of policy settings at multilateral levels and proposes some solutions to the challenges in FTZs that leverage PPPs. Finally, the last section offers conclusions.

Free trade zones and the threat of illicit trade

In recent decades, FTZs have become ubiquitous across the globe. Policymakers see them as an efficient tool to attract new business and foreign investment, aiming to facilitate trade and economic growth. FTZs become an attractive venue for investments by eliminating tariffs, quotas, and other taxes for businesses operating in these zones and by minimizing bureaucratic requirements such as customs procedures and disclosure requirements.

In some countries, FTZs are de facto administered for all purposes outside the country’s customs territory because goods enter and exit these areas with minimal customs controls. Despite international frameworks for establishing FTZs stipulating that they must remain within the host country’s customs territory without exception, the discharge of legislation is often insufficient, if not absent.¹

The scope and nature of FTZs vary significantly across countries, ranging from large areas with extensive multi-modal transhipment logistical capacities to small-scale specialized areas with a limited number of authorized transactions.² Likewise, in many cases the establishment of zones and rapid investments in their logistical infrastructure were not met with the adoption of appropriate governance standards for effective oversight of the activities occurring within them. Inevitably, the deficiencies in governance mechanisms have allowed criminals operating illicit trade networks to abuse the opportunities offered by FTZs.

Exploitation of FTZs in illicit trade has been documented in several forms. It includes manufacturing counterfeit goods within the zones, smuggling and diverting illegal products to the domestic market, mislabelling illicit goods as genuine ones, and facilitating transhipment of unlawful goods by forging shipping manifests.

Several entities, including the World Customs Organization (WCO), Financial Action Task Force (FATF), and the World Bank, have reported cases of misappropriation of FTZs. Operations co-ordinated by the WCO provide evidence on the abuse of FTZs in smuggling tobacco products, illegal wildlife products, and timber. Consignments are repackaged into other containers, enabling the illicit goods to be lost or disappear. They then leave the zone as low-value goods (e.g., textiles), either misdeclared or concealed in other shipments.^3,4,5 A review of seizures’ in FTZs around the world carried out by the WCO concluded that the diversity of illegal products detained in zones had become a “notable trend.”⁶ A broad range of illicit goods was seized, including drugs, counterfeits, tobacco, wildlife, wood, and chemicals.

FATF has also drawn attention to FTZs, highlighting such crimes as smuggling narcotics, arms, stolen goods, and even humans.⁷ Likewise, the World Bank documented evidence of abuse of FTZs to smuggle and leak cigarettes to the domestic market and to sell illicit tobacco products via the Internet.⁸ For instance, duty-free zones in Chile account for a large segment of the country’s illicit cigarette market, attributable to a lack of technical capacity in estimating the size of the market. In contrast, however, Malaysia and Colombia have...