While Singapore has thus far sailed relatively smoothly through roughening global trade winds, 2019 may be a turning point for the economy of this global finance hub. (Reuters Photo/Edgar Su)

HSBC and Yves Bouvier's Freeport: Can Singapore Avoid the Global Crackdown?


APRIL 24, 2019

As the world frets about United States President Donald Trump's constant threat of escalating trade wars, Singapore's market seems blissfully unaffected – at least for now.

While the city-state has thus far sailed relatively smoothly through roughening global trade winds, 2019 may be a turning point for the economy of the finance hub. Not only is gross domestic product growth expected to slow to 2.4 percent, but the global trend toward cracking down on tax havens will inevitably affect Singapore also.

This will be a problem, especially since business confidence is fading, just as the International Monetary Fund predicted a "significantly weakened global expansion." Singapore's economic model is built on its role as a tax haven, offering some of the world's lowest personal and corporate tax rates, along with several other tax incentives, but now this tax-haven policy is reaching its limit. With a global economic slowdown looming and the country's reputation damaged by banking scandals and the sudden cancellation of the much-anticipated Art Stage Singapore – resulting in five-figure losses for exhibitors and countless more for local businesses and investors –  the city-state can hardly afford more discouraging news.

Credibility Under Pressure

Indeed, the country has been under pressure for years. After the authorities in the United States and European Union pressured Switzerland into reforming its infamous banking secrecy laws, Singapore gladly stepped in to position itself as the new hub for the globe's ultrarich to secretly bunker their wealth. Yet, following highly publicized revelations that several Singapore-based banks were involved in various financial scandals, the country's policy makers paddled back and were compelled to tighten financial and tax regulations, the impact of which are felt strongly today.

Singaporean authorities cited various banks for their involvement in global money-laundering operations and enacted even stricter laws last year, finally fully conscious of how vulnerable the economy is to such illegal activities. Most recently, Singapore's taxman has been squeezing British bank HSBC for its involvement in large-scale fraud. In April, bans and jail terms of up to 10 years were handed down to several HSBC bankers for financial crimes, including the sale of false financial products, document forgery and misappropriation of clients' funds.

No wonder then, that HSBC is frantically hiring to aggressively expand its financial crime compliance department at its Singaporean branches, although it is hardly the only bank doing so. Still, banks are not the city-state's only issue. As Singapore tries to clean up its image by cracking down on unsavory behavior, the new legislation enacted inevitably puts other, more bizarre tax-avoidance vehicles in the spotlight that are affecting Singapore's reputation as a tax haven.

Global Crackdown

One of these vehicles is the Singapore freeport. Freeports, a curious but common institution in international trade, are besides banks at the heart of the general move against tax shelters. In developing countries, where they are used for storing grains, fertilizers and other important goods in transit, they can have positive effects on the local economy through monetary incentives, such as tax credits and regulatory flexibility.

But their modern iterations employed in developed countries today serve a different purpose: keeping high-value luxury goods, such as paintings, sculptures and gold, from the taxman's grasp. Devised and promoted by Singapore-Swiss art dealer Yves Bouvier – primarily known as a subject of numerous lawsuits for fraud against him by his former clients, including Canadian art collector Lorette Shefner, Russian businessman Vladimir Scherbakov and Dmitry Rybolovlev, the Russian billionaire owner of Monaco Football Club, freeports are now no more than tax-exempt warehouses where goods can be stored for years beyond the reach of local tax authorities.

After Bouvier established the first such facility in Geneva, others were set up in Luxembourg and Singapore. Thanks to the secrecy and discretion surrounding these freeport projects, they have come under increased scrutiny. These facilities' possible role in tax dodging, money laundering or even financing terrorist organizations is currently under investigation across the world.

Facing negative press, some freeports have launched campaigns to distance themselves from Bouvier and implemented policies to improve transparency and escape unwanted attention. For example, the Geneva freeport introduced biometric devices to guarantee that it is not used for hiding unlawfully obtained goods. The Luxembourg freeport, meanwhile, became the subject of extensive political debate on tax evasion after Wolf Klinz, a German member of the European Parliament, penned a letter to European Commission President Jean-Claude Juncker earlier this year.

Painful Break or Drawn-Out Agony?

None of this bodes well for the Singapore freeport's future and it is easy to see why. A 2016 report by the Financial Action Task Force, an intergovernmental body, painted a damning picture of the facility. In its evaluation of Singapore's money-laundering risk awareness, the report found that Singaporean authorities did not demonstrate a comprehensive understanding of what activities were being undertaken in the freeport, raising concerns about the prevalence on financial crime behind its doors.

This was embarrassing, coming merely three years after Singapore had conducted its own national risk assessment, which already identified the freeport as a potential risk for financial crime. Singapore was changing tack after its participation in the 2012 Oslo Dialogue against financial crime made it more susceptible to international observation. Unwilling to risk another major tax- and finance-related outrage, the country is increasingly following in international authorities' footsteps by taking an ever-closer look at what is going on behind the closed doors of banks and freeports.

Albeit too soon to tell, Singapore may eventually feel the need to end its affair with the freeport sooner than later if negative headlines in times of coming economic uncertainty are to be avoided. For it is clear that headline-grabbing scandals of the kind seen in Geneva and Luxembourg, on top of HSBC-type banking scandals, are hardly in Singapore's best interests.

Hrishikesh Dubey is a final year economics student at the Symbiosis School of Economics in Pune, India. He is the general manager of media startup Qrius.