This is the first in a series on free trade zones (FTZs) in the Middle East. We will look at the risks posed by FTZs, including how they can be used for sanctions evasion, terror financing, and counterfeiting goods, and what insight public data can provide, with cases focusing on individual jurisdictions.
Part 1: An intro to Free Trade Zones with a focus on Jordan, where we revisit a major criminal case involving a counterfeit tobacco ring that exploited a Jordanian FTZ.
Free trade zones (FTZs), also known as foreign trade zones, have been increasingly popular worldwide since the 1950s. Since these designated areas are not subject to the same regulations as standard commercial activity, FTZs have also become hubs for illicit trade. Perhaps the most notorious FTZs are situated in the tri-border area between Paraguay, Brazil, and Argentina — a region exploited by narco-terrorists.
Economic hubs in the Middle East like the UAE, Lebanon, and increasingly Jordan, are similarly vulnerable to exploitation due to the lack of transparency, eagerness of host governments to stimulate their economies, and risk of corruption in the host country.
Why free trade zones?
Governments use FTZs as a tool to grow their country’s economy through increased exports, foreign direct investment (FDI), local employment, and an expanded corporate tax base. Governments consider these zones to be outside of the normal customs and business regulations environment and generally establish them near seaports, airports, and borders to help facilitate trade.
Companies use FTZs to manufacture, import and export, and/or store goods. Companies that would require operating domestically are often prohibited from using FTZs, such as telecommunications, finance, and services. Governments incentivize private companies to register and conduct business in FTZs through a number of means: minimal taxation on the company’s income and employee salaries, streamlined company establishment and licensing processes, full foreign ownership, and duty-free importation of the materials and supplies needed to produce within the FTZ.
However, these incentives accompany restrictions. FTZs are separate from the local economy and therefore companies operating within them are often prohibited from selling their goods domestically, or are subject to taxes and fees that otherwise negate the benefits of operating in an FTZ.
Free trade zones: a magnet for investment…and financial crime?
The proliferation of FTZs combined with insufficient inspection and enforcement regimes provide a situation uniquely prone to illicit trade. As of 2019, FTZs exist in 147 countries and employ roughly 90 to 100 million people, according to the Congressional Research Service. The Financial Action Task Force (FATF) places the number of FTZs themselves at 3000 as of 2010 — the current number is likely well above that.
FATF classifies FTZs as vulnerable to money laundering and terror financing because of inadequate safeguards, relaxed oversight by domestic authorities, weak record keeping and goods inspections, and a lack of cooperation between FTZs and customs authorities.
This vulnerability is evident in the lag between the sharp rise in the opening of FTZs and the disparate regulatory regimes across and even within jurisdictions, as well as a dearth of FTZ corporate records. According to the International Coalition Against Illicit Economies, maritime trade makes up 90 percent of all global trade, of which 25 percent goes through FTZs. Moreover, authorities inspect less than 2 percent of all shipping containers used in maritime trade.
The Middle East in particular has a transparency issue with regards to FTZ corporate records. Despite dozens of FTZs in the UAE, a major commercial hub, there is no singular database for corporate ownership of companies available to the public. Only a few FTZs within the UAE provide limited company details and sometimes company ownership information.
Jordanian free trade zones
Jordan has established six free trade zones. The list below does not include special development zones, as they have a slightly different regulatory framework.
- Queen Alia International Airport Free Zone
- Zarqa Free Zone
- Sahab Free Zone
- Mawakkar Free Zone
- Karak Free Zone
- Karam Free Zone
The incentives offered within these zones include: income tax exemptions, customs duties exemptions, zero percent sales tax, income tax exemptions on foreign labor, exemptions on building taxes, options for 100 percent foreign ownership, and streamlined visa and residency permits.
The Jordanian Investment Commission is the main authority that registers companies in the FTZs and is tasked with promoting Jordan as an investment destination. No public registers comprising specifically FTZ companies exist, and therefore we do not exactly know how many companies are operating in the FTZs. However, Jordan’s Companies Control Department (CCD) does list some FTZ companies. CCD data includes company shareholders, directors, and relevant company details.
Commercial laws in Jordan are unclear with regards to who regulates the day-to-day operations of the FTZs. However, the counterfeit tobacco case we highlight below suggests that the Jordanian Customs Authority is tasked with that oversight.
The smoke case
A major counterfeit tobacco case in Jordan from 2018-2019 highlights the vulnerabilities of FTZs listed by major financial crime bodies like FATF, especially in a low to middle-income country where public corruption persists.
The smoke case, as it is known in local media, was one of Jordan’s largest corruption cases ever. The primary defendant, Awni Mutee, one of dozens named in the 64-page Arabic indictment, used companies registered inside and outside of the Zarqa and Mawakkar FTZs to counterfeit tobacco products, smuggle them out, and sell them on the local market.
Mutee and his co-conspirators evaded customs by illegally altering inventory records and invoices, bribing officials, moving and hiding cigarette manufacturing supplies among companies within the Zarqa FTZ, and mislabeling products. Mutee went so far as to personally finance a fertilizer company in order to disguise tobacco smuggled into the FTZs as fertilizer.
Mutee regularly bribed the Head of Customs at the time, Widah Al-Hamoud, in exchange for information on any upcoming raids on Mutee’s factories. Al-Hamoud also facilitated the smuggling of the counterfeit cigarettes out of the FTZ.
CCD records list several of the companies used in the scheme, some registered within FTZs and some outside. One of the companies linked to Mutee and not named in the indictment, Eastern International Trading, has a registered address in the Zarqa FTZ. Mutee is also the sole proprietor of The East for Cars in Lebanon — a company specializing in the trade of vehicles and vehicle spare parts.
Fig. 1: A snapshot from Sayari Graph listing the Zarqa FTZ as the address for Eastern International Trading
Considering that Mutee and Salamah Al-Alamat, the second named defendant, had a history of producing and smuggling counterfeit cigarettes from factories in Syria and Northern Iraq before operating in Jordan, it’s possible that Mutee used other companies, like the Eastern International Trading and The East for Cars, to facilitate illicit trade out of FTZs and across borders.
The smoke case makes clear how FTZs are vulnerable to financial crime, in this case tax evasion and the smuggling of counterfeit goods. Although regulatory regimes lag far behind how common FTZs have become, there is still much we can learn about the risks they pose and how public records can shed light on potentially risky actors that exploit them.
