As the world is fretting about US president Donald’s 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 become a turning point for the finance hub’s economy: not only is GDP growth to slow to 2.4 percent – but the global trend towards cracking down on tax havens will inevitably reach Singapore as well.
This will be a problem, especially since business confidence is fading just as the IMF 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 company tax rates along with a number of other tax incentives, but now, the tax-haven policy is reaching its limit. With a global slowdown looming and the country’s reputation damaged by banking scandals and the sudden cancellation of a much-anticipated art fair – “Art Stage Singapore” – causing five-figure losses for exhibitors and countless more for local businesses and investors, Singapore can hardly afford more discouraging news.
Singapore’s credibility under pressure
Indeed, the country has been under pressure for years. After US and EU authorities 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 a variety of financial scandals, Singapore’s policy-makers rowed back, and were compelled to tighten their 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 in 2018, 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 fraught. In April, bans and jail terms of up to ten years were handed out to several HSBC bankers for financial crimes including selling fake financial products, forging documents and misappropriating client funds.
Now wonder then, that HSBC is frantically hiring to aggressively expand its financial crime compliance (FCC) department in its Singapore branches, although it is hardly the only bank to be doing so. Still, banks are not the city-state’s only issue. As Singapore tries to clean up its image by cracking down on unsavoury behaviour, the new legislation enacted is inevitably putting other, more bizarre tax-avoidance vehicles in the spotlight that are affecting Singapore’s own reputation as a tax haven.
The global crackdown on Yves Bouvier’s “freeports”
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 like tax credits and regulatory flexibility.
But their modern iteration used in developed countries today serves a different purpose than those in developing ones: namely keeping priceless luxury goods such as paintings, sculptures and gold from the taxman. Devised and promoted by Singapore-Swiss art dealer Yves Bouvier – primarily known as a subject of numerous lawsuits for fraud by his former clients, including Canadian art collector Lorette Shefner, Russian businessman Vladimir Scherbakov and owner of Monaco football club Dmitry Rybolovlev – 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, other facilities were established in Luxembourg – and Singapore. Thanks to the secrecy and discretion surrounding them, these freeport projects have come under increased scrutiny. Among other things, the facilities’ possible role in tax-dodging, money laundering or even financing terrorist organizations is currently being investigated the world over.
Facing negative press, some freeports have launched campaigns to distance themselves from Bouvier and have implemented policies to increase 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 German MEP Wolf Klinz 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 Singapore’s freeport’s future and it is easy to see why. A 2016 report by the Financial Action Task Force (FATF), an inter-governmental 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 Singapore Freeport,” raising concerns about the prevalence on financial crime behind the Freeport’s 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 at 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 in 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 interests.