Free Trade Zones Under Scrutiny: The Hidden Risks of Trade-Based Money Laundering

Free Trade Zones (FTZs) have become indispensable pillars of the global economy, serving as powerful drivers of investment, export growth, and international trade facilitation. Designed to spur economic development through tax breaks, streamlined customs processes, and simplified regulations, these zones have flourished across the world. Yet, beneath their legitimate economic function lies a complex and increasingly troubling reality: FTZs have also emerged as fertile ground for trade-based money laundering (TBML), a practice that exploits the very regulatory leniencies meant to attract business.

FTZs are specific geographic areas within national borders where goods may be imported, processed, stored, and re-exported with minimal government interference. While their primary purpose is to attract foreign capital and promote trade, the features that make them efficient also render them vulnerable. The lack of rigorous inspections, weak regulatory oversight, and corporate anonymity often associated with FTZs provide criminal organizations with ideal conditions to move illicit funds under the guise of legitimate trade.

The mechanics of TBML within these zones are shaped by distinct structural flaws. FTZs typically function with reduced customs oversight, allowing bad actors to manipulate trade documents through tactics like under-invoicing or over-invoicing. These methods help obscure the true value of goods, providing cover for illicit money to enter or exit the financial system undetected. Moreover, corporate secrecy and a lack of transparency regarding beneficial ownership in many FTZs hinder investigators’ ability to track the true parties behind financial transactions. The intricate, multilayered nature of global trade networks—especially those intersecting within FTZs—compounds the problem, making it even more difficult to follow the trail of illicit funds. To make matters worse, poor record-keeping practices and limited information sharing among customs and financial oversight bodies leave authorities with significant blind spots.

Examples from around the world underscore the extent to which FTZs can be exploited. In Paraguay’s Ciudad del Este, situated in the notorious Tri-Border Area bordering Brazil and Argentina, FTZs have become hotbeds for counterfeit goods and contraband. These activities serve as conduits for drug trafficking proceeds and terrorist financing, often facilitated by falsified invoices tied to luxury electronics and other high-value products. In Switzerland, the Geneva Freeport has become emblematic of how secrecy and lax regulation can be misused. Investigations there have exposed cases of stolen artworks and cultural relics being stored with little oversight, directly linking the Freeport to schemes involving tax evasion and money laundering.

Dubai’s numerous FTZs, long celebrated for their commercial dynamism, have also faced repeated allegations concerning illicit gold flows. “Limited oversight and loopholes in beneficial ownership transparency” have reportedly enabled substantial quantities of smuggled African gold to enter global markets disguised as legitimate trade. Though the UAE has initiated reforms to tighten regulations, systemic vulnerabilities continue to persist. Similarly, Panama’s Colón Free Zone—one of the largest in the world—has historically served as a platform for laundering drug proceeds through phony trade involving consumer goods, thanks to weak customs enforcement and poor corporate transparency.

In response to these growing concerns, global regulatory and enforcement bodies have ramped up their efforts. The Financial Action Task Force (FATF) has strongly advocated for implementing robust anti-money laundering and counter-terrorist financing protocols within FTZs. This includes higher standards for transparency and mandatory due diligence regarding beneficial ownership. Customs authorities like the U.S. Customs and Border Protection (CBP) and the World Customs Organization (WCO) have begun to closely monitor high-risk commodities and bolster international collaboration to flag suspicious trade patterns. On the legislative front, countries such as Switzerland, the UAE, and Panama have started reforming their FTZ regulations to improve transparency, mandate stronger documentation requirements, and enforce beneficial ownership disclosures.

Nevertheless, the road ahead is far from clear. Discrepancies in national regulatory regimes, limited enforcement capacities, and the inherently cross-border nature of TBML continue to pose significant challenges. While FTZs remain integral to global economic infrastructure, the pressing need to shield them from criminal misuse is undeniable. Successfully addressing this issue will require nothing short of a coordinated, international effort—anchored in shared regulatory standards, full compliance with FATF guidance, greater transparency, and meaningful enforcement.

By tackling these weaknesses head-on, the global community can preserve the legitimate economic promise of Free Trade Zones while shutting down the avenues that allow illicit financial flows to thrive.

By fLEXI tEAM