Singapore recently leapfrogged Hong Kong and the United States to become the world’s most competitive economy. A number of factors have contributed to Singapore’s remarkable rise to the upper echelons of the financial world – from its enthusiastic embrace of financial technology to its unique model of governance. Some of the tools Singapore has used to draw in investors, however – such as the secretive tax-free zones known as freeports – risk opening the Lion City up to serious security concerns.

Financial powerhouse

Singapore’s strategic location is undoubtedly one reason for its current prosperity. The city-state sits squarely on the Strait of Malacca, one of the world’s most important trade routes and a bridge between the Indian and the Pacific. As the gateway to the ASEAN (Association of Southeast Asian Nations) region, Singapore has become a world hub for wealth management.

According to a recent survey by the Monetary Authority of Singapore (MAS), Singapore-based executives’ total assets under management (AUM) now measures S$3.3 trillion (US$2.4 trillion) and is growing at a rapid rate, outpacing global averages. Since 2013, Deutsche Bank has stored gold bullion worth US$8.9 billion in the Singapore FreePort, illustrating the city-state’s increasing significance as a financial haven.

The dark side

Even as Singapore has reaped the benefits of its status as a financial hub, concerns have mounted that unsavory characters may be taking advantage of the small country’s business-friendly regulations. As other banking havens known for their discretion and low taxes, such as Switzerland, have cracked down on anonymous bank accounts and other loopholes that allowed widespread money-laundering, Singapore’s reputation as “a home for quiet money” has spread.

After Singaporean banks were drawn into the major international money-laundering scandal surrounding Malaysia’s 1MDB (1Malaysia Development Berhad) fund, the city-state’s government passed legislation to address problem areas from dealers trading in precious stones to the carrying of large amounts of cash into the country.

Singapore has yet to address, however, one particularly problematic part of its financial apparatus: its FreePort, nicknamed “Singapore’s Fort Knox,” whose lack of transparency has opened the city-state up to risks of money-laundering and financing terrorism.

Yves Bouvier’s freeport model

The Singapore FreePort, adjacent to Changi Airport, was outfitted with every modern convenience and then some – its hyper-guarded vaults are barricaded by 7-ton steel doors – by founder Yves Bouvier, the self-styled “freeport king.”

Bouvier made his name as a luxury-goods shipper in Switzerland, but he’s now mainly recognized as the subject of countless legal proceedings. Former clients, including Canadian art collector Lorette Shefner, Russian billionaire Dmitry Rybolovlev and Pablo Picasso’s stepdaughter Catherine Hutin-Blay, have accused Bouvier of defrauding them out of more than US$1 billion, while Swiss authorities have questioned whether Bouvier is a bona fide Singaporean resident or whether he owes Switzerland more than 165 million francs (US$166 million) in back taxes.

A museum and gallery that Bouvier was heavily involved in, the Singapore branch of the Pinacothèque de Paris, closed hurriedly and under peculiar circumstances in 2016, less than a year after it opened – ostensibly because of a drop in ticket sales, while tenants of the museum complex complained that the Pinacothèque management had failed to honor their agreements.

Yves Bouvier’s free-port empire has expanded even as his legal troubles have piled up. Bouvier’s company Natural Le Coultre was the largest tenant at Geneva’s freeport until he was forced to sell it in 2017, while the Swiss dealer remains the majority owner of Le Freeport Luxembourg, as well as the facility in Singapore.

Money-laundering hubs

These European facilities have been the target of ever-increasing criticism, particularly after the $230 billion money-laundering scandals uncovered last year by an employee in Danske Bank’s Estonian subsidiary. The full details and repercussions of the Danske Bank scandal are still coming to light, but it has underlined just how much illicit money is flowing through European financial institutions.

Among the dubious funds that passed through Danske Bank? The slush funds of the infamous Azerbaijani laundromat – a money-laundering scheme that a recent Forbes article linked Le Freeport Luxembourg chief executive officer Philippe Dauvergne with.

Dauvergne’s potential connections with dirty Azerbaijani money is likely to intensify European parliamentarians’ conclusion that the problematic risk profiles of freeport owners and operators greatly increase the chances that the facilities will be used for money-laundering, tax evasion or other illicit purposes.

A study by the European Parliament’s TAX3 Committee, released in February, declared that freeports should be phased out entirely in order to crack down on money-laundering and tax evasion; it’s a stance that was backed by the Parliament as a whole on March 26, when it voted overwhelmingly (505 in favor and only 63 against) to support the TAX3 Committee’s report.

Extremist activities

In addition to the general likelihood that freeports will be used for tax evasion and money-laundering, the facilities are likely funneling funds to terrorist groups, including Islamic State (ISIS).

Singapore has resolutely fought against extremist violence, even as incidents such as the Easter bombings in Sri Lanka and the Christchurch mosque attack have underlined how these security risks are increasing across the Pacific region. Singapore has taken a number of proactive actions against terrorism, including signing up to the Financial Action Task Force (FATF) against financing terrorism in 1992 and contributing military personnel and equipment to the global coalition against ISIS.

The terrorism threat in Singapore remains high, however. A number of Singaporean citizens who traveled to fight with ISIS in Syria and Iraq may return to Southeast Asia after the terrorist group’s heavy losses. Singapore also has to contend with a number of other extremist factions, notably Jemaah Islamiyah and Filipino groups sympathetic to al-Qaeda.

These groups have plotted attacks on Singaporean soil in the past, targeting institutions such as the Singapore Stock Exchange. As Bilveer Singh, a professor at the National University of Singapore, noted, Singapore is an attractive target for extremist groups because “it is seen as the capital of capitalism in the region and a key node in international trade” and that a successful attack on the city-state “would represent a psychological boost for the jihadists, proving that Singapore is not only vulnerable but also penetrable.”

Unfortunately, extremist groups may have already penetrated Singapore’s financial institutions, especially its FreePort. Looted antiquities from the Middle East have turned up in freeports around the world, including in Singapore, and are likely to have been used to fund terrorist groups such as ISIS.

Given these links to criminal activity from money-laundering to terrorism, it’s not surprising that one commentator has even remarked that “freeports are a threat to national security and the rule of law in Europe and Asia” – unfortunately, Singapore seems yet to take notice of the worrying possibilities implied by these facilities, a lapse that threatens its standing as a global financial hub.