Free Trade Zones are specific geographic regions that facilitate international trade activities within any country. These zones are strategically designed to allow the importation, storage, processing, and subsequent re-exportation of goods with minimal or sometimes no tariffs, taxes, or extensive bureaucratic procedures. The overarching goal of FTZs is to boost trade and investment by offering various benefits to businesses, including tax incentives, eased regulatory requirements, and simplified customs processes. Nevertheless, Free Trade Zones are also potentially misused for money laundering purposes due to their relaxed regulations and limited supervision. In this blog, learn how business verification procedures can mitigate the risk of shell companies in free trade zones.
What Are Free Trade Zones?
Free trade zones (FTZs) are special areas within a country where goods can be imported, stored, handled, manufactured, or re-exported without being subject to the usual customs duties and taxes. These zones offer key features such as duty exemption, flexibility in operations, cost savings, streamlined logistics, and regulatory advantages. The concept of FTZs dates back to ancient times, and modern zones have evolved to include various types of economic zones aimed at attracting foreign investment and boosting local economies. FTZs play a crucial role in global trade by facilitating the movement of goods and reducing costs for businesses, ultimately enhancing their competitiveness in the international market.
Free trade zones are the areas within a country where goods can be exported and imported easily without customs duties and taxes. Some of the essential features of FTZs are:
- Flexible operations
- Streamlined logistics
- Cost saving
- Regulatory relaxation
In addition to that, these economic zones are also a major source of attracting both local and foreign investments, boosting the economy in the long run. Free trade zones have significant importance in global trade as they facilitate the movement of goods and reduce the costs for companies.
Benefits of FTZs for Businesses
- Inventory Control and Flexibility
Organizations that operate in free trade zones can keep goods without paying to store them.
However, they only have to pay if they want to move out the goods for domestic consumption they have to pay. This gives more flexibility in inventory operations, reducing the financial burden associated with holding stock.
- Cost Effectiveness
Free trade zones allow businesses to import raw materials or other things besides manufacturing and assembling them. After that, they also export these goods without incurring import duties, reducing production costs by increasing competitiveness.
- Tax Advantages
Businesses that are located within Free Trade Zones (FTZs) can enjoy a range of advantages, including reduced or deferred taxes. These tax benefits typically include exemptions from customs duties and import/export taxes. By taking advantage of these tax incentives, businesses can achieve substantial cost savings and experience improved cash flow, ultimately enhancing their overall financial performance.
- Streamlined Custom Procedures
In FTZs, customs procedures are comparatively easy and streamlined as compared to countries where the rules are stringent. This simplification of procedures results in faster processing time and lowers administrative costs for businesses.
Best Practices for Due Diligence in FTZs
Due diligence is one of the best practices of business verification that aims to secure transactions and other company operations. This method investigates and evaluates corporate entities by verifying their structure and their owners. Here’s how due diligence helps in mitigating the potential risk of financial crimes:
- Business Identity Verification
Know Your Business (KYB) is a set of procedures that financial institutions or regulatory bodies use to evaluate the legal status of the company. Companies can mitigate risks by implementing robust KYB programs. To avoid the threat of risk of fraud and legal procedures, it is essential to conduct these checks before doing business with a company operating in a free trade zone.
KYB processes, companies can mitigate risks, avoid legal repercussions, and ensure they are dealing with legitimate and trustworthy partners.
- UBO Verification
While verifying a company in any country, UBO verification is one of the most important steps. The beneficial ownership structure of a company is usually complex. This can be challenging for regulatory bodies during background checks. Criminals manipulate complex ownership frameworks and use them for money laundering and terrorist funding. By finding and confirming who ultimately owns a company, companies can make sure that their operations are legal.
Concluding Remarks
Free trade zones offer plenty of benefits, but they also present different, unique challenges in the form of shell companies. Companies must prioritize due diligence to protect the integrity of the FTZs in the global financial system. By leveraging technology, collaborating with regulatory authorities, and conducting continuous monitoring, businesses can mitigate the risks posed by shell companies and ensure that FTZs remain a safe and productive environment for legitimate trade.