PM Boris Johnson is being warned his plan for 10 British freeports could turn into havens for terrorists and money launderers.
Freeports allow import and export of goods outside normal rules.
But they have attracted dodgy goods paid for in cash.
The EU studied Luxembourg freeport run by controversial Swiss art dealer Yves Bouvier to see how new rules affected it.
A risk assessment added freeports to activities “potentially vulnerable to money laundering or terrorism financing”.
Lib Dem Ed Davey said: “Johnson must drop this ludicrous idea immediately.”
International Trade Secretary Liz Truss has claimed freeports will "do for trade what Canary Wharf did for financial services".
Speaking at the Conservative Party conference in Manchester, Ms Truss said: "There are some people who fear change and competition. They think the solution is to protect ourselves from the future.
"I believe this is the wrong approach.
"Britain will be on the side of the competitive, freedom fighters not the protectionists.
"That's why in striking new free trade deals I am prioritising free market democracies, countries who share our values and can help set global standards.
"We're not talking here about EU-style regulatory harmonisation - a one-size-fits-all approach - but mutual recognition of other countries with high standards."
