Russian Yachts Are Held in Harbors. What About Art in Secretive Free Ports?
(Bloomberg) -- As sanctioned Russian oligarchs’ assets are detained or frozen around the world, many free ports—vast warehouses used by the super-rich to store art and valuables, tax-free—have stayed largely below the radar, at least for now.
Might that change if the sanctions ring continues to tighten? “I assume [questions] will come eventually,” says Fritz Dietl, president and founder of Delaware Freeport LLC, who says he has yet to be contacted by law enforcement agencies of any kind regarding assets potentially owned by sanctioned Russians. “But when it comes, and if it comes through the proper channels, then we’ll answer the authorities.”
Free ports are not new. Ports Francs et Entrepôts de Genève, known both as Geneva Freeport and Free Port, is the world’s biggest; it capitalized on Switzerland’s neutrality to distribute Red Cross parcels to prisoners of war across Europe during World War II.
Such warehouses, often adjacent to rail lines or airports where goods are treated as not yet having been imported into the host country, really came into their own with the emergence of a globe-trotting elite in the jet age. Their numbers began to proliferate in the past decade as the art market boomed and wealthy collectors sought to cut the tax bills they pay to move their masterpieces around the globe.
But for years, mentioning free ports in a conversation conjured up images of havens where shady transactions might occur away from the prying eyes of customs police. In reality, free ports are entirely legal ways to offer wealthy collectors a legitimate way to avoid paying duplicate import duties. “Most of our clients use free ports,” says Philip Hoffman, chief executive officer of Fine Art Group, an art advisory and investment company. “After they purchase something, they’ll send it to the free port in whichever jurisdiction suits them.”
A classic example might be a globe-trotting American art collector who bought a $20 million Picasso at Art Basel in Switzerland. The canvas might then be shipped to Geneva’s cavernous free port to save hundreds of thousands of dollars in import duties; once the collector has set up an appropriately attractive tax environment (that pied-à-terre in Rome might be a cheaper place to hang the painting than the apartment in New York), transport will be arranged to its final destination.
“Many of my clients have five houses,” Hoffman says, “so they’re thinking, ‘Where do I put this?’ There can be huge tax advantages of moving it out of New York or London, and you have to take it somewhere.”
A series of scandals involving stolen art—and even looted antiquities from the war in Syria—that turned up in Geneva’s free port has dented these warehouses’ reputations. The Swiss government, under pressure to strengthen governing rules, has tightened some, but significant loopholes remain. Swiss citizens can store art or other valuables for no more than 12 months inside, but foreigners face no time limit.
When asked if they’d been contacted by law enforcement, a receptionist at Geneva’s free port relayed the question to its director, who didn’t have an immediate response.
Philippe Dauvergne, chief executive officer at the Luxembourg High Security Hub (until 2020 known as Le Freeport) says that anti-money laundering laws prohibit him from saying whether he’s been contacted by law enforcement.“I am convinced there will be checks,” he says, “and that’s very good.”
In Luxembourg, “all the objects that arrive here have to comply with anti-money laundering rules, regardless of their value,” says Dauvergne. Space is rented to a small number of licensed tenants, all previously checked by Luxembourg customs; they, in turn, rent out their space to private clients.
“The economic beneficiary is automatically known by these tenants," Dauvergne continues, "and they, in turn, are in direct contact with the financial intelligence unit'' of Luxembourg.
In Switzerland and the U.S., disclosure of beneficial ownership (the name of the ultimate, physical owner), is not required. An owner can be a holding company or other legal entity, providing opportunity for a sanctioned individual to hide behind a shell company. So, while many shippers and free ports say they require a driver’s license or passport on file for whoever is authorized to move the artwork, that identification could, in theory, be that of a U.S. representative for an offshore corporation that is ultimately controlled by a sanctioned individual.
“An authorized signatory for a closely held company is exactly that: a shadow director who’s just paid to sign documents,” says Rena Neville, a founder of the art market anti-money laundering consultant Corinth Consulting. “Free ports know who signed for the storage, but they don’t know who’s owning or controlling the entity.”
It’s a concern raised by the U.S. Treasury Department in a study published last month on money laundering and terror financing through the art world.
“Shell companies can be used as financial conduits for the transfer and holding of funds and assets, allowing the ultimate natural person owner(s) to avoid giving their names to dealers who may screen for sanctions risk,” the report reads.
Nowhere to Go
Several experts say Russians sanctioned in response to the invasion of Ukraine are unlikely to take fresh advantage of free ports.
“Presumably, a person who’s hit the sanctions list would want to move their art out of harm's way,” says Thomas Danziger, a New York-based art lawyer who’s also a financial partner in Delaware Freeport. “But anyone who helps that kind of move, if it’s prohibited, would be crazy to be involved in it. You’re not going to get a shipper to help move the work, you’re not going to get a lawyer to help with the transaction; no insurance company will engage.” So, he continues, “you can probably take a minivan yourself and drive the art into the countryside, but that’s about it.”
Free ports, he adds, don’t make princely sums from storing priceless artworks. “They’re not getting millions to store a Monet, they’re getting paid a couple hundred bucks a month,” he says. “Why would they possibly risk criminal and civil penalties?”
There is, however, a high likelihood that Russians who already have work in storage will leave it, rather than attempt to move or sell it. “If you’re in a Swiss free port at the moment, I would absolutely not go anywhere near it,” says Neville. “Because it’s unlikely in your name. It’s a Secret Company LLC, owned by another Secret Company LLC, so no one’s going to know who it is.”
And unless an artwork is highly discounted, there aren’t usually collectors lining up to buy it from a sanctioned individual. “It’s not that easy to sell art in a week,” says Hoffman. “I know you can discount it very quickly and so on—and no doubt there will be one or two people thinking along those lines—but we haven’t seen anything like that or been made aware of it.”
Instead, movement into free ports might appeal to individuals not yet on the sanctions list but who consider themselves likely targets. Their art, safely inside a tax-free warehouse in a country they’re not associated with, has a much higher likelihood of staying untouched. “The logical instinct—and self-preservation instinct—is to take anything that’s not stuck in an EU or U.K. jurisdiction and get it inside of a free port or a home” says Neville.
Swiss customs said it cannot say “for tactical reasons” if it’s noticed an uptick in customs filings of valuables since Russia invaded Ukraine. Dietl, of Delaware Freeport, says he has no clients on the sanctions list and “less than a handful of clients with Russian-sounding names.”
Insiders are girding themselves for change.
“I think it’s about to emerge from being a theoretical to a tangible problem,” says Nicholas O’Donnell, editor of the Art Law Report and a partner at Sullivan & Worcester LLP in Boston. This means that lawyers will have to be increasingly vigilant when representing clients in art deals.
“We’d be foolish not to have our guard up about the counterparty and who it might be,” says O’Donnell. “With the landscape of sanctions changing so rapidly, that person you do a deal with now may be on a sanctions list two weeks from now.”
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