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2013-11-27 11:48:43
Ever more wealth is being parked in fancy storage facilities. For some
customers, they are an attractive new breed of tax haven
PASSENGERS at Findel airport in Luxembourg may have noticed a cluster of cranes
a few hundred yards from the runway. The structure being erected looks fairly
unremarkable (though it will eventually be topped with striking hexagonal
skylights). Along its side is a line of loading bays, suggesting it could be
intended as a spillover site for the brimming cargo terminal nearby. This new
addition to one of Europe s busiest air-freight hubs will not hold any old
goods, however. It will soon be home to billions of dollars worth of fine art
and other treasures, much of which will have been whisked straight from
collectors private jets along a dedicated road linking the runway to the
warehouse.
The world s rich are increasingly investing in expensive stuff, and freeports
such as Luxembourg s are becoming their repositories of choice. Their
attractions are similar to those offered by offshore financial centres:
security and confidentiality, not much scrutiny, the ability for owners to hide
behind nominees, and an array of tax advantages. This special treatment is
possible because goods in freeports are technically in transit, even if in
reality the ports are used more and more as permanent homes for accumulated
wealth. If anyone knows how to game the rules, it is the super-rich and their
advisers.
Because of the confidentiality, the value of goods stashed in freeports is
unknowable. It is thought to be in the hundreds of billions of dollars, and
rising. Though much of what lies within is perfectly legitimate, the protection
offered from prying eyes ensures that they appeal to kleptocrats and
tax-dodgers as well as plutocrats. Freeports have been among the beneficiaries
as undeclared money has fled offshore bank accounts as a result of tax-evasion
crackdowns in America and Europe.
The concept is an old one. Originally freeports (also known as bonded areas)
were used to house commodities on the move, and later manufactured goods as
well. In the past half-century more and more of them have moved upmarket, a
trend that has accelerated recently as investment in art and other valuables
has shot up (see chart 1).
Several factors have fuelled this buying binge. One is growing distrust of
financial assets. Collectibles have outperformed stocks over the past decade,
with some, like rare coins, doing a lot better, according to The Economist s
valuables index. Another factor is the steady growth of the world s
ultra-wealthy population. According to Wealth-X, a provider of data on the very
rich, and UBS, a financial-services firm, a record 199,235 individuals have
assets of $30m or more, a 6% increase over 2012.
The goods they stash in the freeports range from paintings, fine wine and
precious metals to tapestries and even classic cars. (Data storage is offered,
too.) Clients include museums, galleries and art investment funds as well as
private collectors. Storage fees vary, but are typically around $1,000 a year
for a medium-sized painting and $5,000-12,000 to fill a small room.
These giant treasure chests were pioneered by the Swiss, who have half a dozen
freeports, among them sites in Chiasso, Geneva and Zurich. Geneva s, which was
a grain store in the 19th century, houses luxury goods in two sites with floor
space equivalent to 22 football pitches.
Luxembourg is not alone in trying to replicate this success. A freeport that
opened at Changi airport in Singapore in 2010 is already close to full. Monaco
has one, too. A planned freeport of culture in Beijing would be the world s
largest art-storage facility.
The early freeports were drab warehouses. But as the contents have grown
glitzier, so have the premises themselves. A giant twisting metal sculpture,
Cage sans Fronti res , spans the lobby in Singapore, which looks more like the
interior of a modernist museum or hotel than a storehouse. Luxembourg s will be
equally fancy, displaying concrete sculptures by Vhils, a Portuguese artist.
Like Singapore and the Swiss it will offer state-of-the-art conservation,
including temperature and humidity control, and an array of on-site services,
including renovation and valuation.
The idea is to turn freeports into places the end-customer wants to be seen
in, the best alternative to owning your own museum, says David Arendt,
managing director of the Luxembourg freeport. The newest facilities are dotted
with private showrooms, where art can be shown to potential buyers. To help
expand its private-client business, Christie s, an auction house, has leased
space in Singapore s freeport (which also houses a diamond exchange). The
wealthy are increasingly using freeports as a place where they can rub
shoulders and trade fine objects with each other. It is not uncommon for a
painting to be swapped for, say, a sculpture and some cases of wine, with all
the goods remaining in the freeport after the deal and merely being shifted
between the storage rooms of the buyer s and seller s handling agents.
Iron-clad security goes along with style. The Luxembourg compound will sport
more than 300 cameras. Access to strong-rooms will be by biometric reading.
Singapore has vibration-detection technology and seven-tonne doors on some
vaults. You expect Tom Cruise to abseil from the ceiling at any moment, says
Mark Smallwood of Deutsche Bank, which leases space for clients to store up to
200 tonnes of gold at the Singapore freeport.
Gold storage is part of Singapore s strategy to become the Switzerland of the
East. The city-state s moneymen want to take its share of global gold storage
and trading to 10-15% within a decade, from 2% in 2012. To spur this growth, it
has removed a 7% sales tax on precious metals. (The Economist understands that
the Luxembourg freeport s gold-storage ambitions will get a fillip from the
Grand Duchy s central bank, which plans to move its reserves now sitting in the
Bank of England to the facility once it opens. The bank declined to comment.)
Switzerland remains the world s leading gold repository. Its imports of the
yellow metal have exceeded exports by some 13,000 tonnes worth $650 billion at
today s price since the late 1960s, says the customs agency. The gap has
widened sharply since the mid-2000s. But trade statistics do not tell the whole
story, since they fail to capture the quantities of gold that go straight from
runways to the freeports.
A murky picture
Wealth piled up in freeports is a headache for insurers. The main building in
Geneva holds art worth perhaps $100 billion. The Nahmad art-dealing dynasty
alone is said to have dozens of Picassos there. More art is stored in Geneva
than insurers are comfortable covering, says Robert Read of Hiscox, an art
insurer. Coverage for new items is hard to come by at any price.
Insurers fear fire most, followed by a heist or a plane crash. They fret that
they may not have a clear picture of their exposure at any given site, because
some clients may have moved collections into freeports without informing them
(art is generally insured on a global basis, meaning it is covered wherever it
is). This has raised fears that insurers could struggle to pay claims if some
catastrophe struck. AXA Art, another insurer, has started asking clients to
tell it when they are moving costly works into storage so that it can get a
better idea of how exposed it is, says the firm s boss, Ulrich Guntram.
It is no help that freeports have habitually been loth to divulge even basic
security information, for fear that their clients (obsessed with secrecy as
they are) would object. In Geneva, for instance, insurers were long left to
guess at the number of storage areas in the structure and the fire-resistance
of the walls separating them factors that greatly affect potential losses. The
Swiss have become a bit more co-operative in recent years in response to the
greater openness of newer freeports, says Mr Guntram.
In a bid to soothe worries about concentrated storage, the private firm that
operates Geneva s freeport (which leases it from the majority owner, the local
canton) is building a new warehouse a short distance from its existing
structures. Most of the art is now stored in vaults under the main building.
These were built in the 1970s as a way for banks to avoid a planned tax on gold
held in their own vaults. The levy was repealed, the banks took back their
gold, and paintings and sculptures soon began to fill the void. Luxembourg s
freeport, which is scheduled to open next summer, recently conducted a roadshow
for insurers that highlighted the facility s state-of-the-art safety features,
including fire-fighting systems that suck oxygen from the air while releasing
inert gas instead of water, so as not to damage art.
Insurance is cheaper for those willing to park assets in remote places.
Switzerland is dotted with disused military bunkers, blasted into the Alpine
rock during the second world war and cold war. The government has been selling
these, and some have been bought by firms hoping to convert them into
high-altitude treasure chests. One is Swiss Data Safe, which sells storage for
valuables and digital archives at several undisclosed sites deep in the
Gotthard granite. It claims to offer protection from the forces of nature,
civil unrest, disasters and terrorist attack . Such places have a low risk of
fire or being hit by a plane. But they cannot offer the tax advantages that
freeports can.
Parallel fiscal universe
Freeports are something of a fiscal no-man s-land. The free refers to the
suspension of customs duties and taxes. This benefit may have been originally
intended as temporary, while goods were in transit, but for much of the stored
wealth it is, in effect, permanent, as there is no time limit: a painting can
be flown in from another country and stored for decades without attracting a
levy. Better still, sales of goods in freeports generally incur no value-added
or capital-gains taxes. These are (technically) payable in the destination
country when an item leaves this parallel fiscal universe, but by then it may
have changed hands several times.
Freeport representatives attend art fairs, hoping to attract clients by
promoting these benefits. Alain Vandeborre, who has set up freeports in Asia,
has estimated that the tax exemptions for users of the one in Beijing will
amount to an average saving of 34%. Even better, this is all legal though some
countries have had to alter their statute books to accommodate the concept.
Luxembourg amended its laws in 2011 to codify its freeport s tax perks. That,
plus the offer of land by the airport, helped persuade the project s backers to
put it there rather than in London or Amsterdam.
Luxembourg s government views the freeport as a useful adjunct to its
burgeoning financial centre, which has been built on tax-friendliness.
Deloitte, which helps firms and rich individuals minimise taxes, brokered the
deal. Mr Arendt believes the freeport could help Luxembourg compete with London
and New York in art finance, which includes structuring loans with paintings as
collateral.
Others question the economic benefits of freeports, arguing that they generate
few jobs (an expected 50-100 in Luxembourg s case) and modest tax revenue.
There is a cultural advantage, however: items can be imported temporarily into
the host country without invalidating the tax exemption, encouraging collectors
to lend pieces to local museums.
Apart from these legal tax benefits, some hope to use physical storage as a way
to continue illegally evading tax owed on past earnings. As Swiss banks come
under pressure to shop tax-dodgers, for instance, some are said to have been
recommending clients to move money from bank accounts to vaults, in the form of
either cash or bought objects, since these are not covered by
information-exchange pacts with other countries. A sign that this practice may
be on the increase is the voracious demand for SFr1,000 ($1,100) notes the
largest denomination which now account for 60% of the value of Swiss-issued
paper cash in circulation. Andreas Hensch of Swiss Data Safe says demand for
its mountain vaults has been accelerating over the past year. The firm is not
required to investigate the provenance of stuff stored there.
According to reports, some Swiss banks are running short of safe-deposit boxes
and imposing stricter conditions for renting them for instance, that the client
also has at least $3m in a deposit or investment account. ($1m used to be
ample.) Some disappointed clients are instead renting boxes in hotels. Others
are traipsing down to freeports. In July an employee at Geneva s freeport told
a reporter from Der Spiegel that scared customers were moving money from
banks to the city s warehouses, and that as a result all the freeport had left
to offer was a 10-square-metre room (108 square feet) for SFr22,000 a year.
Mr Arendt says the Luxembourg freeport is considering offering safe-deposit
boxes, which have become a hassle for banks. These would need to be in a
discrete area of the building with its own entrance, as such boxes are not
subject to the same (albeit relaxed) customs regime as goods in freeports.
Western countries have started to clamp down on those who try to use such
repositories to keep undeclared assets in the shadows. America has led the way.
Under a bilateral accord, Swiss banks will have to deliver information on the
transfer of funds from accounts, including cash withdrawals. Tax authorities
are growing more interested in the contents of vaults. Americans with untaxed
offshore wealth who sign on to an IRS voluntary-disclosure programme are
required to list foreign holdings of art, says Bruce Zagaris of Berliner,
Corcoran & Rowe, a law firm.
Paint it black
Tax-evaders are one thing, drug traffickers and kleptocrats another. In many
ways the art market is custom-made for money laundering: it is unregulated,
opaque (buyers and sellers are often listed as private collection ) and many
transactions are settled in cash or in kind. Investigators say it has become
more widely used as a vehicle for ill-gotten gains since the 1980s, when it
proved a hit with Latin American drug cartels. It is one of the last wild-West
businesses , sighs an insurer.
This makes freeports a very interesting part of the dirty-money landscape,
though also a black hole , says the head of one European country s
financial-intelligence agency. In a report in 2010 the Financial Action Task
Force, which sets global anti-money-laundering standards, fretted that
free-trade zones (of which freeports are a subset) were a unique
money-laundering and terrorist-financing threat because they were areas where
certain administrative and oversight procedures are reduced or eliminated .
Freeporters claim that the vast majority of their users are above board. A
desire for safe, discreet storage should not be confused with wrongdoing, they
argue. Mr Guntram of AXA says demand is being driven not by black money but by
a new breed of collector, buying not only for passion but as an investment. Mr
Arendt points out that Luxembourg s freeport will be subject to EU
money-laundering laws.
Numerous investigations into tainted treasures have led to freeports. In the
1990s hundreds of objects plundered from tombs in Italy and elsewhere were
tracked down to Geneva s warehouse (along with papers showing that some had
been laundered by being sold at auction to straw buyers, then handed straight
back with the legitimate purchase documents). In 2003 a cache of stolen
Egyptian treasures, including two mummies, was discovered in Geneva; in 2010 a
Roman sarcophagus turned up there, perhaps pinched from Turkey.
Under pressure to respond, the Swiss have tightened up their laws on
money-laundering and the transfer of cultural property. A law that took effect
in 2009 brought Switzerland s freeports into its customs territory for the
first time. They must now keep a register of handling agents and end-customers
using their space. Handlers must keep inventories, which customs can request to
see.
In practice, however, clients can still be sure of a high degree of secrecy.
Swiss customs agents still care more about drugs, arms or explosives than about
the provenance of a Pollock. They do not have to share information with foreign
authorities. Much of it is of limited value anyway, since items can be
registered in the name of any person entitled to dispose of them not
necessarily the real owner.
Even greater secrecy is on offer in Singapore. Goods coming in to the freeport
must be declared to customs, but only in a vague way: there is no requirement
to disclose owners, their stand-ins or the value or precise nature of the goods
( wine or antiques is enough). We offer more confidentiality than Geneva,
Mr Vandeborre declared when the facility opened.
However, it is not quite true to say that Singapore and other new sites are in
arm s-length competition with the more established facilities. In fact, they
share the same tight-knit group of mostly Swiss owners, managers, advisers and
contractors. Yves Bouvier, the largest private shareholder in the Geneva
freeport, is also the main owner and promoter of the Luxembourg freeport, a key
shareholder in Singapore and a consultant to Beijing. His Geneva-based
art-handling firm, Natural Le Coultre, is closely involved in running or
setting up all these operations. Singapore s architects and engineers were
Swiss, as are its security consultants.
This has fuelled speculation that Swiss interests have deliberately developed a
strategy to globalise the high-end freeport concept as a way to continue to
benefit, even as the crackdown on undeclared money in Zurich and Geneva drives
some of it to other countries. Franco Momente of Natural Le Coultre rejects
this interpretation. It s nothing more than supply and demand, he says.
Today many countries see the advantages of freeports for the local economy and
to have a place in the global art market. They re looking for solutions with
experienced operators, and [the Swiss] have long experience.
Barring dramatic regulatory intervention or moves to end their tax benefits,
freeports are likely to grow, driven primarily by clients in emerging markets.
At current growth rates the collective wealth of Asia s rich will overtake
Europe s by 2017, reckon UBS and Wealth-X (see chart 2). As this population
grows, so too could wealth taxes in the region, which are now low or
non-existent. That could drive yet more Indians, Chinese and Indonesians
towards the discreet duty-free depots which if they aren t already there may
soon be coming to an airport near you.