Panama Papers Reveal Hidden Art Assets
A Panamanian law firm that created offshore tax havens for a host of well-known world leaders, entertainment celebrities and wealthy individuals has its tentacles deeply rooted in the international art market, according to the International Consortium of Investigative Journalists’ inspection of 11 million documents leaked from that law firm, Mossack Fonseca.
Locked in the so-called “Panama Papers” files, in addition to revelations of a circuitous trail of $2 billion in assets leading back to Vladimir Putin, evidence of tax-haven profiteering by Britain’s Prime Minister David Cameron and incriminating information about the tax-haven holdings of soccer superstar Lionel Messi, there are answers to mysteries involving Rembrandts, van Goghs, Matisses, Chagalls, Modiglianis and other masterpieces, according to the Australian Financial Review.
The “Panama Papers,” reported the ICIJ, also shed light on the real story behind Christie’s milestone 1997 Ganz collection auction, which is credited with starting the art market’s wild enthusiasm for modern art.
These and other art-related disclosures in the Mossack Fonseca treasure trove of documents have raised important art insurance issues.
“The ‘Panama Papers’ have brought to light an unprecedented public, moral hazard that will no doubt increase governmental scrutiny on art ownership and title.” — Robert Read, head of art and private clients, Hiscox London Market
First and foremost is the matter of art title insurance.
Lawrence M. Shindell, New York-based chairman of ARIS Title Insurance Corp., a wholly owned subsidiary of Argo Group, said, “The ‘Panama Papers’ highlight the growing need for transparency in the international art industry. The less the transparency, the greater the title risks with high value, highly mobile art and collectibles.”
Across the many kinds of title risks associated with art and high-value collectibles, whether or not a property insurer has paid insurance proceeds covering the physical loss, clear legal title goes to the core of asset value, which is what enables an artwork to be freely marketable, Shindell noted.
“Hiding away a work of art only compounds the title problems, increases the reality as well as the perception of title risk in an increasingly risk-averse world and impacts object value,” Shindell said.
Diane Jackson, Washington, D.C.- based COO and head of day-by-day operations for Huntington T. Block art insurance brokerage, noted, “In the case of disputed art revealed by documents leaked from Mossack Fonseca and possibly other tax-haven creators, the holders of the art may be asked to provide proof of clear title because the law firm set up the account offshore strictly for hiding purposes.”
If it is determined that art has been hidden in an offshore account, but then the art comes to light publicly, this may well result in a lawsuit being filed by somebody who claims rightful ownership, Jackson added.
“This is typically what happens when heirs will do research to determine if the art belongs to them,” Jackson said. “If they can provide proof that the art was wrongly taken from their family, as in the case of some contested Nazi art, they could dispute the ownership of the art in question. The individuals who have been hiding the art would then need to show how and when they acquired it.
“If a resolution is not reached between the two parties, then the courts would determine who the true owner is,” observed Jackson.
As for storage possibilities for art registered in offshore tax havens, Robert Read, head of art and private clients at Hiscox London Market, said, “Depending on the circumstances of ownership, there are a number of likely storage options for artworks owned by clients the likes of Mossack Fonseca. If the circumstances relate to tax planning, it is likely artworks will be held in a Freeport or under an alternative ownership structure, though it is feasible that such works would be on display in private homes.”
Whether artwork is held in one of the growing number of art warehouses around the world or kept in an owner’s home, property insurance for this art may be provided by law firms like Mossack Fonseca or it may be taken out from an insurance company by the holder of the artwork, Read noted.
If a work of art that has been stolen at some point suddenly comes to light as a part of Mossack Fonseca revelations or by some other means, Chicago-based Scott Hodes, senior counsel at Bryan Cave LLP, said this presents yet another kind of major art insurance-related matter.
“A collector needs to ensure that missing or lost artwork is listed in the records of the Art Loss Register as soon as possible and that the FBI is notified when the loss or disappearance occurred,” said Hodes. “These actions will help establish the collector’s timely claim.”
Hodes added that the collector needs to review the art insurance policy in force at the time of the loss and focus on the definition of “loss” in the insurance policy.
“A financial loss may not be covered,” said Hodes. “But if a theft or mysterious disappearance of the artwork is covered, was the insurance company notified when the loss occurred or was discovered? If so, then the insurance company should be contacted immediately if the policy provides that the insurance company is required to represent the collector in any effort to recover the artwork.”
The collector should check to determine if the policy allows reimbursement of legal fees and costs or provides that the insurer must represent the collector, Hodes said.
“Potentially, this could be a big money saver for the collector,” Hodes noted.
Lastly, Hodes said, the collector may need to act quickly through his or her counsel to file a lawsuit in the proper venue to sequester the artwork and enjoin any sale or disposition of the artwork until a court has ruled on lawful ownership.
But insurance companies themselves may have a means to pursue recovery of stolen or lost works of art that may suddenly come to light in LLCs held by Mossack Fonseca or firms like it.
“Some insurance companies may have already paid claims under terms of the art policy when an insured art collector was the victim of a theft or a mysterious disappearance,” Hodes said.
“As a consequence, the insurance company that paid off the initial claim may now be in a position to sue a LLC to recover the work of art if it turns out that the missing artwork is an asset of the LLC.”
Looking to the future, Hiscox’s Robert Read observed, “The ‘Panama Papers’ have brought to light an unprecedented public, moral hazard that will no doubt increase governmental scrutiny on art ownership and title, but this alone will not be sufficient to force behavioral change among owners. The only way this will affect the art market is if governments enact laws which render current ownership arrangements illegal.”
Finally, Read noted, “The art market typically follows the lead of other established asset classes, so as long as the storage of art in international Freeports behind complex ownership structures continues to be legal, it will likely remain in practice for the purposes of both tax planning and privacy.”