This post was written by Leila A. Amineddoleh, Esq., of Amineddoleh & Associates LLC. Ms. Amineddoleh has been published extensively on issues related to art, cultural heritage, and intellectual property, and has appeared in major news outlets, including the New York Times, Forbes Magazine, TIME Magazine, and the Wall Street Journal. Ms. Amineddoleh’s post discusses how art assets may be hidden from divorcing spouses, creditors & others. It is also the 29th post at the Asset Search Blog’s “Divorce & Hidden Money” series:
In an entry that was published on this blog, I discussed the ways in which art collectors use undisclosed art holdings and valuation uncertainties to evade legal responsibilities (such as payment of tax bills of alimony to divorced spouses). Just as Audrey Hepburn’s character discovered that her husband hid his wealth in three valuable stamps in the 1963 film “Charade,” art collectors have been using their collections to hide value for years. Difficulties related to valuation arise, particularly when it becomes impossible to locate the artwork or determine the identity of the actual owner. But with breaking news about the “Panama Papers,” suspicion about art’s role in the obstruction of justice and concealment of funds has been confirmed again. Wealthy individuals are using artwork as an investment tool and they are shielding these holdings through shell companies and misleading tools. In light of these facts, the art world is once again coming under scrutiny.
The art market is one of the least regulated markets in the world, as transactions are completed without oversight, due to the nature of the trade. It is particularly shocking as the value of the art market is astronomically high. According to Art Market Report, sales of art exceeded $63.8 billion in 2015.
However, there are valid reasons for anonymity in the art world. First and foremost, secrecy is guarded due to security concerns. Whereas tens of millions of dollars in cash are difficult to walk off with, artworks are usually portable. A single lightweight canvas may be worth over $100 million, making the object vulnerable to theft. It is important to protect information about the works in private collections to limit the information available to thieves fixated on the objects.
Another reason to hide information is more personal. Collectors may not want to admit to selling works due to poor cash flow. Some owners are forced to sell works when facing financial hardships. Those individuals do not want this information to become public. At the same time, buyers may not want competing buyers to procure an overabundance of information about their purchases. Art is a personal passion, and something that some collectors do not want made public.
However, art is also used to hide assets, evade taxes, and unfairly withhold value from deserving parties (like creditors or divorcing spouses). This regrettable use of art was confirmed after the leak of the “Panama Papers.” In April, a Panamanian law firm, Mossack Fonseca, experienced a security breach and had over 11 million documents from internal files become public. Although illegal to assist someone in tax evasion, Mossack Fonseca specializes in establishing corporate structures to hide assets. The information in the leak confirmed the suspicion that wealthy individuals use shell companies to hide assets in contemplation of impending divorces or litigation.
One such situation involved the highly publicized divorce of Russian billionaire Dmitri Rybolovlev. In February, the New Yorker published an expose about the Russian billionaire’s relationship with Yves Bouvier, the “king of the freeports.” (The use of freeports to store property has also come under scrutiny as it is feared that the freeport framework allows customers to commit tax evasion or money laundering due to the lack of oversight of transactions executed in those locations.) The New Yorker article discussed the art buying relationship between Rybolovlev and Bouvier, and the way that Bouvier hid important information about the value of works from his client. The article also mentioned the ongoing divorce between the Russian collector and his wife. The twist is that Rybolovlev has been accused of hiding assets from his wife during his drawn out divorce. With the exposure of documents from Mossack Fonseca, it was revealed that Rybolovlev was withholding funds from his former spouse. According to the documents, the billionaire held shares in a company in his name only, contrary to his wife’s belief that assets were placed in both their names.
An incident involving the use of a shell company to protect against art theft litigation relates to a famous family of collectors, the Nahmad Family, and a Modigliani painting. The painting, “Seated Man With a Cane,” is a work with a storied past involving appropriation by the Nazis. The Nahmads have faced problems with art and the law the past, and they denied owning this work. According to art historians, the Modigliani work was removed from Paris upon the Nazis’ entry into the French capital. At that time, gallery owner Oscar Stettiner fled the city and left behind his art collection. As with many works of valuable art, the Nazis seized the portrait. By the time the descendants of Stettiner, began the searching for the piece, it had already disappeared.
The work vanished for decades, but reappeared on the art market at Sotheby’s in 2008, with the well-known Helly Nahmad Gallery listed as consignor. At this time, Stettiner’s sole heir, Philippe Maestracci, discovered the work’s whereabouts and asserted that this was his family’s missing property. He drew attention to the work’s problematic provenance. His scrutiny of the sale led to the work’s failure to sell at auction. Following the failed sale, Maestracci demanded the return of the painting from the Nahmad Gallery. However his efforts were fruitless—the gallery claimed that it did not own the work. The Nahmad Gallery asserted that the painting was bought by International Art Center SA (“ICA”), a Panamanian company. Not only did they no longer own the painting, but they could not be sued in NY. However, Maestracci asserts that IAC is merely a shell company for the Nahmads, as it was established by Ezra Nahmad and then transferred to David Nahmad through the transfer of shares in 2008 and 2014.
Is this a legitimate reason to stop the title dispute from moving forward in the US? Will Maestracci be able to “pierce the corporate veil” and hail the Nahmad Gallery’s owners into court? In fact, the lawyers for the Nahmad Family are aware of the dangers of associating IAC with them, as they faced difficulties in finding appropriate agents of the family to sign documents; realizing that having Nahmad family members signing on behalf of IAC would entangle the family even tighter with the shell company.
The use of shell companies to shelter actual owners from liability is somewhat common in the corporate world. As many art collectors are sophisticated, (and the same wealthy individuals involved in high-stake corporate enterprises), it is unsurprising that some of these individuals sometimes use unscrupulous means to protect valuable art holdings. It is disappointing to see beautiful artworks treated in such a way, but it is expected in a market where it is becoming commonplace for single pieces of art to sell for over $100 million.
Copyright 2016 Fred L. Abrams