Bloomberg

(Bloomberg) -- Art collectors have begun to pull their paintings and sculptures out of Geneva’s secretive free port storage facility as the site once again finds itself under scrutiny following the identification of a $20 million Amedeo Modigliani painting in its tax-free vaults that was allegedly stolen by the Nazis.

“A few” customers over the past six months have transferred their collections to newer rival Delaware Freeport near Philadelphia and similar warehouses in London, David Hiler, president of the Geneva Free Ports, said in an interview.

Facing criticism that the 127-year-old facilities’ lack of transparency fosters money laundering and tax dodging, Geneva authorities hired Hiler a year ago to overhaul how the sites are run. The reforms he’s undertaking, including a biometric system to identify and track visitors, combined with stepped-up customs inspections and recent art scandals are forcing clients to either accept the heightened scrutiny or get out.

Hiler, who was previously Geneva’s finance minister, acknowledges the free port’s international reputation needs improving but that he will need the help of Swiss regulators and governments around the world to help things change for the better.

“Today, the image is still deteriorating,” the 61-year-old said. “I don’t expect that things will improve quickly: this will take time.”

Lost Clients

Losing a few nervous clients, however, may be the price to pay to improve that image, he said.

“Today, in terms of customers, the greater risk lies in not doing anything,” he explained.

The Geneva business has two sites close to the city center, with one at the airport and another 10 minutes away at La Praille in the city’s southwest. They have more than 150,000 square meters (1.6 million square feet) of storage. The free ports allow clients to store goods in transit, postponing some taxes and customs duties.

Though money-laundering experts have been calling for years for reform of the Geneva Free Ports and Warehouses, as they’re officially known, Hiler’s task recently took on greater urgency.

Modigliani Dispute

Geneva prosecutors earlier this month opened a criminal probe into the ownership of Modigliani’s “Seated Man With a Cane” identified in storage at the site. That came on the heels of a feud that began last year after Russian billionaire collector Dmitry Rybolovlev accused Geneva-based art dealer Yves Bouvier of overcharging him for $2 billion worth of canvases by Pablo Picasso, Mark Rothko and others.

Until that case exploded with Bouvier’s arrest in Monaco 14 months ago, the Swiss businessman was better known as the head of Natural Le Coultre SA, an art storage and shipment company that is the free port’s largest tenant. Bouvier was released on bail, saying he did no wrong and only charged Rybolovlev market prices that the Russian was willing to pay.

The Modigliani canvas was ordered sequestered by Geneva prosecutors as they probe its provenance. The Nazis stole its from its original owner, Parisian art dealer Oscar Stettiner, who died before he could recover the piece after the war, according to reports. The current owner, revealed in leaked Panamanian legal documents as wealthy collector David Nahmad, has said through his lawyer that he only acquired the piece in 1996 and that there is no evidence yet that shows the painting belonged to the Stettiner family.

Delaware Warehouse

The Delaware Free Port is a low, white, 36,000 square-foot warehouse that sits halfway between New York and Washington, and also benefits from its location in one of five U.S. states with no sales or use tax. Fritz Dietl, who opened the Delaware facility last September primarily to cater to the New York art market, said he’s already seeing the repercussions for his business from the Geneva scandals.

“I feel for the Geneva Free Port as a lot of the negative publicity they’re getting is undeserved,” Dietl said by phone. “But yes, I am benefiting from that.”

In Zurich, one art world veteran said he had heard of the Delaware Free Port but wasn’t aware of European customers feeling sufficient pressure to move their collections across the Atlantic.

New Twist

“None of our clients are planning to move their art to Delaware yet so that’s a new twist and turn,” said Thomas Stauffer, partner at Gerber Stauffer Fine Arts, a Zurich based art-advisory firm. “It’s ironic and kind of hypocritical given the U.S. crackdown on tax havens abroad. ”

U.S. prosecutors are taking greater interest in the art market and free ports as auction prices continue to surge. The Manhattan District Attorney’s office is looking at several New York galleries to determine if buyers failed to pay state tax, according to Artnet News. A spokeswoman for the Manhattan D.A’s office declined to comment.

U.S. Justice Department prosecutors have begun examining some Bouvier transactions including works by Modigliani, Gustav Klimt and Rothko, to determine if he misrepresented to clients how much he’d marked up prices, according to people familiar with the matter. Bouvier’s lawyer has said he’s had no contact with the U.S. authorities and pointed to a recent Singapore appeal court decision on which judges wrote that Rybolovlev and his representatives “received what they bargained for and at the price they were willing to pay.”

Biometrics

Back in Geneva, Hiler outlines the steps underway to crack down on wrongdoing. A biometric system to track the movement of clients within the free port should be ready by the end of the year, he said. With the help of specialists, the free port will soon begin inspections of all new requests to store ancient works to ensure valuables looted from Syria and other war zones aren’t making their way into storage.

“We won’t rent space to a company that we don’t know who is behind it,” Hiler said. “We don’t want clients that are shell companies or blind trusts.”

But the free ports cannot force its tenants to disclose who they are actually leasing space to -- the so-called “beneficial owners” -- as that authority rests with Swiss customs. A new law that took effect on Jan. 1 requires free-port tenants to only disclose their sub-tenants’ formal names, not their beneficial ownership.

“It’s a first step and for sure not the last" in working to improve traceability, Pierre Maudet, Hiler’s boss and the Geneva councilor in charge of security and economy, said in an e-mail. The free ports "are a very important part of the Geneva economy."

Progress is being made, even if it’s not as fast as he would like, Hiler says.

“As long as we keep moving forward, I’ll stay,” he said.

--With assistance from Albertina Torsoli and Keri Geiger To contact the reporter on this story: Hugo Miller in Geneva at hugomiller@bloomberg.net. To contact the editors responsible for this story: Anthony Aarons at aaarons@bloomberg.net, Christopher Elser, Albertina Torsoli

©2016 Bloomberg L.P.

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