By Talia Berniker.

In September 2020, Arcis, the first freeport in New York City announced its closing after being open for just two years, and that clients had until October 31, 2020 to retrieve artworks stored at the Harlem storing facilities.[1] While the reasons for the closing of this resource remain unclear, the closing of Arcis is indicative of the impact the COVID-19 pandemic has had on the art market. This inquiry will explore the history of freeports, their role in the art market, as well as what the opening and closing of Arcis might indicate about the future of the freeport as a staple of the global art market.

What Is A Freeport Anyway?

A freeport is a lot, usually a large warehouse located near an international hub, “within which goods may be landed, handled, manufactured or reconfigured, and reexported without the intervention of the customs authorities.”[2] Only when the goods have left the facilities are they subject to taxation and other customs requirements. These lots exist formally outside of the territorial jurisdiction of any country, making them an important part of the global art market. While the term “freeport” is most often used in the art law lexicon, the terms “free trade zone” or “foreign trade zone” are synonymous.[3] In the United States, Foreign Trade Zones, or FTZs, exist under the protections of Customs and Border Patrol.[4] These zones take advantage of what is known as an “inverted tariff” to create conditions that are optimal for trading and storing artworks.[5] Because there are no federal import duties on art within a freeport, freeports have emerged as a legal way for art dealers and collectors to avoid paying duties and taxes on artworks they might be storing or planning on selling.[6]

A Brief History of Freeports

The idea of a freeport first emerged in nineteenth-century Switzerland where extremely secure storage facilities were constructed to hold valuable commodities, as well as goods like grain, coffee, and spices.[7] These storage structures became popular for not only storing one’s personal belongings, but for storing grain and agricultural products in transit.[8] The use of storage structures, to hold products in transit, directly mirrors how freeports have evolved to hold art. A distinctive feature of modern freeports is that each stores art for an unlimited quantity of time without being taxed.[9] Additionally, because freeports are invisible to tax authorities, foreign governments use freeports to store art anonymously.[10] In fact, the construction of freeports as secrecy jurisdictions, where the content of the warehouses is unknown, is one of the main characteristics that freeports share.[11]

The notion of storing goods has evolved to include the ability to legally, safely, and privately store valuable commodities without paying taxes and today, freeports are found all around the world like in Luxembourg, Geneva, and Delaware and play a significant role in the art market. Art dealer and “freeport king” Yves Bouvier was one of the first to grasp how the very operation of freeports can be a successful business venture[12] and is now suing a group of businessman who allegedly reneged on a deal to sell his $60 million Singapore facility.[13] While many collectors of fine art would likely prefer to keep their collections in their homes, the freeport is ideal for speculators and collectors who are betting that their art will increase in value. Since the art stored in a freeport cannot be traced to its owner, or taxed, it’s the ideal facility to hold works that are expected to appreciate in value or works that one is planning to sell in the near future.[14]

Impact of Freeports on the Art Market

Due to the unregulated nature of the industry, the art market operates within the larger network of capital accumulation and distribution globally.[15] Though the art market represents a small part of global production, the global art trade in 2019 was still valued at $67.4 billion dollars.[16] As an industry that is contingent on global grade, implications arise when any given artwork crosses into another country––as each country has a distinct legal framework for regulating the import and export of works of art.[17] Thus, in some ways, freeports operate like offshore financial accounts.[18]

To that point, freeports are representative of how the free trade market, as it applies to art, often benefits privileged investors at the expense of artists and other art professionals.[19] Even while freeports cater to wealthy collectors and investors, they remain popular as a way to store expensive works. The 2014 Art & Finance Report conducted by Deloitte and ArtTactic revealed that 28% of art collectors and professionals used or had a relationship with a freeport provider.[20] Meanwhile, 43% of the art professionals surveyed said their clients were likely to use a freeport facility in the future.[21]

If an international seller is uncertain that the sale of a piece in their collection will take place, they can admit the work to a freeport so that private viewings can be arranged. To that end, in addition to serving as secure warehouses, freeports also operate as small showrooms in which collectors and investors can arrange private viewings for potential buyers in secrecy, which is what Arcis had set out to do. Some artworks may change hands but never leave the facilities. This system becomes especially valuable for art collectors who buy hundreds of works a year and use the freeport as a means to avoid some of the complexities, logistics, and expenses (such as import/export documentation, taxes, and shipping and insurance arrangements) that arise when trading expensive works to buyers in other countries.

Though freeports are widely considered an important part of the art trade, they have also been a source of fraud in the art industry as officials have lied on customs forms, gotten away without paying dues or taxes on works, or have been part of larger art, and financial, embezzlement schemes––as the Panama Papers revealed in 2016.[22] For example, following the leak, Swiss authorities discovered the Nazi-era looted painting by Amedeo Modigiliani entitled “Seated Man with Cane” (1918) in a Geneva freeport.[23] Its return to Philippe Maestracci and the estate of the Jewish art dealer Oscar Stettiner who fled occupied Paris in 1939, is still disputed by the Helly Nahmad Gallery in New York State courts.[24]

Furthermore, no one can tell if art in a freeport was bought with money resulting from a crime, because of the anonymity that freeport users hold. This is what the European Union had in mind when it enacted the 5th Anti-Money Laundering specifically imposing heightened due diligence on “persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to 10 000 euros or more.”[25] In the United States, the positioning of freeports, as tax-evading structures for wealthy art owners, is being contested in the senate as anti-money laundering legislation is currently being discussed.[26] The result of this deliberation will impact whether the appeal of the freeport will continue to grow in the future.[27]

The Founding of the Arcis Freeport

The abrupt closing of the Arcis freeport, after only two years of operating, provides a unique case-study into changes in the art market. The Arcis freeport opened in 2018 in Harlem and operated as Manhattan’s first freeport. The development of the $40 million warehouse seemed like a natural placement— considering the rich context of New York City as a pillar of the art world. The windowless five-story warehouse was developed by Cayre Equities as a state-of-the-art freeport structure and resource for art collectors.[28] The name, Arcis, meaning stronghold or citadel in Latin, aptly described the building’s physical structure but would prove ironic after the freeport’s short operating span. To gain access to the building, visitors encountered an iris scanner, retina scanner, vascular scanner, and a mechanized holding vestibule among other security-oriented procedures.[29] The tight-security measures were implemented to ensure the protection of the $2.5 billion dollars worth of blue-chip art in the building.[30] The Arcis freeport was constructed with hopes of giving wealthy investors an edge over the crowded New York art storage market.[31] In their application for property tax breaks from the city, the founders of Arcis noted that the freeport was developed in response to how Superstorm Sandy “ravaged” the downtown gallery scene and led to lawsuits against Christie’s storage facilities.[32] The art storage facility Cayre Equities developed was less like a standard warehouse and more like a very expensive, minimalist, gallery space with unobstructed views of New York City[33] and $1,000-a-bulb lighting.[34] The immaculate design of the freeport, and grandeur of the five private viewing rooms within Acris, provided the perfect backdrop for art sales. In order for works to be sold at a freeport, it has to be viewed by the buyer in the best and safest conditions possible.

The Closing of Arcis

In January 2020, the Art Newspaper concluded that the Arcis freeport was destined to be a success as dealers and collectors excitedly took advantage of the tax-exempt foreign trade zone.[35] Why then did the state-of-the-art facility announce its closure just a few months later? Though there is no formal indication of why the Arcis freeport closed, there are a couple feasible possibilities. It seems likely that the pandemic’s impact on museums and shipping[36] affected the pace and scale of art sales––diminishing the demand for freeports. Leaving the health crisis aside, members of the arts community have voiced skepticism over whether Arcis’s freeport model was sustainable.[37] Reports have indicated that from the start, spaces were not selling, rates were too high, and demands for the supposed tax breaks proved far lower than expected.[38] While there is no comment from those involved with Arcis on these rumors, one thing is certain, that the demand for Arcis projected by the Art Newspaper would never become a reality. All Arcis customers were asked to make arrangements to remove their collections from the freeport before it officially closed on October 31st.[39]

The Future of Freeports

The freeport model has become relied upon within the art market but, as the closing of Arcis indicates, perhaps the use of freeports is not the most efficient or equitable tool for ensuring a vibrant art market. Judd Grossman, a Manhattan attorney specializing in art crime says, “When you just add another layer of insulation between the participants and the market, I see the likelihood of more fraud, not less fraud.”[40] While the art market is slow to change, the pandemic has disrupted the generally stagnant art market landscape. Perhaps in the closing of Arics, against the backdrop of this global pandemic, there is an opportunity to question, or rethink, how to make the art market more transparent and equitable.


Endnotes:

  1. Katya Kazakina, Fortress in New York Storing Million-Dollar Art to Shut Down, Bloomberg (Sept. 2, 2020).
  2. Encyclopedia Britannica, Free-Trade Zone.
  3. Atossa Araxia Abrahamian, Inside the New “Fortres” in New York City That’s Housing Millions Dollars of Art, Artsy (May 29, 2018).
  4. Foreign-Trade Zones Act of 1934, 19 U.S.C. 81a-81u.
  5. See U.S. Customs and Border Patrol, About Foreign-Trade Zones (March 2020).
  6. Katya Kazakina, supra.
  7. Corey Tazzara, The Free Port of Livorno and the Transformation of the Mediterranean World, Oxford University Press (Dec. 2017).
  8. John Zarobell, The Role of Freeports in the Global Art Market, Artsy (July 14, 2017).
  9. Id..
  10. Id.
  11. Id.
  12. Sam Knight, The Bouvier Affair, New Yorker Magazine (Feb. 1, 2016).
  13. Chanyaporn Chanjaroen and Hugo Miller, Owner of Asia’s ‘Fort Knox’ Sues Over Failed Freeport Sale, Bloomberg (June 14, 2020).
  14. John Zarobell, supra.
  15. Id.
  16. Art Basel, The Art Basel and UBS Global Art Market Report 2019, (2019).
  17. John Zarobell, supra.
  18. Id.
  19. John Zarobell, supra.
  20. Id..,
  21. Deloitte Luxembourg & ArtTactic, Art & Finance Report Third Edition, (2014).
  22. Benjamin Sutton and Claire Voon, Panama Papers Shed Light on the Shadowy Art Market, Hyperallergic (April 12, 2016).
  23. David Lawler, Modigliani Seized in Geneva in Panama Papers Probe, The Telegraph (Ap. 11, 2016).
  24. Gowen v. Helly Nahmad Gallery, Inc., No. 650646/2014 (N.Y. Sup. Ct. filed Feb. 27, 2014). See Madeleine Werker, Case Review: Maestracci v. Helly Nahmad Gallery Inc. (2014), Center for Art Law (June 12, 2017).
  25. Directive (EU) 2018/843 of the Europan Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purpose of money laundering or terrorist financing and amending Directives 2009/138/EC and 2013/36/EU.
  26. U.S. Senate Permanent Subcommittee on Investigations, The Art Industry and U.S. Politics That Undermine Sanctions (July 2020).
  27. Ursula Sommer, Demand For New York’s First Freeport Facility Steps Up, The Art Newspaper (2020).
  28. Katya Kazakina, supra.
  29. Eileen Kinsella, New York’s Ultra-High-Tech Art Warehouse and Freeport ARCIS Is Abruptly Closing After Just Two Years, Artnet News (Sept. 2, 2020).
  30. Katya Kazakina, supra.
  31. Atossa Araxia Abrahamian, supra.
  32. Starnet Ins. Co. v Christie’s Fine Art Stor. Servs., Inc., 260 N.Y.S.2d (Sup. Ct. Jan. 21, 2016); AXA Art Ins. Corp. v Christie’s Fine Art Stor. Servs., Inc., 2016 N.Y.S.2d (Sup. Ct. Jan. 21, 2016). See Scotti Hill, Fine Art Storage Services v. Insurance Companies: A Cautionary Tale, Center for Art Law (July 6, 2016).
  33. Ursula Sommer, supra.
  34. Atossa Araxia Abrahamian, supra.
  35. Ursula Sommer, supra.
  36. Jonathan Saul, Lisa Baertlein, Sonya Dowsett, Ocean shipping shrinks as pandemic pummels retailers, Reuters (June 4, 2020).
  37. Eileen Kinsella, supra.
  38. Id.
  39. Katya Kazakina, supra.
  40. Ursula Sommer, supra.

About the Author: Talia Berniker is a Fall 2020 graduate intern. She graduated from the Robert D. Clark Honors College at the University of Oregon in 2018 majoring in Advertising and Media Studies with a double minor in Multimedia Design and Political Science. She is currently pursuing an M.A. in Arts Politics at New York University’s Tisch School of the Arts.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Opinions expressed here are those of the author.