The following article from The Economist is extremely telling about the macro world we live in on several different levels. First, it shows that the super wealthy are desperately concerned about not only the debasement of their national fiat currencies, but are also seriously concerned about appropriation of assets. Second, it exposes an interesting point related to Bitcoin. While the Senate held hearings on BTC last week, and focused on money laundering and tax avoidance, here you have these Freeports springing up all over the world, which seem to be extremely friendly to such activities. More than anything else, it shows that if people have a need and desire to hide assets, they will find a way to do it.
More from The Economist:
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.
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 toThe 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.
Oligarch asset consolidation. Thank you Ben Bernanke!
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.
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.
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.)
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.
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”.
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.
Yeah, let’s spend all our time worrying about regulating Bitcoin when Freeports are popping up like weeds. Oligarchs are allowed to hide their assets; peasants, not so much…
Full article here.