The art finance market has seen an unprecedented boom in recent years, buoyed by the changing perspectives of wealth management players and art collectors. Wealth managers increasingly see art as an integral part of any wealth management offering; while to art collectors, it is a valuable capital and investment asset.
According to recent estimates, the art-secured lending sector is doing in excess of $15 billion of business per year.(1) The sector is at its most developed in the United States, particularly New York – which is unsurprising given the city's position as an art and finance hub. Coupled with the excellent legal framework provided by the Uniform Commercial Code, lenders can place a lien on artwork while art collectors keep possession of the artwork for the duration of the loan.
The industry is less developed in Europe, partly because lenders must often take possession of the artwork in order to perfect their security interest. However, the outlook is becoming brighter, as several European countries have introduced a register of charges against chattels and new lenders are entering the market. Interest in the market is also expected to increase following the lifting of economic sanctions on Iran – the Middle East's biggest art market.
The growth of the art-secured lending market has been accompanied by a parallel increase in the array of financial products and services specifically crafted for art collectors and dealers. While the US art market is dominated by private banks, auction houses such as Christie's and Sotheby's have also established finance arms. Loan facilities range in size and complexity – from thousands to millions of dollars and from acquisition, personal loan, working capital, bridging and trade finance facilities to factoring and minimum price guarantee arrangements – often secured solely against portfolios of art.
Advantages of the British Virgin Islands
Companies incorporated in the British Virgin Islands are, by most measures, the most popular offshore holding structures in the world and it is therefore not uncommon for art to be owned through BVI structures. For both borrowers and lenders, there are many advantages in doing so, including the following.
Taxation
The British Virgin Islands has no income tax, corporation tax, capital gains tax, wealth tax or similar fiscal laws.
Speed
Subject to satisfying relevant know your customer requirements, companies can usually be incorporated within 24 hours.
Cost
BVI companies are still comparatively inexpensive compared to those in jurisdictions such as the Cayman Islands and Bermuda.
Confidentiality
While safeguards exist to prevent money laundering and international crime, the general public is not privy to the register of directors or the share register of a BVI company, which provides privacy and confidentiality.
Corporate flexibility
BVI company law is designed to provide the maximum flexibility consistent with common law legal systems. Companies are permitted to undertake any lawful act or activity, and there are no strictures relating to corporate benefit.
Debt financing
The British Virgin Islands has a quick and simple system relating to secured creditor registration, which facilitates leveraging assets where a BVI company needs to do so in order to raise capital. The British Virgin Islands also has the most developed insolvency system offshore, which, while not usually a great consideration for entrepreneurs, is normally a key factor for the lenders that are being asked to fund them.
Light-touch regulation
Outside certain specific industries – including investment funds, banking and insurance – BVI companies do not need regulatory approval to conduct their affairs. The British Virgin Islands aims to provide light but effective regulation to minimise unnecessary regulatory burdens. The most common type of regulated business is investment funds, for which specific carve-outs exist to minimise the regulatory burden for low-risk investment funds.
Innovative trust structures
Trust law has been heavily modified in the British Virgin Islands to remove 'uncommercial' common law provisions. New and innovative products, such as Virgin Island Special Trusts Act trusts and private trust companies, have driven the popularity of trusts, combined with rules refining restrictions to applicable non-charitable purpose trusts and rules against remoteness of vesting.
The consensus in the art-secured lending market is that increasing market transparency is key to the future development of the art and finance industry. Given the regulatory requirements placed on financial firms, the art finance market is not as murky as it is often painted to be. Art market transactions are becoming more transparent, traditional informal arrangements are increasingly being replaced by written agreements and careful due diligence is now the norm. The British Virgin Islands is well placed to keep pace with the evolving regulatory landscape for the art finance market, and already has measures in place to identify ultimate beneficial owners, understand customers, and therefore reduce the risk of abuse of the art finance industry by money launderers.
Secured lenders providing art finance to a BVI vehicle as borrower should verify or ascertain:
- that the company is validly existing and in good standing in the British Virgin Islands;
- that the company has the capacity and power to enter into the transaction;
- the identity of the company's directors and shareholders;
- that the company has been properly authorised to enter into the transaction;
- that no competing security interests have been registered over the collateral;
- that the lender's security is registered in the public register of registered charges; and
- that the lender's security filing is updated if and when collateral is added or removed.
For further information on this topic please contact Tanya Cassie-Parker at Harney Westwood & Riegels by telephone (+1 284 494 2233) or email ([email protected]). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
Endnotes
(1) Deloitte Art & Finance Report 2016.
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