Getting to the art of the matter: Key considerations for using BVI structures in art-secured lending

The art finance market has seen an unprecedented boom in recent years, buoyed by changing perspectives amongst 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.

Drawing a crowd – art-secured lending on the increase

According to recent estimates, the art-secured lending sector is doing in excess of US$15 billion of business per year[i]. The sector is at its finest and most developed in the US, particularly New York, which is not surprising, given the city’s position as both an art and financial capital. Coupled with the excellent legal framework provided by the Uniform Commercial Code, lenders are able to place a lien on artwork whilst art collectors keep possession of the artwork for the duration of the loan. The industry has lagged in Europe, partly because lenders must often take possession of the artwork in order to perfect their security interest. However, the outlook for Europe is looking brighter, as several European countries have introduced a register of charges against chattels and new lenders entering the market. There is also expected to be increasing interest in the market following the economic sanctions lifting in Iran – the Middle East’s biggest art market.

Framing it up – typical art-secured lending structures

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. Whilst the US sphere 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 the thousands to millions of dollars and from acquisition, personal loan, working capital, bridging, trade finance facilities to factoring and minimum price guarantee arrangements – often secured solely against portfolios of art.

BVI – painting a pretty picture

Companies incorporated in the BVI 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:

  • Taxation: BVI has no income tax, corporation tax, capital gains tax, wealth tax or similar fiscal laws
  • Speed: subject to satisfying relevant KYC requirements, companies can usually be incorporated within 24 hours
  • Cost: BVI companies are still comparatively inexpensive compared to jurisdictions such as Cayman and Bermuda
  • Confidentiality: whilst 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: BVI 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 BVI also has the most developed insolvency system offshore, which – whilst not usually a great consideration for entrepreneurs – is normally a key factor for the lenders who are being asked to fund them
  • Light-touch regulation: outside of certain specific industries – including investment funds, banking and insurance – BVI companies do not need regulatory approval to conduct their affairs. BVI 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 BVI to remove ‘uncommercial’ common law provisions. New and innovative products, such as VISTA 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.

 A clearer picture – the move towards increased transparency in the art world

There is general consensus amongst the players in the art-secured lending market that increasing art 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 out 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 BVI is well placed to keep pace with the evolving regulatory landscape for the art finance market, and already has in place measures to identify ultimate beneficial owners and understand customers (KYC) and therefore reduce the risk of abuse of the art finance industry by money launderers.

[i] Deloitte Art & Finance Report 2016