Art as Movable Capital: How South Africa May be Losing Millions Every Year
In March 2011, Irma Stern’s Arab Priest sold in London for R34 million. Erin Torkelson uses this example to explore how art can be used to expatriate capital.
Erin Torkelson, Researcher, Organised Crime and Money Laundering Programme, ISS Cape Town Office
Although crime in the art market has a long history, the global popularity of South African artists coupled with the conversion of their work into speculative assets has brought this issue closer to home. In March 2011, Bohnams auction house in London held a dedicated sale for South African Art that raised an unprecedented GBP 8,523,280 (or R95,115,375). Since the early 2000s, Bohnams has been actively engaged in generating a market for South African art overseas. As their website boasts: “South African art, as proved by previous successful sales at Bonhams, is no longer of purely domestic interest. The continuing strength of the market has produced exceptional record-breaking prices. Such record-breaking prices and worldwide bidding have propelled modern South African art into the front lines of the global art market. Bonhams` sales of South African art offer a valuable indication of the position of modern South African art internationally.
If it is true that Bohnams’ sales ‘offer an indication of the position of modern South African art internationally,’ then the potential for using art as a vehicle for capital flight must be interrogated: how does so much South African art make its way overseas (about 300-400 pieces each sale)? Do local customs authorities recognise this art as a high-value speculative asset leaving the country for sale? If so, is it taxed appropriately? Is the money made by South African sellers repatriated, or does it end up in a tax haven like the City of London? These questions should be of vital interest to the South Africa Revenue Service (SARS, particularly since Bohnams is just one of many overseas auction houses and dealers engaged in the sale of South African Art.
While it is difficult to say exactly what South African art has been used as a tool for capital flight, it is possible to frame several scenarios of how this could be done. The extremely high value of the Bohnams’ sale mentioned above is, in large part, attributable to Irma Stern’s Arab Priest. This one painting made headlines around the world because it sold for GBP3,044,000 (over R34 million), far more than any of her other work to date. An iconic piece from Stern’s Zanzibar period, the 1941 painting had hung in Cape Town’s Irma Stern Museum for decades on long-term loan from a private collector. Due to the vast price escalation and increasing popularity of the artist, the Stern Museum could no longer afford to insure the painting and the owner chose to sell it.
The sale could have gone like this: The London auction house could have approached the South African Heritage Resources Agency (SAHRA) in advance of the sale to apply for an export permit for the Arab Priest (which it did). SAHRA could have denied the permit on the grounds that the exportation of the painting, deemed a cultural treasure, would be a loss to the national estate (which it did). Any work of art that was denied a permit should first be offered to a national cultural institution for purchase, but as such institutions have limited budgets, only in remote cases have works been acquired. The Arab Priest could have been granted a temporary export permit to be sold on auction in London (which it was), under the condition that it would return to South Africa directly after the sale. The buyer could have been a South African citizen interested in protecting cultural patrimony, preserving a national treasure and investing in a painting to bequeath to her children; and the money from the sale could have been transferred into the seller’s South African bank account. This scenario would be in accordance with the legislation governing SAHRA: Government Gazette, 2 June 2000, Vol.420 No.21239, Notice No.548.
Alternatively, there is another possible scenario, in which the parties were not interested in the painting as a cultural artefact, but as a movable asset. The South African seller could have opened a bank account in the City of London, one of the world’s largest tax havens, where the proceeds of the sale were deposited (GBP3,044,000). The buyer could have repatriated the Arab Priest to South Africa in accordance with SAHRA’s temporary export permit, and waited until the purchase had been forgotten. The buyer could then pack a crate labelled ‘household contents’ and ship the painting abroad. Since fine art is highly subjective and reliant on specialized knowledge, it is likely that most customs agents would not question the declaration. The Arab Priest could be passed on to another European dealer for resale and the proceeds paid into another off-shore account. Ultimately, the original seller in this scenario would have expatriated R34 million into an offshore account and the buyer-turned-seller would have evaded South African customs, transported the painting abroad and expatriated the same plus market inflation. By their nature, art objects are highly transportable, speculative assets and irresistible to financial fraudsters, tax-evaders and money-launderers.
These are imaginary examples, the second of which may only represent a minority of deals, there is immense potential for art to be used as a tool for capital flight. This is particularly true since the art market is characterized by the confidentiality of buyers and sellers. Auction houses go to great lengths to keep the identities of their clients secret. While almost impossible to uncover the ‘true’ story behind the Arab Priest, these scenarios raise interesting questions about how South African art has become a coveted commodity at the international level and how domestic institutions often fail to stop its movement out of the country.
The scenarios above also point to several important loopholes in the legislative and institutional framework meant to prevent capital flight. First, SAHRA is the only institution currently keeping an eye on the movement of art – but, its mandate is limited to the protection of cultural patrimony, not the restriction of capital flight. According to Government Gazette, 6 December 2002, Vol.450 No.24116, Notice No.1512, SAHRA can only intervene in the sale of “South African items of artistic interest that have been in South Africa for 50 years or more.” This means that valuable collections of foreign art or contemporary art (defined by the Gazette as “any object made by any living person”) can be used as vehicles for exporting capital without making application to SAHRA. Works of high-value contemporary artists like William Kentridge provide perfect vehicles to store value for the purposes of expatriation. Since SAHRA has such a narrowly-focused mandate, very expensive works falling outside their interest areas can move across borders without any institutional oversight.
Second, even works falling under SAHRA’s purview can be exported without its knowledge. The process of applying for a permit is largely voluntary and incumbent upon the seller. According to one member of SAHRA’s heritage committee, Bohnams applies for 15-20 export permits each time it has a South African Art Sale. However, when the auction catalogue comes out, there are typically more than 300 South African lots. This raises the possibility of some of that work being exported without the knowledge of SAHRA or SARS.
Third, since art is a highly specialized commodity and knowledge about art is undemocratic, most customs agents would not have the skills to identify valuable works. Once out of the country, SAHRA has limited capacity to track South Africa art sales on the international market, much less refer suspicious transactions to SARS for investigation. Additionally, art dealers and auctioneers tend to honour confidentiality agreements with clients, so information about sales is notoriously difficult to ascertain.
Where SAHRA leaves off in terms of protecting cultural heritage, SARS must take over to prevent the expatriation of large amounts of capital in very small packages.
