"The pair of them don't concern themselves with anything. They don't go to any assemblies, and their windows are not decorated with flags on official political holidays," wrote a Stasi lieutenant in the surveillance file on graphic designer Heinz Dietel and his girlfriend.

The man described as being "arrogant" and "playing the bon vivant" had long been in the sights of the East German authorities when, one fateful day in 1973, Heinz Dietel woke to find himself swallowed by a nightmare from which he would never escape.

Locked away in custody awaiting trial, Dietel was first accused of having bought a wooden sculpture that he allegedly knew had been stolen. As he sat in his cell, the authorities searched Dietel's apartment in Erfurt. What they found was Dietel's considerably large private art collection, including antique furniture, ceramics, porcelain, and coins totaling 2,105,245 East German Marks.

After a six-month spell in prison, Dietel was found not guilty and released. Seizing the opportunity, the authorities then accused him of being a commercial art dealer rather than a private collector and hit the graphic designer with a fictitious tax evasion case to the tune of 1.2 million East German Marks.

Faced with prison or payment, Dietel was effectively forced to sell around 500,000 East German Marks worth of artwork in order to pay off the "debt." But that wasn't the end of the matter. Five days after Heinz Dietel's death in November 1975, his legal advisor, his former girlfriend and the director of the Anger Museum in Erfurt, Karl Römpler, rummaged through Dietel's apartment selecting artworks for the museum's collection.

The selected works were transported to the museum where they have remained as part of the public collection ever since. As far as the East German authorities were concerned, Dietel's debt was finally paid in full.

Caught in the cynical state machinery

Cases concerning artworks looted by the Nazis regularly garner media attention, while that carried out by the authorities in the German Democratic Republic (GDR) remains little more than a footnote in history. The seizure of artworks continued long after World War II in what Ulf Bischof, a Berlin-based lawyer specializing in legal claims relating to art, describes as "a rather dark chapter in Germany's post-war history."

Ravaged by war and battling severe shortages, authorities in Germany's Soviet Occupation Zone set about seizing assets owned by nobility, war criminals, and former Nazi party members as part of the Land Reform act of 1945.

The contents of large mansions and private collections - including artworks, coin collections and antiques - were taken to storage depots and examined by experts who then cherry-picked items for their museums. Other objects were used to decorate the offices of the Soviet and East German authorities.

"Some were given to officials in the communist regime, others simply went astray. From a museum perspective they were a welcome 'compensation' for the often severe losses they suffered during the war," Bischof explained.

The seizure of assets in the GDR continued for decades - albeit in different forms - after the economy hit dire straights in the late 1960s and 70s.

Since the East German Mark could not be converted on the international market, the regime was desperate to acquire foreign currency in order to buy urgently required goods from abroad. And so, as in the case of Heinz Dietel, the authorities turned on art collectors.

"Initially the regime planned to sell off large swathes of its museum depots. But following criticism from East German museum employees and the fear of bad press in the West, the plan was dropped. They then reverted to seizing and exporting private collections," Bischof said.

The pattern was always the same: Tax inspectors together with Stasi officers would arrive at the break of dawn and accuse private collectors of running a commercial operation. Tax evasion charges would follow, along with an unreasonably high tax bill.

By the 1970s, GDR authorities had perfected a system of acquiring works of art that was as cynical as it was savage. Dietel's case was just one of an estimated 150 to 200 that occurred during the 1970s and 80s after fewer and fewer members of the public were willing to sell works to the state authorities and the economic situation worsened.

The vast majority of pieces were sold to dealers in the West where there was no shortage of buyers willing to turn a blind eye to the provenance of submarket-value artworks.

Clock is ticking for German museums

When Dietel's son arrived at his father's apartment just a few weeks after his death in November 1975, the artworks, ornaments and antiques were already packed away in wooden boxes ready for transportation to the Anger Museum in Erfurt.

Stonewalled by the authorities, the situation seemed hopeless for Matthias Dietel. It wasn't until the reunification of Germany years later that prospects brightened. In 1994, a Compensation Act was introduced, entitling the original owners of certain forms of confiscated property, including artworks, to compensation.

But there was a caveat: Since a significant proportion of confiscated artworks and other objects were housed in national museums in the former East Germany, the Compensation Act contained a separate clause to prevent the sudden stripping of those collections. The clause stated that those institutions had 20 years to reach a settlement with the owners in question and would retain the right to exhibit the works free of charge during that time.

With that legal caveat due to expire in 2014, museums will be forced to return works to their original owners should they fail to reach a deal.

Negotiating in the public interest

All state museums in former East Germany are facing the same problem, from the Prussian Cultural Heritage Foundation and the state museums in Berlin, to the Burgk Palace Museum in southern Thuringia, according to Hellmut Seemann, chair of the Klassik Stiftung Weimar. His cultural foundation represents numerous museums, palaces, historic houses and literary and art collections in Germany.

While museums have been able to reach agreements with the heirs of several noble dynasties that had owned confiscated art, many more cases remain unresolved. "We have yet to negotiate a settlement with other Thuringia dynasties, such as the Reus family. We'll surely have problems with items in the Gera Art Collection next year. There are many cases for which a solution agreeable to both sides has not been reached," said Seemann.

He believes that public museums must retain the right to show disputed artworks, particularly when they are of national significance.

"It means that former owners can demand the return of artworks of national importance. And I don't think that's right," according to Seemann. "If an artwork is in a museum and has been taken care of for 60 years already and is important for the cultural identity of the country, then it belongs there."

But Ulf Bischof takes a different view: "The ultimate public interest lies in not overriding the fundamental legal principles, such as the guarantee of private ownership. If we do not restitute these objects to their former owners then we carve in stone their confiscation by the communist regime."

Unlike for the owners of artworks looted during the period of Soviet occupation, claimants fighting to retrieve items confiscated by the East German authorities are facing an uphill struggle since the loot was mostly exported to a variety of western countries. Involving a variety of foreign legal systems only complicates the situation.

As for Matthias Dietel, his decade-long struggle with the Anger Museum for either possession of the works or financial compensation remains unresolved.