Dark Deals in the Art Market

Collectors and other art market participants must realize the obsession with market opacity is proving counterproductive.

Originally published in the Singapore Business Times in November 2016.

The art world loves a good scandal, and its attention will soon turn to the Singapore International Commercial Court, where the case against Swiss freeport magnate Yves Bouvier is headed towards a trial.

While engaged on behalf of Russian billionaire Dmitry Rybolovlev, Bouvier helped assemble a breathtaking collection of paintings by old masters and famous modernists, from Leonardo da Vinci to Amedeo Modigliani. The relationship soured amid accusations of price manipulation, which led to the arrest of Bouvier in Monaco on charges of fraud and money laundering, followed by court actions in Paris, Hong Kong and Singapore. Mr Rybolovlev has alleged that Bouvier was acting as an agent and entitled only to earn a modest commission for each acquisition. The Russian claims he and his family trust were duped into paying inflated prices while his agent potentially pocketed more than US$1 billion in illicit proceeds. Bouvier has denied the charges and contends he was acting as an independent seller, not an agent, and therefore permitted to set prices as high as the market would bear.

As Andy Warhol once said: “Art is what you can get away with.” He might have been talking about the market itself, where allegations of conspiracies, forgeries, tax evasion and other crimes have become common in recent years. Estimates from the FBI Art Crime Team suggest art crime results in losses as high as US$6 billion per year, placing it among the most profitable of criminal enterprises. That figure is equivalent to nearly 10 per cent of all sales in the international art market, which totaled US$63 billion in 2015, according to analysis by Dublin-based research firm Arts Economics.

The art market is infamously opaque. Multimillion-dollar artworks often trade hands in backroom deals, and even at public auctions, private proxies are employed as cutouts to place bids for anonymous buyers. Other tangible assets such as real estate, planes and yachts typically have title histories that can be traced through public records, but fine art and antiquities don’t leave the same kind of paper trail. Auction sales prices are published, but auction houses consider information regarding the identities of their clients to be privileged and confidential. Similar discretion is demanded of art dealers and advisers.

Outside this culture of secrecy, it is difficult to imagine how the perpetrators of a forgery scheme could have succeeded in selling 50 fake artworks for US$20 million to Knoedler & Co, one of the oldest and most respected galleries in the US until it closed in disgrace in 2011. When a civil case against former Knoedler president Ann Freedman went to trial in New York in 2016, irate collector Domenico De Sole testified: “I got a fake painting for US$8.3 million and I want my money back!”

As chairman of Sotheby’s, Mr De Sole might seem an unlikely victim. Yet he was not the only art sophisticate fooled by the forgeries, which had been produced by a Chinese immigrant in his garage. Several other experienced collectors and experts had fallen for the fictitious backstory about the provenance of the paintings, which had been sold to the gallery by a corrupt dealer, Glafira Rosales, who claimed she represented an anonymous Eastern European heir who lived in Switzerland and Mexico. Rosales told the gallery that the heir had inherited dozens of previously unknown works by Abstract Expressionist masters. He was also said to be very protective of his privacy. Around the Knoedler gallery – which resold the phony paintings for US$60 million – this mysterious benefactor became known as “Mr X” and “Secret Santa”. The heir was later revealed, of course, to be a complete fabrication. Rosales was convicted on fraud charges, and the civil suit against Ms Freedman was settled for an undisclosed sum. Yet even after Mr X’s unmasking, the art world has not lost its taste for secrecy and anonymity.

The art market tends to reward discreet players who can put together deals based on privileged insights. Insider trading may be a prosecutable offence in financial markets, but in the art market it is often met with a shrug of indifference. In addition to his sideline in selling artworks, Bouvier – known as the “freeport king” – is owner of Natural Le Coultre, a moving and storage company that operates luxury warehouses in Geneva, Luxemburg and Singapore, where art and antiquities can be safely kept for investment purposes and traded without taxation.

These high-tech facilities are popular places to store museum-quality paintings and sculpture, potentially lending advance knowledge to a well-placed observer about what pieces are re-entering the market, and which collectors might be interested in selling. The Swiss government announced plans in 2016 to impose stricter regulations at its freeports, clamping down on the secret caches and tax-free transactions that have come to characterize the high-end European market for art, antiquities and other collectibles.

This is not a new phenomenon. The “Panama Papers” leak of 11.5 million documents from Panamanian law firm Mossack Fonseca exposed 40 years of offshore maneuvering and legerdemain used to conceal ownership of artworks by Van Gogh, Picasso, Rembrandt, and other artists. Buried among the internal emails, bank records and confidential correspondence were many details about dark money and unsavory deals, including lots of lying, Nazi looting, and some reprehensible behavior by well-known billionaires. Of course, not every foreign shell corporation is complicit in fraud; not every nominee director is a beard for tax evasion; and not every owner of “bearer shares” has a history of money laundering. The value of discretion is understandable among ultra-high-net-worth collectors, celebrities, and private trusts. There are legitimate reasons for using special-purpose vehicles for specific acquisitions or for ring-fencing liabilities. Yet in time, collectors and other art market participants should come to realize the obsession with market opacity is proving counterproductive.

Current conditions in the international art market give cover to bad actors. Conversely, failure to regulate conflicts of interest in the market can also have the perverse consequence of making legitimate (but conflicted) participants look like criminals. To quote Warhol again: “It’s not what you are that counts, it’s what they think you are.” Either way, secrecy comes at a cost. It should be no surprise that there are bad consequences to doing business in the dark.

About the Author: John Powers is president of Hudson Intelligence, an investigation agency specializing in fraud and other financial crimes.