“Panic. Absolute bloody panic.” A senior gallerist is describing the first reaction of fellow members of the Society of London Art Dealers to new regulations to combat money laundering in the art market. I’m hardly surprised: even after 15 years of covering the art world as a journalist, I’m often amazed by its peculiar codes and customs, still substantially based on relationships, private agreements and trust. But this old-school way of doing things, which provides a climate ripe for exploitation by the unscrupulous, is under challenge from the modern world.
There has long been concern over the ease with which suspect funds can be laundered through the buying and selling of art. Now, at last, we are seeing a concerted attempt to get to grips with the issue, which — even if welcomed by most — has sparked resentment and wariness. This almost unregulated sector doesn’t take easily or kindly to attempts to legislate it. What we do not know is whether the EU initiative — the fifth Anti-Money Laundering Directive, which spread the net to include luxury goods, property and the art market, and which became law in the UK in January — will prove equal to a problem some have considered intractable.
The art trade seems almost ridiculously tailor-made for money laundering — because of the value of some pieces, because they are usually easily portable, and most of all because of the cult of secrecy that holds sway in the sector. There’s nothing inherently wrong with secretiveness; there can be valid and innocent reasons for it. But there’s clearly room for subterfuge. At least 50 per cent of all art transactions are entirely private and handshake deals are still common; even in the auction houses, which appear to be so public-facing, the price may be disclosed but the identities of both buyer and seller are often guarded to the grave.
Perhaps most significantly of all, there is no registration of ownership of artworks, as there is with shares or property — we don’t know for certain where even some of the most famous pictures are held, or who in fact owns them. Take Van Gogh’s “Sunflowers”, one version of which sold in 1987 for a then spectacular $39.9m to a Japanese buyer (or possibly his company): does anyone know where it is now?
And the now infamous “Salvator Mundi”, with its record-breaking $450m price tag, which appears to have gone Awol. Since the market relies heavily on advisers, agents and intermediaries, including foreign and offshore companies, questions of ownership become even more opaque.
At least 50 per cent of all art transactions are entirely private and handshake deals are still common
What is not in doubt is the scale of the problem. It’s almost impossible to find reliable figures about shady money-laundering activities, and few cases actually make it to court. But Daniel Bruce, chief executive of the anti-corruption watchdog Transparency International, last year described the UK as a “safe haven” for money launderers, especially in the “luxury” sectors of art, property and other expensive goods. British offshore tax havens — Jersey, the British Virgin Islands and other territories — allow extra secrecy and opacity.
Transparency International estimates that murky transactions in the UK art world amount to many billions. Scale that up over the multiple nations involved in today’s art market — many of them far more loosely regulated than the western countries — and you will have some idea of the size of the issue.
Two years ago, the EU, stung into action by the Panama Papers revelations of 2016, formulated the regulations that sent shockwaves through the art world. They mean that from now on, in the UK and across the EU — and in some other areas, such as Switzerland, that have voluntarily signed up — in any art transaction worth more than €10,000 the purchaser’s identity, address and other personal information have to be registered by the seller: passport details and the lot, just as if you were opening a bank account. It even applies to existing clients of galleries. If the sale is to a company or other body, very full details are needed — including the identity of the ultimate beneficial owner.
In many sectors this might seem like the kind of basic compliance that has been conducted for years, and with the same pretty fierce penalties for defaulters. But in the secretive art world it has landed like a bomb. Although the big auction houses have been conducting this sort of search for some time, Freya Simms — chief executive of trade organisation Lapada and a board member of the Responsible Art Market Initiative (Ram) — remembers her own auction house days of the late 1990s, when eager buyers might wheel in suitcases full of cash. As that came under increasing scrutiny, Francis Outred, a former senior director at Christie’s, recalls some clients refusing to comply with requests to disclose information — alarmed, perhaps, by the repercussions of such disclosures, even behind the famously tight secrecy wall of the auction houses.
The big question is what effect the new regulations will have on the market, prices, artists and their work? The art market has been almost indecently buoyant at the top end. In the past few years breathless auction rooms have seen a Picasso sold for $179.4m, a Jeff Koons “Rabbit” for $91.1m and a painting by Banksy that went for five times its estimate. But how many of the top players have been stoking these flames with dirty money? And how many of them will fade away, in the face of increased regulation?
So far, most dealers seem worried only about souring relationships with their existing clients or discouraging new ones. At Ram, Simms says the emphasis is on preparation: letting potential buyers know what’s going to be asked of them. Alistair Hicks, an experienced dealer and curator, says: “It’s the smaller galleries in the middle that’ll be most affected. For bigger galleries this is nothing new — international dealers know the drill.” Besides, as one gallerist put it at last month’s London Art Fair — the first fair since the regulations took hold — “The big galleries always have ways of getting round this sort of thing if they want to. That’s one reason why they have established offshoots in so many places.”
And of course that is quite right. An art deal can be done anywhere: the picture or object in question doesn’t need to be on the same continent, let alone in the same room. Do your handshake in Singapore or Moscow. No problem. Or shift your location. The creation of “freeports” — tax-haven storage units where art can be kept indefinitely, and can be bought and sold without even leaving the secure facility — makes the layers of secrecy even more impenetrable.
Deals can be nigh-impossible to track, and funds that derive from illegal activities can be passed through a chain of opaque transactions involving art to launder the dirty money from such operations. Since tighter regulations were applied to Le Freeport in Luxembourg, some clients, according to staff, have taken their business away to freeports in Hong Kong or Shanghai.
Mark Stephens, a partner at law firm Howard Kennedy and chairman of artists’ rights body DACS, believes more business may now take place outside the EU as a result of tighter controls. “I can see a boom in sales in freeports around the world and jurisdictions that probably hold the money already and are not going to impose the same obligations.”
That international dimension is what makes legislating the art market so hard. Even companies that specialise in shipping art can be used as smokescreens. A young staffer at an art shipper talks of sending valuable works “on a world tour” — meaning that after their acquisition, often at auction, the works might be dispatched on a long, slow voyage through different tax dispensations, across changing destinations and jurisdictions, to end up — where? Follow it if you can, Mr Taxman.
One famous case involved multiple works, including Jean-Michel Basquiat’s “Hannibal” and Serge Poliakoff’s “Abstract Composition”, which were shuttled about the world to and from destinations as far apart as the Netherlands, New York and Brazil — the $8m Basquiat showing a customs value of $100 — by Brazilian financier Edemar Cid Ferreira. The former president of Banco Santos, in 2006 he was sentenced to 21 years in prison for crimes against Brazil’s national financial system as well as money laundering.
In 2018, an expensive Picasso featured in a fraud case, when US government officials charged British art dealer Matthew Green with using the painting to help launder more than $9.2m, as part of a larger $50m securities fraud.
Some schemes are not even particularly complicated. Most simply, you can buy a painting or a valuable artefact with dodgy funds — perhaps at an inflated price for no questions asked, or perhaps in a geographical region with less beady eyes — and resell it anonymously, or even quite openly and respectably, for “clean” money.
In the art market, “provenance” (ie a documented chain of respectable ownership) is important in the valuation of a work offered for sale, especially for pictures, but much less so for precious antique objects. If you offer a fabulous Chinese jade for sale, a blue-chip piece that experts will certify, when you are questioned about provenance, the response could be: “I found it in my granny’s attic — and she lived in Kazakhstan.”
Other ways of money laundering include using artworks bought with dubious money as collateral against “clean” loans, from any one of the reputable finance companies who increasingly offer to lend against art. Once again, the Kazakh granny might come in handy for such an arrangement — since these firms have eagle-eyed compliance officers who surely do their due diligence — but even with more well-documented works, a very recent purchase wouldn’t necessarily raise a warning signal.
When you are questioned about an antique’s provenance, your response could be: ‘I found it in my granny’s attic’
Clever evasion tactics will probably only last so long, and more forward-looking players have immediately spotted business opportunities. Simms says there is already “quite a number of art entrepreneurial businesses sparked by this.” If a collector buys from several different galleries and auction houses, for instance, why should each one have to undertake laborious checks? How about a centralised information bank, which each seller can access to check up on a prospective client?
Well, yes . . . but how do the clients feel about the idea of such a cache of information? Not at all happy, it seems. So much stored data — passport details, bank details — sends out warning signals to even the law-abiding art buyers. As for the all-important question of the effect on prices, opinions also vary. Spokespeople from the auction houses say they don’t anticipate any significant changes — a response only to be expected — and Hicks’s view is that the impact will be minimal. But other objective art market experts foresee a different logical outcome. The FT’s Melanie Gerlis suggests that it is “highly likely to affect prices quite considerably, especially at the top end — that’s why there’s such resistance!”
Resistance or not, there’s no doubt that the art market would be a less exciting place without its aura of risk and naughty glamour. Putting fabulous sums of money together with the intangible lure of art and beauty is an explosive combination. Whether or not it does anything to deter the criminals remains to be seen, but I doubt a mere EU directive can dim the lustre.
Jan Dalley is the FT’s arts editor
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