Bloomberg has a long article this morning calling Sotheby’s a shadow bank and suggesting its loan business helped Malaysian client, Jho Low, launder money.
The argument tries to imply that Low took a loan from Sotheby’s Financial Services on art he had purchased at Christie’s and privately because the auction house does not do rigorous KYC screening. Here’s Bloomberg:
“One way to launder is to use art as a security for a loan,” said David Hall, who spent 10 years as a special prosecutor for the Federal Bureau of Investigation’s Art Crime Team and is now a partner at law firm Wiggin & Dana LLP. Hall, who wouldn’t comment about Sotheby’s or the Low case, said the aim is to use ill-gotten funds to purchase assets that can be used as collateral for a loan. “The level of scrutiny you’ll receive from a bank is much higher than you will receive from an auction house.”
There’s only one problem with this line of argument. Jho Low could and did easily pass KYC enquiries because he and his father (and his grandfather) are well established Malaysian business figures. Until the 1MDB mis-appropriation wound its way through nearly a dozen jurisdictions any probe into Jho Low’s background would have revealed that he had ample legitimate resources to purchase a great deal of art.
One of the important questions raised by the recent Department of Justice civil suit is what Jho Low was aiming to accomplish with his art and real estate purchases. If laundering money was the intent, Low went out of his way to call attention to himself, not exactly the behavior of someone looking to default on a loan and disappear with the “clean” cash.
It’s important to note in the context of Bloomberg’s article that the Department of Justice did NOT file a criminal complaint against Low. If there was evidence of money laundering in the FBI’s investigation, the US Attorney did not decide to act on it.
Nevertheless, Bloomberg has decided that because Low sold works at a loss (isn’t there a chance those sales were simply Low trying to unwind his purchases in an ineffectual attempt to stay ahead of the international investigators from Singapore, Switzerland and the US?) he must have been engaged in money laundering.
Many of Low’s works sold for less than their purchase price. A 1935 portrait by Pablo Picasso of the artist’s lover, Marie-Therese Walter, fetched $27.6 million at auction in February, a decline of 31 percent from the purchase price. Sotheby’s sold “Dustheads” in a private transaction for about $35 million, according to a person with knowledge of the matter, a 28 percent drop in less than three years.
Even though he took a loss on the sales, Low got the proceeds of the loan.
The goal of money launderers is to create a separation between the ill-gotten gains and subsequent transactions, according to Hall, the former FBI prosecutor.
“You can see how effective this is as a laundering scheme,” said Hall. A borrower “doesn’t need to repay the loan because he just sells the collateral. He ends up with the money that appears to be clean. And he can use it however he wants.”
There’s only one problem with this logic. There’s no evidence that Low defaulted on his loan to Sotheby’s. It’s true that Sotheby’s does make loans with the hope that it will also make a sale to satisfy the loan. That way the company generates interest payments and sales commissions. To coax borrowers into becoming sellers, it can hardly be heavy handed in selling works it holds as collateral. In other words, its hard to get clients to borrow money from you if you have a track record of selling their art before you get a chance to figure a way out of a financial squeeze.
The sales that alerted everyone to Low’s exit from the art market took place in February of 2016. That means the works were consigned in December or January. The Malaysian Attorney General issued a report in January that attempted to quash concerns over 1MDB. The timing suggests Low was trying to unwind his actions to tidy up what they thought was a contained problem, not default on a loan and walk away with “clean” money.
If he was trying to erase the money trail, he was really bad at it.
This last point is important because, of course, the issue here isn’t whether Jho Low’s behavior was a problem. It was. And that’s why 10 countries are trying to track the money down.
The question is whether the art trade, in general, and auction houses, in particular, are some sort of loophole for illicit financial transactions. On that, Bloomberg remains unconvincing.