The Financial Times believes the art world is vulnerable to money laundering.
This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)
The Art of Money Laundering
In a long essay in the weekend’s Financial Times, Janet Dalley, the salmon sheet’s Arts Editor, claims the UK’s new application of anti-money laundering (AML) protocols to the art trade have “landed like a bomb.” The problem with the “long read” is the fact that although the press harps on the idea that art market is a major venue for money laundering there is very little evidence of it taking place in the $60-billion-a-year industry. If it did, there’s good reason to believe that we would already have seen the economic effects of extensive money laundering on price volatility.
“Daniel Bruce, chief executive of the anti-corruption watchdog Transparency International,” she writes, “last year described the UK as a ‘safe haven’ for money launderers, especially in the ‘luxury’ sectors of art, property and other expensive goods.” Yet the article produces evidence of only two cases of art being used for money laundering over the last 20 years.
Money laundering in real estate, the “property sector,” has been a notorious problem for many years. The sheer size of the real estate market, the increasing prevalence of transactions involving large sums and their international nature in certain cities made real estate convenient for money laundering. In the United States, it is particularly easy to hide real estate transactions by constructing an limited liability corporation that whose ownership can be traded privately without leaving a public record of a high-value transaction.
In response, the US created a program a few years ago in real estate markets like Manhattan, Miami and Hawaii where abuse seemed to have the most potential. Coincidentally, the very top of the real estate market in places like Manhattan dried up at about the same time.
The art market isn’t the luxury real estate sector. Dalley adduces the only two criminal cases that give evidence of art being involved in money laundering: the Basquiat painting “Hannibal” used by Edemar Cid Ferreira, a Brazilian embezzler, to secretly send money to the US nearly 15 years ago and the more recent case of British art dealer Matthew Green who offered to sell a Picasso painting to undercover law enforcement agents for the purpose of money laundering.
Green did not actually launder money using the painting. He was trying to sell a painting to self-avowed money launderers. The Green case inadvertently suggests the real reason art isn’t used as a vehicle for laundering money very often: there are too many people selling art who are only too happy to sell an unsuspecting crook an over-priced painting. It’s easy to buy a Picasso or a Monet for a great deal of money; it is not so easy to sell one for anywhere near the same value. To believe art is used for money laundering, we have to believe that money launderers will do their homework and find the few works of art that trade easily and often without trading at a deep discount.
The best recent example of that is the Jho Low case and 1MDB scandal that consumed Malaysia’s politics. Low bought some $300 million in art in 2013 using money he is accused of stealing from a government-backed development fund. He bought much of the art at one auction house and privately setting record prices. Later, he pledged the art as collateral against loans to another auction house and got cash for half the value that he paid. Low used the cash from the loans to build his yacht, Equanimity, a trophy that seemed to excite the supposed financier far more than esoteric paintings. Low easily relinquished his rights to the paintings instead of paying back the loans. The works were sold at a loss from what Low paid but a profit for the auction house.
That looks a lot like money laundering. On the face of it, Low seemed to be hiding the source of money through a string of transactions. Though from the story told in The Billion Dollar Whale, it is unclear whether Low sought the loans to hide the source of the money or more just because that’s where he could get the money on short notice. By all descriptions, Low was a compulsive spender. The art transactions may have been driven more by expediency than a conspiracy. For our purposes, the motivation is less important than the price Low paid. Notice the steep discount at which the art traded at each time it was resold quickly to generate ready cash.
If that’s what happened to some of the most valuable and desirable works if Low was trying to launder a mere $300m, imagine the effect on art prices if even a tiny portion of the $800bn to $2 trillion the UN estimates is laundered each year ran through the art market. The price volatility would be dramatic and pervasive. Just one percent of the world’s money laundering would account for an eighth of the estimated annual sales of art in its best years.
Yet Dalley isn’t concerned whether wide-spread money laundering is already damaging the market for art. She’s concerned that the AML regulations will :
- “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? 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!’”
How Dalley imagines her money launderers expect to complete the process of laundering their money through these trophies without selling them, she does not say. Whether she thinks anyone would give those supposed money launderers a non-recourse loan for the works without doing any sort of due diligence of them and their potential ties to money laundering is also unstated.
With our would-be money launderers trapped in high value transactions with little chance of recouping their cash, it is easier to formulate a response to Gerlis’s suggestion that the opposition to AML stems from its threat to prices which would already be affected by high volatility created by extensive money laundering if it existed in the art trade.
The auction houses, where most of the highest value transactions take place, already vet their clients through their banks and their own direct research. Larger institutions, like some of the biggest galleries, can afford to have a staffer or legal department check the names of clients against lists of suspicious or exposed persons and report transactions involving those persons.
For smaller dealers, this process is not so much hard as it is unfamiliar and cumbersome. It’s also expensive when there’s little evidence of real money laundering taking place. That’s why dealers are resisting the new regulations. It’s a tax. Few people like paying taxes, especially when its hard to see the value of where the money is going.
In last week’s newsletter, we reported that Sotheby’s Financial Services has two Gerhard Richter works pledged as collateral for a loan. The works were listed in a filing related to the loan that named the Metropolitan Museum of Art as the bailee for the works, meaning the art is in the Met’s possession for the upcoming Richter show at the Met Breur, Gerhard Richter: Painting After All which opens on March 4th. Presumably the two works will be included in the show which closes on July 5th. The Met is not a financial party to the loan. Sotheby’s Financial Services remains the lender and the works have fair amount of likelihood to be sold by the auction house either privately or at auction some time in the future if the borrower doesn’t pay off the loan.