Mark Lehman of Borro and member of RICS personal property valuation counsel sent me a link to an interesting article from the Financial times on art fraud and price fixing. The article discusses how the art market, with billions of dollars in sales has very little oversight, and a lack of transparency.  The article is rather long so I only posted an excerpt. For the full article, follow the source link below.

The Financial Times reports

Many in the art world dispute that the art market is more susceptible to abuse than other asset classes, or that it is even a great way to hoard illegal assets. “Art is an illiquid market and knowing that it will appreciate in value requires a great deal of skill,” says Mr Maneker. Some draw parallels with the property market, particularly in London and New York, where foreign money flows into high-end properties, often through offshore shell companies. “In real estate there is a registered deed and even if it’s owned in a name of a corporation, there is somewhat of an ability to trace ownership. There is not a lot of transparency on who is buying or selling art,” says Sharon Cohen Levin, head of the money laundering and asset forfeiture unit at the US Attorney’s office for the Southern District of New York.

Art is portable and easily shipped across borders. Transactions may be brokered by advisers, who are not regulated. “Art advisers can be speculators, or just rich kids with the right friends,” says one art insider.

Dealers and auctioneers are not covered by anti-money laundering regulation, as banks are, but it is a crime to conduct transactions involving the proceeds of illegal activity. In Britain, auction houses have filed 15 so-called suspicious activity reports out of a total of 354,186 in the year to September 2014, according to its National Crime Agency.

In 2012, the Basel Institute of Governance proposed self-regulation guidelines for the art world. “We don’t only focus on provenance of objects, but provenance of funds in our guidelines. We want to close the black money flow,” says Thomas Christ, a board member of the group and co-author of the draft. “If you don’t self-regulate, eventually the state will come and make the law, and the art trade will be worse off.” To date the efforts have come to nothing.

Falling foul of the law or inadvertently selling fake or stolen art carries a devastating reputational risk. Auction houses such as Christie’s and Sotheby’s have large compliance departments, which carry out due diligence on clients and check the provenance and authenticity of pieces. But not all involved in the art trade have the means, or the appetite, to carry out due diligence.

“If I think that the guy in front of me sells drugs or has blood on his hands that is where I draw the line. But when it’s a guy who has undeclared money, as long as the bank accepts the money I do the deal,” says one art dealer who spoke on condition of anonymity. “As long as art is not regulated why should I be the one to fix the rules?”

There are notorious cases that have hurt the market’s reputation. Former Brazilian banker Edemar Cid Ferreira, who was convicted of money laundering and bank fraud, stashed millions of dollars into art, including Basquiat’s “Hannibal”. The $8m painting was smuggled into the US with a customs form saying its contents were worth $100. German art adviser Helge Achenbach was sentenced last month to six years in prison for falsifying invoices and overcharging supermarket tycoon Berthold Albrecht for paintings, sculptures and classic cars. And US lawyer Marc Dreier, who was convicted in 2009 of securities fraud, had assets that included more than 200 works of art, including a Picasso and works by Warhol.

For some the fault does not lie with the quirks of the art market. “The flow of funds is the big issue,” says Mr Maneker. Art is often owned through offshore entities. For some this provides secrecy; for others it is a way to save tax or to structure inheritance planning.

Source: The Financial Times