Transparency in the Art Market

Mark Bench of Borro forwarded me an interesting, and hot-button topic on transparency in the art market from the Financial Times. The article notes one of the main issues with a lack of transparency at the top end of the market is money laundering, and states many feel, such as government regulators that more standards and regulations would end some of the issues, and increase demand as it removes a concern. The article also notes there are legitimate reasons why some collectors and investors wish the art market to remain opaque.

The Financial Times reports

One of the hottest topics in today’s art market is regulation. Numerous recent cases have shaken public confidence in the trade, and led to a growing clamour for better oversight of what is traditionally a murky field.

The issues concern the opacity that surrounds transactions, particularly at the top end of the market. One of the most egregious examples is that of New York’s 165-year-old Knoedler Gallery, which snapped shut in 2011. It had been selling fakes for decades, with buyers told only they were the property of “Mr X” and his son, “Mr X Junior”. The Michigan art dealer Eric Spoutz was recently convicted of selling dozens of counterfeit artworks to unsuspecting buyers. Lawrence Salander of the now defunct Salander O’Reilly gallery in New York defrauded customers to the tune of millions before what was dubbed the “art world’s Ponzi scheme” collapsed.

The issue of money-laundering has also triggered widespread concern, particularly in the light of the ongoing 1MDB scandal, where art was apparently bought with money allegedly looted from a Malaysian sovereign fund.

At issue are two apparently irreconcilable forces. Dealers and galleries need to respect vendors’ requests to remain unidentified; otherwise they will simply take their business elsewhere.

Yet many collectors, as well as of course the taxman and law enforcement officials, believe that increased regulation and transparency would not only control wrongdoing but would actually boost the art market by bringing in greater consumer protection.

Anyone who buys at auction will be familiar with the designations “Property of a Lady of Title”, “From a distinguished European collection” and other such smokescreens. In addition, catalogues can be economical with the verité, omitting unattractive provenances or previous failures at auction. To add to the confusion, there is no agreed standard for condition reports.

Things can be no more transparent in art galleries: a plethora of legal cases have shown that buyers often don’t know who is selling and at what price. The billionaire Ronald Perelman attempted to sue Larry Gagosian in 2014 for what he claimed, in court documents, was a “sham” sale of an $8m painting by Cy Twombly, which he said was taken for a secret round trip via another buyer before being offered back to him at a higher price. The case was dismissed before it got to court, but it served as a peek behind the normally tightly closed curtains of high-end art transactions.

Nevertheless, “There are perfectly legitimate reasons for consignors of art wanting to protect their privacy, generally for reasons of security,” says art lawyer Megan Noh, until recently senior counsel for Bonhams and now with Cahill Partners. Noh recently spoke about the subject of balancing transparency and anonymity at the first Art Business Conference held in New York. Also speaking was Julian Radcliffe, chairman of the Art Loss Register of stolen art, who has attracted some controversy in the marketplace.

Radcliffe argues that better regulation would boost the art market as a whole. “The lack of proper standards are a disincentive to many potential collectors, [who] just don’t trust the art trade,” he said. When things go wrong, he pointed out, the biggest losers are actually dealers and auction houses: “Collectors can usually get their money back from dealers or auction houses but the trade can’t get money back from insurers.”

Certainly, art dealers have been facing losses in recent forgery cases, not least that of the German faker Wolfgang Beltracchi whose works were filtered into the trade across Europe and the US.

Today’s more complex art market contains new players such as art agents. Thus there can be several layers of dealers between the buyer and seller, who might never know who the other is. This is underlined by the ongoing case in which the family trust of the Russian businessman Dmitry Rybolovlev spent about $2bn on art purchased through the Swiss entrepreneur Yves Bouvier, but apparently did not know the identity of the vendors of the works.

There are issues over the actual ownership of the art, which may be held by offshore companies, as well as tax and investment issues. The fundamental problem, according to the FBI’s art and antiquities special agent Meridith Savona, is the lack of records of ownership. “Even for cars, I can see who owned it for a certain period of time,” she says. “In the art market there is nothing, no regulation. If someone will not tell you who was the previous owner there’s a reason. There needs to be a way of having records maintained for, say, 20 or 30 years.”

This chimes with the stand taken by Nanne Dekking, a Dutch entrepreneur whose start-up Artory aims to bring more transparency to the market through catalogue raisonnés and provenance research.

“In Holland there is a digital registry for second-hand cars — it’s obligatory to register, so if you buy the car you know exactly what you are getting,” he says. “And if the exhaust falls off, you know where to go. That’s the kind of transparency we’re after.”

So, should regulation be imposed from above or come from the trade itself? Radcliffe would like to see ownership details, after a sale, put in some sort of escrow for a decade or so, to be made available to buyers if a dispute arises. Further, he favours a levy — he suggests 0.01 per cent on art transactions — to create an independent committee to establish and maintain standards.

But Clinton Howell, president of the International Confederation of Art and Antique Dealer Associations, argues for self-regulation. “Top-down government regulation would be a huge threat to transparency. It would make inappropriate decisions about how to ‘regulate’ the art trade, based solely on popular support.”

Savona disagrees. “In my opinion, self-regulation does not work because the individuals who work in galleries and auction houses have differing moral and ethical standards. Sadly, we will always have a job, but we would like to see more integrity in the market.”

Source: The Financial Times