VANTAG galeria: The New York Times Still Doesn’t Get Art & Money Laundering

Monday, February 20, 2017

The New York Times Still Doesn’t Get Art & Money Laundering

February 19, 2017 by Marion Maneker

Basquiat, Hannibal one of the very few works of art ever identified by authorities to have been involved in a money-laundering case — Basquiat’s Hannibal one of the very few works of art ever identified by authorities to have been involved in a money-laundering case

The New York Times has a terrible habit of going after the art market with thin arguments and weak evidence. Yesterday’s store threading together three very well known—but unrelated—cases into a story questioning the practice of not revealing the identity of sellers is a case in point.

The problem isn’t their argument that seller’s should reveal themselves. It’s the slapdash evidence and flawed logic they use. The story’s biggest problem begins with the lede where it is argued that real estate sellers are transparent. Several graphs deeper in the story it is revealed that real estate transactions that are on a par with major art transactions are, in fact, not transparent. How do we know that? Because the Times tells us about a pilot program that requires transparency. Here’s the opening graph:

When you sell your home the paperwork details the sale, including your name, and the title search lists the names of the people who owned the property before you. But when someone sells an artwork at auction — even something worth $100 million, much more than your house — the identity is typically concealed. […] In finance, Treasury officials last year began asking banks to identify customers who set up accounts in names of shell companies. In real estate, they introduced a pilot program that requires the full identification of people who buy expensive properties in New York and Miami using cash and shell companies.

The program in Miami and Manhattan was developed exactly because those real estate markets above several million dollars were being conducted by entities that concealed beneficial ownership, i.e., the real seller’s identity. There’s a more important point that comes out of this pilot program that we’ll address further down.

The story goes on to perpetuate another fairy tale: that art is a good vehicle for money laundering. It’s not. And that’s not because art dealers are choir boys. Art is bad for money laundering for the very reasons the Times mentions here:

Artworks are particularly suitable vehicles for money launderers, experts said, because they transfer easily and store quietly, perhaps in a basement or in an offshore tax haven. Unlike the real estate market, where lightning escalations in price are rare, values in art can be suddenly boosted by intangibles such as fads and personal taste.

Rapid and dramatic rises—and collapses—in price are bad things for money laundering whose sole purpose is to find a relatively stable vehicle to mask the source of funds. Money launderers are not looking to make a profit on their purchases let alone a killing. In fact, a money launderer is willing to take a loss on the vehicle that hides the illicit source of the funds because that is the price of washing the money. If a money launderer buys something with dirty money that has the potential to be unsalable for clean money, it doesn’t work. Art, even some of the world’s best art, is often temporarily unsalable for a variety of real and legitimate reasons.

This would all just be face-palm silliness on the Times’s part, a reflection of its editorial disconnect between the culture pages and the business staff, if the story didn’t also glide over the real point of what is going on here. The best protected transactions in the art market are those that pass through the auction houses because those firms do the KYC due diligence that squelch money laundering. Auction houses have compliance staff and are easily monitored by the law enforcement which doesn’t crack down on large private transactions that take place through lawyers or dealers. The Times admits this when they point out that Jho Low passed KYC diligence before it was revealed that he was involved in the 1MDB transactions. After it was revealed, he is no longer able to access art markets through the auction houses.

The cringeworthy part of the story is when the Times trots out the continuing battle between Yves Bouvier and Dimitry Rybolovlev to suggest malfeasance because Mr. Bouvier was allowed to sell a work for Mr. Rybolovlev but not pass the money through to his client. The joke here is that Rybolovlev, a Russian who lives in Monaco and banks in Cyprus while engaging is massive art deals and, separately, massive real estate deals, is a guy with the kind of profile that pops red flags in KYC reviews for more detailed review.

Most of Rybolovlev’s art was acquired privately where there is no KYC; the few sales through the auction houses rested on Bouvier’s reputation. Were Rybolovlev using art sales to mask the source of his income, it would be Bouvier who would share in the responsibility for that action.

Let’s get back to the real estate pilot program that lies at the heart of the Times’s confusion. That federal program, which may or may not be continued, relies upon mortgage title insurance companies to report to authorities the ultimate beneficial owner of any vehicle used to buy or sell very valuable real estate. It does not require the seller to reveal the beneficial owner to the buyer or vice versa.

There is no comparable entity in the art market. But were the same type of program instituted in the art market, it would only require that the auction house, dealer or lawyer know the beneficial owner and be able to reveal that information to federal authorities. It would not require the other side of the transaction to learn the seller (or buyer’s) identity.

In other words, the protections that real estate and finance have started to put in place are absent from the art market for the same reason that federal authorities down investigate much in the way of art transactions, there is no central entity to rely upon to do the day-to-day record-keeping that makes enforcement easier to do.

The solution for art market would be for a federal agency to create the entity it needs, a back-breaking task that is unrealistic. In lieu of that, we’re back to relying on the banking system to act as the vetting mechanism. That’s basically the system that’s in place now.

To sum up, the Times muddles the very different issues of ensuring the integrity of works of art—the authenticity question—which is real and requires an entity that can work with owners who want to maintain their anonymity for legitimate reasons with the issue of beneficial ownership—which is less pressing with art because it is relatively rare and covered by the parallel system of KYC run by the banks the auction houses rely upon to vouch for their clients’ ability to afford the works they want to buy.

Has the Art Market Become an Unwitting Partner in Crime? (The New York Times)