Phony Profit

As Global Art Market Booms, Dubious Dollars, Dodgy Dealers Move In

  • Why it matters

    Why it matters

    The global art market is still reeling from a scandal in Germany, which saw dealer Wolfgang Beltracchi and his accomplices forge and sell hundreds of fake paintings to collectors and dealers. Experts say that unless the art market implements proper regulations, it will become a target for forgers and money launders.

  • Facts

    Facts

    • Dubious money is distorting the art market and driving prices ever higher.
    • Many dealers say the art market needs better regulation to survive.
    • Colombian drug ring the Cali Cartel once used paintings by Rubens and Picasso for money laundering.
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    Audio

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A visitor to Mexico City's Bellas Artes Museum walks between two Andy Warhol "Dollar Sign" paintings.  Source: Reuters
A visitor to Mexico City's Bellas Artes Museum walks between two Andy Warhol "Dollar Sign" paintings. Source: Reuters

 

When can we begin to speak about art again without talking of fraud, deceit and embezzlement?

Perhaps when inside galleries and auction houses, we speak first of the impact and aesthetic of an artwork, instead of its price. Martin Roth, a museum director who worked in the eastern German city of Dresden and is now based in London, told Die Zeit that the entire art world now revolves around money.  But it’s far worse than that.

“The business has become dirty, really dirty,” he said. One could think this is just one museum man’s view of his discredited industry, however, it’s not so simple. Many gallery owners and auctioneers also complain about the rumors, the absurd prices and the self-importance of the industry.

“The system is screwed,” Bruno Brunner of the Gallery of Contemporary Fine Arts in Berlin recently told Monopol, a German art magazine.

One well-respected New York collector going by the pseudonym Elliott King recently went on art buying tour in Berlin and said it was clear the art market must reform itself or it will die a protracted death.

He said the system is breaking down, now that art is becoming a business. Deals lack transparency. Money obtained by unsavory means is going into art works, and once honest dealers and curators are acting like fraudsters. This money is distorting the market and driving prices ever higher.

Experts such as Swiss lawyer Andrea Racher say that tighter controls in the finance industry have made the art market a more attractive target for money launderers. Artworks can be bought for an inflated price, to launder vast sums of money, in complex deals that can be very hard for investigating authorities to control.

As another Swiss lawyer, Monika Roth, wrote in her article “Money Laundering in the Art World” for Art & Law this year, there is often a conflict of interest. Art dealers are meant to be agents for the buyer, but in reality they often end up taking commissions from both sides. There is also rarely direct contact between a buyer and a seller, which makes these deals hard to trace and makes it almost impossible to create a comprehensive paper trail to verify the authenticity of a work of art.

Through offshore companies in the Bahamas or the British Virgin Islands, businessmen can pretend to be art buyers to avoid taxes and bypass regulations. Offshore companies have no legal obligation to keep proper records, and can remain totally opaque.

In her article, Ms. Roth exposed a long list of Swiss banks that had used illegal art deals for money laundering purposes. Outgoing government officials would often steal artworks from their embassies, sell them through Swiss accounts and keep the illegally gained profits in Swiss banks.

At the moment, it is impossible to know if galleries are pushing up the auction prices of the artists they represent.

The art market expert Georgina Adamas, in her new book “The Explosion of The Art Market in the 21st Century,” describes a recorded telephone conversation between the British buyer and dealer Alberto Mugrabi, the gallerist Larry Gagosian and an employee at Sotheby’s about how to prevent the auction of three Andy Warhol paintings in 2009 from failing. A failed auction would depress the price of remaining Warhols, and Mr. Gagosian and Mr. Mugrabi, who had had hundreds of Warhol paintings in their store rooms, wanted to make sure the prices remained high. Ms. Adamas also wrote about the Columbian drug ring, the Cali Cartel, which at the start of the 1990s used paintings by Rubens and Picasso for money laundering.

Melanie Gerlis, the art market editor at the English-language The Art Newspaper, writes in her book, “Art as an Investment, A Survey of Comparative Assets,” that much data on the art market is incomplete. Laws and politics do not appear to affect the market, which is made up of small clubs of millionaires closed to outsiders. And self-regulation of the art industry, if it exists at all, is different from other markets such as gold or wine.

If the art market is to open itself to a wider public, Ms. Gerlis argues that it needs more checks and balances. There needs to be safeguards to stop insider trading, and also to use the Internet to make information available to everyone and forbid collusion. Currently, the asymmetry of information on the art market makes it an unreliable for investors who are not part of the inner circle, and lucrative for those who are.

How can the art market repair its reputation? Mr. King called for better regulation. The art market must adopt a certification system, particularly when dealing with certain countries. At the moment is it impossible to know if galleries are pushing up auction prices of the artists they represent. Anyone using an art certification system would have to declare such conflicts of interest. Dealers and middle men should not act for both sides of a sale. Art buyers should check that their customers, and the bank accounts they use, are legal and should know where large sums of money come from.

Above all, gallerists and art dealers should make sure they know the basic rules, and middlemen should be like stock brokers, operating within clean, well-known regulations.

There would be less artificial boosting of prices and museums could again become places to learn about painting and sculpture. And we could begin to speak again about the art.

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