Is the art world’s free ride coming to an end?
The EU’s Fifth Money Laundering Directive (5MLD) took effect in the UK on January 10, casting a long-overdue regulatory net over the art market. Policymakers hope that the 5MLD will usher in a new era of regulation following a number of high-profile scandals affecting the art world, including the Panama Papers’ release and heightened scrutiny of the murky tax-free zones known as freeports following the allegations of fraud against art dealer and “freeport king” Yves Bouvier.
In practice, the latest change means that all participants in art transactions worth more than €10,000 will be obligated to carry out “know your client” (KYC) and customer due diligence (CDD) checks before the deal can go ahead. The monetary threshold, moreover, is not limited by payment type.
Mirroring current VAT legislation, the new regulations cover an extensive list of works of art. From paintings to collages, sculpture casts to photographs, buyers and businesses alike will now be forced to carry out these new checks and balances to stamp out the art market’s own ugly underbelly. However, given the scaleof global tax evasion and black markets drawn into the public limelight, it is little wonder that authorities are scrambling to craft a formal, and adequate, regulatory response.
The art market’s regulatory black hole
Often likened to the Wild West, the art market’s relative lawlessness means that art itself is a prime vehicle for laundering money. According to Peter D. Hardy, a former US prosecutor who now consults on AML compliance, “It can be hidden or smuggled, transactions often are private, and prices can be subjective and manipulated— and extremely high.”
Indeed, regulations hindering unsavoury practices have, until now, been conspicuously absent from the art world—and bad actors have taken advantage of this regulatory gap. It is not uncommon for dealers to collude to bid on artworks at auction so as to artificially boost the value of a piece of work. In other industries, such practices would be immediately recognised as fraud. But in the shadowy art market, the lack of regulation has allowed them to continue—and has given rise to a new breed of fraudulent institution: so-called consultancies.
“Hidden” commissions for unscrupulous consultants and dealers
These bodies are run by consultants that take effective advantage of subjective pricing structures that can put a fee at anywhere between 2% to 500%.“Anyone can become a consultant or dealer or adviser from one day to the next, with little or no expertise and nothing being required of them,” lamented Kenny Schachter, a London art dealer. “It’s often the case that someone offers something legitimately, and before you know it there’s 12 links in the chain, which is just a layering up of commissions on top of each other.”
These hidden commissions often don’t come to light—as one art insider explained, a culture of secrecy encourages wronged parties to deal with disputes outside of any legal framework. “Art is a handshake business, and if someone treats you poorly, don’t deal with them again, but don’t go public with your gripes.”
This unwritten code notwithstanding, one dealer’s alleged attempts to enrich himself at the expense of his client have become very public indeed—and have sparked a slew of consequences throughout the art world, including drawing the European Parliament’s attention to freeports’ potential as vehicles for money laundering and other financial crimes.
The Bouvier Affair’s far-reaching repercussions
In the so-called “Bouvier Affair”, which court documents referred to as “the largest art fraud in history”, Swiss dealer Yves Bouvier has been accused by his former client, Russian billionaire Dmitry Rybolovlev, of defrauding him out of $1 billion over ten years by overarching him for some 38 masterpieces.
After an article in the art press apparently tipped him off to the fact that his long-time dealer was apparently selling him works at an enormous markup, Rybolovlev sued Bouvier for fraud and complicity in money-laundering. Although the case was dismissed in Monaco, Rybolovlev apparently intends to appeal to a higher Monegasque court, and proceedings against Bouvier remain open in Geneva.
More broadly, the art scandal drew European policymakers’ attention to Yves Bouvier’s freeport empire, and the myriad ways in which these opaque, ultra-secure warehouses could be used for financial wrongdoing. In March 2019, the European Parliament adopted the report of the Special Committee on Financial Crimes, Tax Evasion and Tax Avoidance (TAX3). The report minced no words about how freeports—so chock-full of priceless art that the director of the Louvre calledthem “the greatest museums no one can see”—for their potential use as vehicles for tax evasion and money laundering. Owing to their high secrecy, any deals happening within freeports’ walls can be hidden from the state’s eyes, making them ideal for illicit financial activities.
5MLD the beginning of a new era?
Given this history of lucrative backdoor transactions and dodgy deals, it’s no wonder that this latest directive from Brussels has left many dealers and auction houses chafing at the new oversight. According to much of the art world, legal changes in Europe such as the latest AML initiative strip vendors of a major industry selling point: anonymity in sales, and the genteel privilege of avoiding the prying eyes of authorities. But now, 5MLD demands almost immediate compliance—and a new level of transparency.
“I see our greatest challenge as artfully bringing these regulations in a natural process, rather than something that could deflect the buyers’ focus,” argued Philip Mould, the founder of a London gallery. Other art world insiders have suspected that the new regulations, despite how much they may irk dealers and galleries, won’t go far enough to crack down on the rampant financial malfeasance in the art sector. Overburdened revenue and customs departments, they argue, simply don’t have the resources to adequately enforce the 5MLD—and fines for rule-breakers are too low to serve as a major deterrent. The 5MLD is, at the very least, a heartening step in the right direction. One can only hope that the new regulations truly help to clean up the glamorous, but ultimately opaque, art world.
This article does not necessarily reflect the opinions of the editors or management of EconoTimes.