Financial regulators are cracking down on the opaque international fine art market’s untoward methods and loopholes for money laundering. The Swiss «Bouvier case» was the trigger.
Prosecutors in Geneva and New York are wading through reams of evidence allegedly documenting one of the largest frauds in the secretive market for fine art. Russian oligarch Dmitry Rybolovlev is suing Swiss art dealer Yves Bouvier as well as auction house Sotheby’s.
Rybolovlev alleges that he was cheated of $380 million in superfluous payments for artworks because of market collusion. In a separate complaint against Bouvier, he is suing for $1 billion, which is what the Russian alleges is how much he overpaid for a total of 38 pieces of fine art.
The document-rich Bouvier case has preoccupied courts for years – and is exemplary for how opaquely the market for international art is. The cash-friendly marketplace is closely linked to private banking – and art has grown in importance as an asset class.
A European money-laundering rule aimed at shutting loopholes for fine art came into force two weeks ago. The changes including similar «know your client» rules as apply in banking, for transactions of more than 10,000 euros ($11,084). That means galleries, dealers, agents, and other intermediaries to the rich must apply a type of due diligence to their clients before buying and selling.
Regulators have also drawn up an extensive list of fine art of various mediums which are subject to value-added tax at purchase. It is meant to force buyers as well as sellers into a regulatory framework, and to cleanse the market of improprieties.
Glitzy art fairs in Basel, Geneva, Hong Kong, and Miami have until now been accompanied by lots of cash – as well as more than a whiff of scandal. The specter of sudsing out ill-gotten money with a few pricey art buys is one that clashes with the image of well-heeled, refined culture mavens that galleries and auction houses have long cultivated.
The estimated $70 billion annual art market until now has operated largely outside the purview of international regulators – as well as to its own capitalist tune. «It can be hidden or smuggled, transactions often are private, and prices can be subjective and manipulated— and extremely high,» former U.S. prosecutor Peter Hardy said.
In other words, a valuable work of art is the perfect vehicle to conceal untaxed assets, or to launder dirty money.
Commissions in art deals can be astronomical, while collusion and price-fixing through agents and intermediaries are reportedly rampant – and until the Bouvier case blew open, super-wealthy art clientele had rarely complained about it.
Undoubtedly wounded in pride over being hoodwinked, Rybolovlev was the first major art buyer to blow the whistle, so to speak. Bouvier is known more as «king of Swiss freeports», tax-free storage facilities that play a huge role in stowing illicit loot, than as an art dealer. The Swiss government estimates that the country’s freeports hold more than $100 billion in assets – in secret, and untaxed.
A Louvre director called the facilities «the biggest museums that no one can visit». The European rules are set to rob art sellers and auction houses one of their biggest advantages: vendor anonymity.
The move comes as private banking is forced to abandon secrecy in major jurisdictions like Switzerland – a bid to crack down on lost tax income. It remains unclear whether customs and tax officials have the resources to enforce compliance in the art market – but the new money-laundering rules are a first step to force the industry into an era of oversight.
