NEW YORK (NYT NEWS SERVICE).-
The federal agents who raided a drug dealer’s house in a suburb of Philadelphia found marijuana and, to their surprise, $2.5 million in cash stashed in a secret compartment beneath a fish tank.
But they were even more surprised to discover so much art — 14 paintings on the walls and another 33 stacked in a storage unit a few miles away from the home of the dealer, Ronald Belciano. The artists included Renoir, Picasso and Salvador Dalí.
“That jumped out at us,” said Brian A. Michael, special agent in charge for Homeland Security Investigations Philadelphia. “That amount of artwork was not something you come across in every investigation.”
It turned out, Mr. Belciano used the art to launder some of his drug cash, purchasing the works from an established gallery near Philadelphia’s Museum Row.
In 2015, he was sentenced to more than five years in prison for dealing drugs and for laundering the illicit proceeds by taking advantage of one of the art market’s signature features — its opacity.
Billions of dollars of art changes hands every year with little or no public scrutiny. Buyers typically have no idea where the work they are purchasing is coming from. Sellers are similarly in the dark about where a work is going. And none of the purchasing requires the filing of paperwork that would allow regulators to easily track art sales or profits, a distinct difference from the way the government can review the transfer of other substantial assets, like stocks or real estate.
But now authorities who fear the Belciano case is no longer an oddity, but a parable of how useful art has become as a tool for money launderers, are considering boosting oversight of the market and making it more transparent.
In January, Congress extended federal anti-money laundering regulations, designed to govern the banking industry, to antiquities dealers. The legislation required the Department of the Treasury to join with other agencies to study whether the stricter regulations should be imposed on the wider art market as well. The U.S. effort follows laws recently adopted in Europe, where dealers and auction houses must now determine the identity of their clients and check the source of their wealth.
“Secrecy, anonymity and a lack of regulation create an environment ripe for laundering money and evading sanctions,” the U.S. Senate’s Permanent Subcommittee on Investigations said in a report last July in support of increased scrutiny.
To art world veterans, who associate anonymity with discretion, tradition and class, not duplicity, this siege on secrecy is an overreaction that will damage the market. They worry about alienating customers with probing questions when they say there is scant evidence of abuse.
“We are in the paranoid-terrified phase of what’s going to come down the pike,” Andrew Schoelkopf, then the president of the Art Dealers Association of America, said at an industry panel this year. “It’s going to be a whole lot of paperwork and a whole lot of compliance and I don’t think we will extinguish much of a problem.”
Their concerns are great enough that lobbyists for the dealers’ association and major auction houses have been trying in Washington to shape the evolving policy on this and other regulatory measures. Since 2019, the lobbying bill for Christie’s, Sotheby’s and the dealers’ association has approached $1 million.
Still, there is no question the art market has exploded in value and scope from the sleepy days when its customs were created. Paintings routinely sell for $10 million, $20 million, often as much as the penthouses in which they hang. Though the profits from art sales are subject to the robust capital gains tax on luxury goods of 28 percent, the I.R.S.’s ability to track who is accurately reporting windfalls is something of a struggle. Even figuring out who sold what is a hurdle. Half the purchases are in private, not at public auction, so many prices never become public.
Recent studies have projected substantial tax evasion by the richest Americans, which led to President Biden’s plan to boost audits. While there is no evidence of widespread cheating involving art, experts say it’s clear the secrecy of the market creates vulnerabilities for an enforcement system that rarely conducts audits and relies heavily on the willingness of collectors to make plain their profits.
“The only ones who know,” said Khrista McCarden, a professor at Tulane Law School who specializes in the tax code, “are you, the art gallery and God.”
A Long History of Whispered Names
The secrets of the art world sometimes tumble out at places like the Eden Rock hotel on St. Barts, where in a lunch in 2014 overlooking the turquoise waters of St. Jean Bay, the Russian billionaire Dmitry E. Rybolovlev, a collector, was introduced to Sandy Heller, a New York art adviser. Naturally, the conversation turned to art, and money.
Mr. Rybolovlev had paid $118 million for a Modigliani nude from an unknown seller. Mr. Heller confirmed that the seller had been his client, the hedge fund manager Steven A. Cohen. But something was off. Mr. Cohen had charged only $93.5 million, Heller said.
Mr. Rybolovlev has alleged in multiple court cases that he was defrauded when he used a man he said he believed he had hired as an art adviser, Yves Bouvier, to make that and many other purchases, totaling nearly $2 billion. According to the suits, Mr. Bouvier was buying the works at one price and flipping them at huge markups to Mr. Rybolovlev.
Mr. Bouvier, who has prevailed in several of the lawsuits, has said it was always clear he was operating, not as an adviser, but as an independent seller who could buy the art and resell on his own terms. But in the legal battle that has ensued, Mr. Rybolovlev has castigated not only Mr. Bouvier, but the art world itself.
“If the market were more transparent, these things wouldn’t happen,” he said.
What is the origin of such secrecy? Experts say it likely dates to the earliest days of the art market in the 15th and 16th centuries when the Guilds of St. Luke, professional trade organizations, began to regulate the production and sale of art in Europe. Until then, art was not so much sold as commissioned by aristocratic or clerical patrons. But as a merchant class expanded, so did an art market, operating from workshops and public stalls in cities like Antwerp. To thwart competitors, it made sense to conceal the identity of one’s clients so they could not be stolen, or to keep secret what they charged one customer so they could charge another client a different price, incentives to guard information that persist today.
The market is less secretive than it once was. Auction houses, for example, today publish estimates of prices they expect artworks to achieve. But so much about it remains opaque, which lends an air of mystery and romance to a world where values and profits can rely on something as capricious as a fleeting consensus on genius.
Auction catalogs say works are from “a private collection,” often nothing more. Paintings are at times brought to market by representatives of owners whose identities are unknown, even to the galleries arranging the sale, experts and officials say. Purchasers use surrogates, too. When Mr. Rybolovlev sold Leonardo da Vinci’s “Salvator Mundi” to Crown Prince Mohammed bin Salman of Saudi Arabia, for example, it was bought by a friend of the prince, which obscured who was shopping.
In these circumstances, the galleries rely on the integrity of the agents, with whom they have long done business. Sometimes the buyers and sellers are not individuals at all, but shell companies, opaque investment structures often designed to conceal identity.
“Very rarely is anybody buying a $5 million painting as a person because they don’t buy anything else that way,” said Cristin Tierney, a New York gallerist.
And once works are purchased, many of them, including some of the world’s most expressive and expensive, end up hidden away in cavernous, nondescript, tax-sheltered free ports, their whereabouts largely unknown.
“The variety of frauds in the art world is almost infinite and that is facilitated by the fact that the art world operates with a secrecy that no other investor would dream of operating in,” said Herbert Lazerow, a professor at the University of San Diego School of Law.
Following Europe’s Lead
Now the federal government is considering using a law designed to combat money laundering at financial institutions to further regulate the art market. The law, the Bank Secrecy Act, requires banks to report cash transactions of more than $10,000, highlight suspicious activity and understand the identity of their customers and where their wealth comes from.
Congress has already authorized Treasury officials to tailor the regulations to fit the antiquities market, which has long been burdened by worries about illicit artifacts trafficked from countries like Syria and Iraq. Now dealers of ancient treasures like Roman marble statues or Egyptian reliefs will be treated like financial institutions, and federal regulators will study whether the restrictions should be extended to the broader art market.
Antiquities dealers are concerned about the cost of complying with the so-called AML (anti-money laundering) regulations. They say they already know their customers well enough to know they are not engaged in illicit activities.
Randall Hixenbaugh, a New York antiquities dealer, complained that small businesses would be forced to hire compliance officers. “I can’t even afford to hire a full-time assistant in this horrible economic climate,” he said in an email.
If the new strictures are extended to the much broader art market, dealers and auction houses would likely be required by law to determine who the actual owners are, even pierce the veils of shell companies.
Christie’s said it “welcomes the opportunity to work with U.S. regulators on appropriate and enforceable” guidelines. Sotheby’s said it “has long-established due diligence procedures and will comply with all applicable laws and regulations.”
Auction houses have already responded to the changes in Europe with more thorough vetting of their customers in the United States, too. Christie’s says sellers at its New York auctions must fully disclose their identity. For buyers, it says it verifies the identity of any agent and works to identify the sources of funds when there is any suggestion of risk.
But last year, Senate investigators found gaps in the policies the art market now has in place. Auction houses and dealers were cited for having allowed two Russian oligarchs, close to President Vladimir V. Putin and under sanctions, to buy and sell art using shell companies fronted by an art adviser. The subcommittee concluded that the auction houses, in transactions between 2011 and 2019, did not determine who the real owners were despite professing to have adopted safeguards.
Senator Rob Portman, an Ohio Republican and a sponsor of the report, said “the art industry cannot be trusted to self-police.”
“While the auction houses claimed to have robust anti-money laundering programs, we found that the actual employees who facilitated the transactions never asked who the art intermediary was buying the painting for or where the money was coming from,” he said in a statement.
Even if the tighter rules were adopted, the names of buyers and sellers would not become public. But dealers and auction houses would need to determine who they are dealing with in case of law enforcement inquiry.
Are Authorities Aiming a Cannon at a Mouse?
How much money laundering involves art? No one seems to have quantified it, though many experts agree the art market is a natural place for it to flourish. “Pieces are portable, there is a high level of secrecy around who owns what and the value that they’re paying, and it’s debatable in some ways,” said Nienke Palstra, a researcher at Global Witness.
Still, the number of prosecutions that have been made would not, by itself, suggest the problem is ubiquitous.
In a typical case, someone uses illicit profits to purchase art, parking the money there until a later sale results in “clean” money with a legitimate pedigree. A famous case concerns the financier Jho Low, who prosecutors say helped siphon billions of dollars from a Malaysian government fund employing a network of bank accounts and shell companies. He then laundered the money, prosecutors say, via a spending spree on things like art. In 2014, a Cayman Island company he owned received a $107 million loan from Sotheby’s using some of the art as collateral. (Mr. Low denied any wrongdoing and remains at large.)
Sotheby’s and Christie’s said they stopped doing business with him once they knew he was under investigation. They were not accused of wrongdoing.
Some experts say enforcement efforts have simply been too anemic to detect laundering, and that the size of the problem will become apparent if dealers and auction houses are required to report suspicious activities.
“You don’t know what you don’t know,” said Peter D. Hardy, a former U.S. prosecutor.
Advisers to collectors say they also do not believe that the opacity of art transactions has led to major cheating on the reporting of capital gains, even though dealers have no obligation to provide independent reporting of sales to the government.
“Collectors are savvy business people of prominent standing in their communities,” said Michael Plummer, principal at an art management and investment firm in New York, “and advised by sophisticated tax and legal professionals — saving tax dollars by not reporting capital gains and committing outright tax fraud is just not worth the risk to their other business and social interests.”
In cases where people fail to report the profits from art sales, some advisers think the banking system is able to flag possible tax evasion. But other experts said the ranks of I.R.S. and other regulators were too thin to follow up on the millions of banking alerts that come in each year.
“They get so many reports, they could not possibly follow up on all of them,” said Julie A. Hill, a University of Alabama School of Law professor.
Her Money Smelled Like Pot
Four months after his arrest, Ronald Belciano returned to I. Brewster & Co., the Philadelphia gallery where, investigators said, he had bought the art he used to launder money.
But he was not there to shop for himself. Instead, he introduced the gallery owner, Nathan Isen, to Lisa, who he identified as a drug dealer with lots of cash to spend on art, according to court records.
Lisa said she had concerns.
“Like, I’m willing to invest in stuff like this, but this I don’t know,” she said, according to a transcript of their conversation. “I don’t know how to sell this. Cars, other things I can get rid of easy. Like this I’m nervous about.”
Mr. Isen provided his perspective on art market transactions.
“It’s different than selling a car,” he said, “’cause car has to have the registration, the title, and this and that and everything. … These are nothing. … These could have been, these could have been your grandmother’s. You follow me?”
“So I can say, ‘hey, this is stuff that I inherited not that I bought,’” Lisa asked.
“Right. ‘I found it at a thrift store, they were $10 a piece,’” Mr. Isen replied.
Mr. Isen had not been accused of wrongdoing in Belciano’s case and has denied knowing Mr. Belciano was using the art to launder money, but as a result of his conversations with Lisa, who was an undercover agent wearing a wire, he would later be charged with money laundering and plead guilty in 2015. He was sentenced to 320 hours of community service and received a $15,000 fine.
A week after their first conversation, Lisa returned to Mr. Isen’s gallery to buy 12 Salvador Dalí lithographs for $20,000. She had the cash in a brown paper bag. It smelled of drugs, she told the gallerist, because she kept it with her marijuana stash.
He told her she was not getting an invoice for her purchases, according to the court papers.
“No invoices? Cool,” she replied. “No receipt, no invoice, I’m good with that. That’s the way I like to do business.”
“We never saw you before,” Mr. Isen said.
Correction: June 22, 2021
An earlier version of this article that discussed a legal dispute between Dmitry E. Rybolovlev and Yves Bouvier as to whether Mr. Bouvier was acting as an art adviser or independent seller of art works omitted attribution regarding the discussion. Mr. Rybolovlev’s position was drawn from court filings.