Banks now call the shots in art deals

Oct 25th, 2015 | By | Category: Journal
English High Street Banks

English High Street Banks

Whereas Bankers used to process art deals with little fuss, they now examine them in detail and decide if they will accept them or not. Your ‘Relationship Manager’ always wanted to know more about your business….well, now he does… and he is your new boss.

All art deals of any significance now get referred to ‘Compliance,’ a mysterious unit deep within most bank’s HQ’s which previously dealt with identifying African dictator’s and drug lord’s illicit gains. Unfortunately the art world has become the current whipping boy in the global hunt for transparency, hidden offshore capital and compliance with new regulations such as FATCA, GATCA and the international exchange of tax information.

French Economist Thomas Piketty stirred the pot with his book in early 2014, Capital in the 21st Century, which stated that, in his opinion, the return on capital is generally higher than economic growth and that this causes extreme inequalities, discontent and undermines democratic values. He says economic inequality is not new…but its getting worse. Now we have a Piketty protégée, the 27-year-old Gabriel Zucman, who has produced another book titled The Missing Wealth of Nations, which suggests that tax evasion is the reason why international balance sheets show more liabilities than assets. Zucman states (guesses) that US$7.6trillion (8% of the world’s personal financial wealth) is stashed in tax havens. He argues that this is a major driver of wealth inequality and, if it were taxed properly, would grow global tax revenues by more than US$200 billion a year.

Despite recent progress in reducing bank secrecy described by Zucman as “remarkable progress” he advocates a global financial registry. This would be a further extension of FATCA and GATCA, i.e. a worldwide reciprocal exchange of financial information by governments applicable to both corporations and individuals.

Economists have joined the chorus calling for art market reform. Nouriel Roubini used a panel at the World Economic Forum in Davos (no less) to state that the art market is corrupt and needs reform. In his own words he said: –

“During that panel I sketched out three main ideas: –

  1. That art is a new and separate asset class.
  2. That there are a number of serious distortions in the art market that suggest there is some shady behavior going on.
  3. That there is need for regulation and reform of the art market.”

Kenneth Rogoth then joined in in September with an article in which led with the view that, “Artwork has become the investment of choice of aiding capital flight and hiding wealth.” The Art Market Monitor countered with, “What was Kenneth Rogoth Drinking when he wrote this Art Market Screed? Kenneth Rogoth joins Nouriel Roubini in the competition among respected economists to say the silliest thing possible about the art market (with as little evidence as possible).”

The Banks have been further spooked by the current court case in Monaco between collector Dmitri Rybolovlev and his dealer Yves Bouvier. The dispute is over the size of commissions that Yves Bouvier charged Rybolovlev whilst putting together a US$2 billion art collection over 10 years.

In addition the banks are still reeling from the Libor rate manipulation and a host of other scandals. London’s Guardian Newspaper reported, “The global banking industry racked up more than £166bn in fines, settlement fees and provisions between 2009 and 2013, the CCP Research Foundation has found. Offences range from Libor rigging and currency market manipulation to breaching sanctions against Iran and Sudan, money laundering for Mexican drug barons and abusive mortgage practices in the US. Research led by academic Roger McCormick at the CCP Research Foundation shows 10 large banks, including RBS, Barclays, HSBC and Lloyds Banking Group, incurred £166.63bn in fines and provisions between 2009 and 2013. This year is shaping up to be another big year for bank penalties with Bank of America’s $16bn (£10bn) settlement over allegations of mis-selling mortgage-backed securities taking the total for the first eight months of 2014 to more than £31bn, surpassing the total for the whole of 2013.

The current push towards transparency and attacking tax havens, and the money deposited there, plays well for both Cameron and Obama politically who have both joined the chorus calling for change.   But how many of these accusations against the art market are actually true is less clear. The one thing that all these people attacking the art market have in common is that none of them are actually involved in the art market. Talk to anyone who is involved and a very different picture emerges.

Art market transactions are currently subject to full domestic (wherever the transaction occurs) and international money laundering regulations. There have been numerous papers published on the complexity of existing art market law such as “Art Market and Transactions (covering the US market)” written by Anne Marie Rhodes, Professor of Law at Loyola University of Chicago School of Law and published by the Carolina Academic Press in 2011, which runs to 451 pages (ISBN 978-1-59460-773).

All that is certain is that there is major drive against tax evasion, and international cooperation between governments on taxation, on a scale not seen before. The art market, secretive and competitive by nature, does not have a body to fight its corner, and it has become an easy target for some of this anger. The result is that art dealing has become considerably harder as banks are scrutinizing transactions closely and refusing to accept certain deals. The art market, like cricket or the stock market, can only be understood by participating in it for a considerable length of time. Art deals are often complicated, involving buyers and sellers from different legal jurisdictions and intricate commission structures.

Needless to say, dealers are struggling to try and explain such deals to Compliance Units who are demanding more information than ever traditionally required by buyers or sellers. The result is that, until Compliance Units gain a better understanding of the art market, and the current bad publicity surrounding the art market subsides, significant art deals are going to fall apart at the closing stage.   Perhaps the auctions, who have much larger legal departments than most dealers, and PR departments skilled in emphasizing the transparency of the auction process, will be able to use this all to their advantage in winning business.

Tags: art market, art market transactions, Banks scutinize art deals, Dmitri Rybolovlev versus Yves Bouvier lawsuit, Gabriel Zucman, Kenneth Rogoth, Nouriel Rubini, Thomas Piketty

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