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Fakes, forgeries and dirty deals

Global fight against amorphous art fraud

The opaque and unregulated global art market is vulnerable to forgeries, tax fraud, insurance fraud and money laundering. Here are details on how fraud examiners can detect and investigate crimes in this murky corner of creative commerce and why circumstances are often in the fraudster's favor.

Over the past decade, as prices in the international art market soared to record-setting heights, Swiss art dealer Yves Bouvier helped assemble what he described in the Financial Times as "the most beautiful collection of the third millennium." Controlled by a private trust of a Russian oligarch, Dmitry Rybolovlev, the collection has been estimated to be worth $2 billion and includes works from old masters like Leonardo da Vinci plus well-known modernists such as Magritte and Modigliani. In February 2015, Bouvier traveled to his client's home in Monte Carlo, expecting to add a new conquest to that list: a Mark Rothko painting known as "No 6 (Violet, Green and Red)" that his client had reportedly agreed to acquire for 140 million euros (around $180 million). Yet instead of being congratulated and handed a glass of Champagne for closing the deal, Bouvier was handed over to the Monaco authorities and arrested.

"I was ambushed and put in a gulag," Bouvier complained to the Financial Times, after Monaco's Public Prosecution Department indicted him for criminal charges of fraud and complicity in money laundering. Bouvier has been accused of fraudulently inflating the prices of the paintings and pocketing millions in illicit profits. (See Art: A market laid bare, by Cynthia O'Murchu, Financial Times, April 7, 2015.)

"He [Bouvier] made us believe that we were acquiring the paintings directly from the owners and paying him a commission," Tetiana Bersheda, a lawyer representing the Russian collector, Rybolovlev, told Bloomberg Business. "He said he would be able to get a better price if people didn't know the acquisition was being made by a trust related to a Russian billionaire." (See "The Billionaire, the Dealer, and the $186 Million Rothko," by Stephanie Baker and Hugo Miller, Bloomberg Business, April 27, 2015.)

Bouvier allegedly used offshore companies to acquire and sell artwork in a series of blind sales and kept his client in the dark about the details, including the extent of his markups. He acquired the Rothko through an intermediary for $80 million plus commission, after persuading Rybolovlev to pay $180 million for the piece — netting a potential profit of nearly $100 million until the police intervened, according to figures cited by Bloomberg.

Previously, Bouvier made more than $25 million on a Modigliani, which he bought for $93.5 million in a private sale in 2014 and promptly sold to Rybolovlev's family trust for $118 million, according to published reports. Several other deals also reportedly resulted in comparable, eye-popping payouts.

The art market tends to reward well-positioned players who can capitalize on privileged, nonpublic insights. In this regard, Bouvier occupies a prime position. He runs a business that operates luxury warehouses in "free ports" in Switzerland, Singapore and Luxemburg, at which art and antiquities can be safely stored for investment purposes and traded without taxation. These maximum-security facilities have become popular places for tax-avoidant collectors to stash artworks, lending a well-placed observer such as Bouvier a valuable perspective on what pieces are quietly entering and exiting the market and which owners might be motivated to sell.

Rybolovlev's representatives contend that Bouvier milked his behind-the-scenes deals to manipulate his client, and they claim his sensational profits are proof of illegal activity. In court filings, Rybolovlev claims Bouvier was his trusted advisor and broker, who received a 2 percent commission for negotiating the deals, and was not otherwise entitled to extra proceeds.

In the interview with Bloomberg Business, Bouvier counters that he was a private "seller" of the paintings — not a broker — and therefore he was entitled to capital gains. He says his 2 percent commission simply covered his administrative costs and was never intended to serve as his total compensation. Bouvier has denied any wrongdoing and remains free on bail.

No fixed prices in nebulous art market

"While art looks as if it is all about beauty, as a business it is full of shady stuff," said economist Nouriel Roubini, speaking at the World Economic Forum in Davos, Switzerland last year. Notoriously opaque and unregulated, the art market is susceptible to manias, booms and busts, according to Roubini. It's also vulnerable to a variety of frauds, including forgeries, tax fraud, insurance fraud and money laundering. (See Seven Things You Should Know About the Art Market, by Nouriel Roubini, EconoMonitor, Feb. 28, 2015.)

Yet are the hyperbolic profits of Bouvier evidence that an actual crime was committed? Paintings and sculptures are worth whatever someone will pay for them. A fixed pricing model doesn't exist in the art market.

Consider the case of Ronald O. Perelman, a billionaire known for leveraged buyouts, who pledged to expose the "ugly business" of the art world during his civil fraud suit against Larry Gagosian — one of the most influential dealers in the contemporary art world.

Perelman brought suit against Gagosian in 2012 through two holding companies he'd used to acquire million-dollar artworks. The complaint — which alleges fraud, breach of fiduciary duty and unjust enrichment — essentially comes down to a claim that Gagosian successfully persuaded Perelman to pay too much money ($4 million) for a sculpture by Jeff Koons, an artist represented by the Gagosian Gallery. (Disclosure: Koons employed me as a studio assistant about 20 years ago.)

The allegations didn't convince justices of the New York State Supreme Court and an appellate court panel, which dismissed all claims in December 2014. Although plaintiffs alleged the value of the artwork had been manipulated and misrepresented, Associate Justice David Friedman concluded, in the court's opinion, "as a matter of law, these sophisticated plaintiffs cannot demonstrate reasonable reliance because they conducted no due diligence; for example, they did not ask defendants, ‘Show us your market data.' " In other words: Buyer beware. (See MAFG Art Fund, LLC v Gagosian.)

Collectors tend to think of art as an investment, but an agreement to purchase a painting or a sculpture isn't an investment contract. Buying art is an entirely different — and in many ways, riskier — endeavor than purchasing stocks or bonds. Art dealers operate outside the framework of criminal penalties, civil regulatory enforcement and compliance requirements established under federal securities law. The statutes that apply to stockbrokers and financial advisors, which prohibit deception, misrepresentation, and non-disclosure or omission of material facts, don't govern art dealers' business practices.

What made consignment fraud cases 'criminal' were the amount of occurrences. If 30 people make the same complaint against the same gallery, that's not a bad businessman — that's a thief." — Mark Fishstein, former NYPD Detective

If collecting art were simply a pastime for a tiny subset of ultra-high-net-worth individuals, pricing distortions and market risks might not matter very much — at least not to most people. Yet Roubini and others believe the art market has evolved into a new asset class, involving participants across multiple sectors of the economy with total global transactions estimated at up to $70 billion each year. How much of this figure is attributable to fraud and other forms of art crime?

"The entire art crime industry worldwide is a $6 billion endeavor," says Robert Wittman, former FBI special agent and founder of the FBI Art Crime Team, during my interview with him. "The biggest part of the art crime industry worldwide is fraud."

Criminal prosecution or civil dispute?

Part of what makes the Bouvier case so exceptional — and, within the art world, so scandalous — is the involvement of police in what might have been considered a private dispute to be settled in the civil courts. Art crime historically has been a priority for European police forces, including the Comando Carabinieri per la Tutela del Patrimonio Culturale (commonly known as the "Carabinieri Art Squad") in Italy and the Art and Antiques Unit of London's Metropolitan Police, both of which have been fighting art crimes since 1969. Yet most contract disputes in the art market lead to litigation not jail.

In the U.S., we've seen some notable prosecutions of art fraud, including the 2013 federal conviction of Glafira Rosales, a small-time dealer from Long Island who persuaded Knoedler & Company — one of the oldest and most respected galleries in New York — to buy 50 forged artworks for $20 million in an elaborate 15-year scheme.

Rosales claimed she had a client who'd inherited a treasure trove of Abstract Expressionist paintings and later described in Rosales' indictment: "[He] was of Eastern European descent, maintained residences in Switzerland and Mexico … [had] inherited the paintings and wanted to sell them, but wanted to remain anonymous." (See USA v. Glafira Rosales, S.D.N.Y., 2013.)

Her mysterious client, of course, didn't exist. The true provenance of the paintings could be traced to a Chinese immigrant in his 70s, who'd previously hawked his artwork on the sidewalks of Manhattan and produced the knock-offs in his garage in Queens.

After Knoedler acquired the fakes, the gallery found customers who were eager to pay competitive prices, including $17 million for a passable Pollock and $5.5 million for a purported Rothko, plus other sales that, altogether, added up to a reported $63 million. When questions arose about the authenticity of the Pollock, the private buyer submitted it for forensic analysis in 2011.

The day after the buyer presented the gallery with a copy of the forensic report — declaring the Pollock a forgery — Knoedler closed its doors forever, after 164 years in business. The gallery now faces numerous civil suits, with allegations from disgruntled buyers that include fraud, conspiracy, racketeering and trafficking of counterfeit goods.

Emphasis on art theft not fraud

Forgery and art fraud complaints that result in criminal convictions like Rosales are the rare exceptions not the rule in the U.S., where art crime specialists are exceedingly scarce in the ranks of law enforcement agencies. "The LAPD, NYPD and FBI are probably the only three [agencies] that actually have quote-unquote dedicated units," says Wittman. "They're not dedicated. If you look at the FBI, it's a co-venture. Every agent on that team is part-time. It's a collateral duty. They do all kinds of other things. None of them are full-time art theft investigators."

Wittman estimates that 80 percent of all art crime is fraud, forgeries and fakes — not theft. Nevertheless, he says, "Generally speaking, the vast majority of law enforcement focus is on art theft."

In fact, there are no forgeries or frauds at all featured on the FBI list of "Top 10 Art Crimes." Most cases the FBI Art Crime Team have worked since it was founded in 2004 have pertained to thefts of art and antiquities, according to Wittman. At the local level, the Los Angeles Police Department claims to have the "only full-time municipal law enforcement unit in the United States devoted to the investigation of art crimes" — the "Art Theft Detail," which again conveys the investigative imperative is on finding thieves — not frauds or fakes.

This imbalance in resources and priorities is partly because thefts and burglaries are more clear-cut than most frauds — from a law enforcement perspective. When a thief steals artwork from a museum, we have unambiguous evidence a crime has been committed, and law enforcement officers can follow standard protocols for investigating other kinds of property crimes. "Detectives do bank robbery investigations, theft investigations and robbery investigations all the time," says Wittman. "But when it comes to investigating whether a Picasso is real, a fake, a copy or a substitute — that's not part of their wheelhouse."

Mark Fishstein confirms law enforcement's emphasis on theft during my interview with him. He spent more than a decade as the sole NYPD detective specializing in art crime before joining the Art Risk Advisory practice of K2 Intelligence last year. During his NYPD tenure, Fishstein was involved in some high-profile fraud investigations, including the case of Larry Salander of Salander-O'Reilly Galleries who was convicted of a $120 million fraud in 2010. However, Fishstein readily acknowledges most of his art crime caseload with the NYPD consisted of thefts from galleries and commercial establishments.

In Fishstein's experience, the most common fraud complaint that crossed his desk at the NYPD Major Case Squad were what he calls "consignment fraud" in which dealers failed to pay their clients after brokering a private sale. When prosecuted, those offenses were classified as larceny or grand larceny, he says, rather than fraud. "The reason for this is there is no actual charge in the [New York State] Penal Law entitled ‘fraud' which covers this type of crime," Fishstein noted. "In New York State, property crimes all fall under the statute for Larceny - Penal Law section 155." Moreover, not all complaints from collectors were deemed to be criminal matters. "What made consignment fraud cases ‘criminal' were the amount of occurrences," Fishstein explains. "If 30 people make the same complaint against the same gallery, that's not a bad businessman — that's a thief."

Opaque market creates opportunities for fraud

The complexity and opacity of the art market also aids fraudsters in avoiding detection and prosecution. Activities such as illegal price manipulation, collusion and kickbacks can be costly to investigate and difficult to prove. In some cases, victims who are wealthy collectors or celebrities might prefer to quietly accept losses rather than come forward with public admissions that they were duped to avoid personal embarrassment or exposure of their financial holdings.

"The art market is non-transparent," says Wittman.

"The art world is based on privacy and secrecy, to some extent," agrees Fishstein. "People who invest in — or collect — high-value art are not looking to advertise it."

Fraud examiners who are accustomed to tracing title histories of physical assets such as real estate, planes and boats might be surprised by the difficulty in establishing provenance of sculpture and paintings. In some cases, paper trails don't even exist — at least, none that can be easily tracked through public records.

Auction houses such as Christie's, Sotheby's and Phillips present what appear to be a public forum for the sales of paintings, sculpture and antiquities. However, an auction house will only make part of a transaction public; many bidders choose to remain anonymous or conduct their business through proxies.

"All auction houses say the same thing, that [the identities of] their clients are privileged and confidential," says Fishstein. "But at least with public sales — auction sales — even if you can't figure out who bought it, you can find out when it was bought and sold." Many subscriber databases, such as Artnet, provide detailed transactional histories for artworks sold at auction, although it doesn't disclose names of anonymous buyers.

Sales between collectors and private dealers are even more difficult to trace. "Private sales are not documented anywhere," says Fishstein. "So if you're looking to track a specific piece, it becomes very challenging."

From pre-Columbian artifacts to more recent movements like Neo-Geo Conceptualism and Post-Internet Art, the global art scene might seem unfathomable to outsiders. Yet even if the art itself is somewhat mystifying, most CFEs will recognize familiar patterns when it comes to examining the means of common art frauds. These schemes often resemble — and replicate — models of insurance fraud, tax fraud and investment fraud.

Fraudsters can use purchases of fine art and antiquities for re-investing criminal proceeds from other illicit activity. They use artwork as a portable, tradable commodity to conceal, transport and launder cash. Expensive works by famous artists can also boost the egos — and aid the artifice — of fraudsters wishing to surround themselves with the trappings of success.

After the fraud conviction of Marc Drier for a $400 million Ponzi scheme, U.S. marshals seized his art collection, including works by Mark Rothko, Andy Warhol, and Damien Hirst estimated to be worth $33 million. (See the Huffington Post article by Ula Ilnytzky, Aug. 12, 2103.) The U.S. Marshals distributed those assets to fraud victims. Drier was a Park Avenue attorney who's now serving a 20-year federal sentence, and was memorably described at a bail hearing as "the Houdini of impersonation and false documents." His paintings, for the record, were authentic.

John Powers, CFE, is a director of Beacon Investigative Solutions. His email address is: jpowers@beaconinvestigation.com.