Beijing, 26 October 2014

According to the United Nations Office on Drugs and Crime, 2 to 5% of global GDP is laundered money; in currency, $800 million to $2 trillion. The art market, notoriously opaque and uncontrollable, is one in which a staggering amount of this criminal activity takes place, where ‘dirty’ money obtained from illegal activity is laundered into legal tender. Worldwide cases of money laundering and illegal activity conducted through the purchase and sale of artwork are far from uncommon, with cases involving high profile figures such as Edemar Cid Ferreira, the Brazilian ex-banker who laundered millions of dollars through a collection of 12,000 works, and art dealer Helly Nahmad, who was caught on tape arranging the price increase of a Raoul Dufy painting he was selling, and explaining his plans to split the profit with another member of his gambling ring.

However, the phenomenon is particularly rife in the Asian art market, with one auctioneer estimating that 30%-50% of works in the market are related to the practice of money laundering, reports French newspaper Le Figaro. In Asia, the combination of a booming economy, lax regulations on the sale of art and strict capital control laws means that the art market is a primary target for those looking to launder or export capital.

Why Asia?

In well-established art markets in the West, measures have been taken to make sure that potential money launderers cannot operate through the purchase of works; in February 2013 the European Commission brought in a law which ensures galleries declare any sale that is more than €7,500 in cash. Brussels Developments from 2012 make sure that galleries who do trade in cash for values more than €15,000 are registered as “high value dealers”, and undergo more stringent checks. These galleries are also under pressure from organisations such as the Financial Action Task Force (FATF), an inter-governmental body which targets money laundering, and the Association for Research into Crimes Against Art (ARCA) to undertake Know Your Customer (KYC) checks to customers’ identities and sources of their funds.

The Asian market, on the other hand, is far newer and understandably less regulated. For the majority of the 20th century, China lived under the rule of Chairman Mao, whose Cultural Revolution not only censored and restricted artistic output, but made it illegal to own or inherit a piece of art. After Mao’s death in 1976, regulations were loosened, but it was still not until the late 1990s that the Chinese art market truly began to pose a threat to those of the USA and Europe, the latter of which has been operational since the 15th century. In 2010 China was declared the world’s largest art market, with $8.2 billion in sales, increasing by 700% from 2000-2011 — a growth worthy of what is now the world’s second-largest economy.

However, China’s emerging millionaires and billionaires are also subject to strict capital control laws, technically restricted to taking only $50,000 out of the country. Due to these restrictions, China saw as much as 10% of its GDP leave the country illegally between 2000 and 2011 according to Global Financial Integrity, an US-based advocacy group. As there are few open money and commodity markets in China, more and more people are looking to money laundering as not only a form of legitimising illegally-obtained funds, but as a form of tax avoidance.

Furthermore, the huge demand and limited supply of artworks mean that the Asian market is rife with fakes, and an operative policy of caveat emptor means that there is no legal support for buyers. Antony Lin, former chairman of Christie’s Asia, told MarketWatch.com that, “at Chinese auctions, they don’t guarantee any authenticity. There’s no legal recourse, no warranties for fakes. In any kind of market that escalates at this pace, there’s going to be fakes.” In the business of money laundering, however, authenticity is not always the number one priority — as long as auction houses (several of which are rumoured to be in on the deal) verify it, it can be sold and money can be cleaned through the sale. Many have suggested that the fact that China’s largest auction house, Poly, is owned by the government and is the auction branch of a large company which is also a weapons manufacturer, makes it hard for it to be regulated by any other external body. Nancy Murphy, a Beijing-based art lawyer, estimated that up to 80% of works at Poly are fakes, reported Forbes.

A notable example of a supposedly fake work on the market is the sale of a scroll by Song Dynasty poet Su Shi, which was estimated at $500,000, but was actually sold for $8.2 million by Sotheby’s. After the sale, several art historians declared the scroll to be a fake. This demonstrates the ample potential for money launders; the market is volatile and deals with huge amounts of money in an anonymous and unregulated setting, allowing criminals to buy works (real or fake) in cash, and legitimately sell them on for often inflated prices at auction. China also has a history of non-payment in auctions; the most expensive Chinese painting at auction, sold in 2011 for $64.5 million dollars, Eagle Standing on a Pine Tree by Qi Baishi, remained unpaid for six months after its sale. More than half of winning bids on objects over £1 million remain unpaid six months after auction. This has a dangerous effect on prices, allowing them to skyrocket on paper but not reap the financial reward in reality. From a criminal perspective, the high monetary stakes in the art world are an advantage, allowing them to launder more money at a time. However, when auctions are fixed, or when empty bids are placed purely to raise the profit, it results in a disproportionate raise in price records, leaving genuine collectors either unable to afford the work, or overpaying. The true value of art becomes easily distorted as prices soar, raising questions about how long the market can continue to beat its previous records.

Elegant bribery

The art market facilitates the covert exchange of funds through the process of using art as bribes for officials, one of which has become so widespread it has its own name in Chinese: Elegant bribery, or Yahui. Works can be bought in cash, gifted, and then re-sold, often involving rigged galleries. In 2009 Chinese authorities detained the city of Congquing’s deputy police chief Wen Quiang; upon searching his home they found over 100 works including sculptures made from ivory, a stone Buddha head, ancient calligraphy and a painting by the legendary Zhang Daqian. He was executed in 2010 for taking $1.76 million in bribes. In the highest echelons of Chinese society and government, art is treated as a commodity which allows for the exchange of funds with no obvious paper trail, and also provides a handy opportunity for those involved to escape punishment if caught — they can always claim (or reveal) the inauthenticity of the painting and stress its lack of value, handily avoiding legal repercussions.

Effect on the industry

Speaking to The Art Newspaper, an FBI art crime expert and Dean of the Yale University School of Art expressed the desire for a sense of perspective about the problem. Although referring to the US market, their point of view is transferable; they argue that art is fundamentally still about legitimate collectors buying real art. Despite the fact that the criminal nature of money laundering makes it hard to estimate exactly how prevalent it is in the art world, it seems clear that it is; Judge Fausto Martin De Sanctis (the judge who handled the Ferriera case) explains his book Money Laundering through Art: a Criminal Justice Perspective, that authorities and international bodies manifest a “lack of awareness and regulation” which leads to art becoming an “invisible asset” in the criminal underworld. The problem of money laundering and bribery through art is evidence of an attitude which has grave potential; the sale of art for exclusively financial purposes and the distortion of prices, disadvantaging passionate collectors and those who are involved in art “for art’s sake”. Although the problem is not as of yet this widespread (particularly in Europe, where steps are being taken to combat it), its unnerving presence in the underbelly of the Asian art market is something which should worry all tiers of the art market, from collectors and auctioneers down to enthusiasts and admirers of artistic output.