Does the Art World Need to Be Regulated Like the World of Drugs?

How do we know how much a piece of art is worth? For most of us, a professional art appraiser or auction house gives us a number or price range, but that number is based partly on how much the artwork sold for the last time it changed hands, and it turns out determining that number is more tricky than it might initially appear to be.

To start with, who’s really buying the artwork? An auction house or dealer might say that sold a piece to a particular collector, but they rarely meet the collector in person. Instead, they deal with a “friend” of a collector, but that “friend” might turn out to be an “independent agent” who buys the artwork from the auction house or dealer for one price and sells it to someone else at a higher price.

Buyers and sellers are frequently shell companies, rather than individual agents, taking advantage of the secrecy inherent in the art world to conceal their identity.

Most investors would never consider investing millions (much less billions) into an industry with so much secrecy because such secrecy leaves the industry ripe for fraud. But in the case of the art world, it is that very secrecy that makes it so appealing to certain investors.

To combat the fraud that some say has become rampant in the world of art collecting, some people are saying it’s time we treat art dealers and auction houses more like we treat banks.

Banks are already required by law to identify their customers and where their wealth is coming from, as well as any transactions involving more than $10,000 in cash. Now the federal government is considering applying that same law to the art world. The new law would put an end to shell companies acting as collectors, or allegedly buying on behalf of collectors.

The market for antiquities has to deal with a lot of the same issues of fraud and money laundering as the art world, but because it is such a small and exclusive world, antiquities dealers claim they already know their customers well enough to be able to confidently say they’re not involved in anything illegal. The antiquities dealers worry that anti-money laundering regulations will increase their cost of doing business and prevent some of their more exclusive clients from buying. They also worry about the cost of hiring a compliance officer, especially considering many of the dealers are small businesses who can’t afford the extra overhead.

Auction houses in Europe are already subject to similar laws, and some of the biggest international auction houses, including Sotheby’s, claim they already follow many of these guidelines in their American locations, as well as their European locations. But Senate investigators tell a different story.

A report by the Senate released last year cited major, international auction houses and dealers for allowing two sanctioned Russian oligarchs to use shell companies to buy and sell artwork. The report concluded that, although the auction houses and dealers claimed to have put safeguards in place, they had completed transactions between 2011 and 2019 without identifying the true owners of the artwork they were buying and selling.

Legislators say the new law will not require the names of art buyers and sellers to be made public after each transaction, but that the auction houses and dealers need to know who’s really buying and selling which pieces in case law enforcement needs to investigate.

Some people claim fraud and money laundering in the art market is too rare to be worth allocating the resources necessary to investigate illegal activity in this one, small market. Others argue there’s no way of knowing how common the problem is until we investigate.

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