Your stocks are regulated, your mortgage is regulated, but your art isn’t. Even though art is a growing investment class, the high-end art world faces little regulation or scrutiny although allegations of fraud and tax evasion abound. Oversight may increase as some people are calling for a tighter, shorter leash to be put on some of the top art brokers and auction houses.
The call for action gained momentum recently when the owner of Natural Le Coultre, one of the largest shippers of art in the world, Yves Bouvier, was charged with fraud and money laundering on February 28th. Bouvier brokers deals between sellers and buyers of very high-end art, and his company also provides “fine art freeports,” which are basically really posh storage units where people can hold private viewings.
Specifically, Bouvier allegedly defrauded Russian olegarch and long-time client, Dmitry Rybolovle, by overcharging Rybolovle in an art acquisitions that Bouvier served as the middle man. Often, purchasers and sellers won’t meet and have little-to-no communication, and it was only after Rybolovle accidentally ran into and began talking with the seller that he realized he had been overcharged. According to the charges, Bouvier manufactured and tampered with documents to increase his commission and then used offshore companies to cover up the sale. Rybolovle, whose collection is worth an estimate $1 billion dollars, was furious.
Many people allege that fraud and tax evasion are recurring and common practices, not a onetime misstep on Bouvier’s part. The shipping tycoon’s trouble has once again shed light on the opacity and secretive dealings of the high-end art world. Previously, auction houses had to institute self-imposed regulations after a large price-fixing scandal. They also received criticism for chandelier bidding, where auctioneers call out fake bids to drive up the price, and currently they face reproach for irrevocable bids which could also be a vehicle to inflate the bid prices.
“The art world feels like the private equity market of the ’80s and the hedge funds of the ’90s,” James R. Hedges IV, a New York collector and financier, said. “It’s got practically no oversight or regulation.”
But while many people are calling for more oversight of the billion-dollar fine art industry, others ask what that regulation would actually look like. Buying and selling art is rooted in basic contract law, and parties can negotiate as they wish and are responsible for their own due diligence. Aside from contract principles, such as fraud, what other regulation could there be?
Any regulation will probably come from the IRS, investigating tax evasion, or from state legislatures. If the IRS ramps up its scrutiny of art brokers, it could curb the off-shore activities of frauds like Bouvier. Moreover, state legislatures where large auction houses call home, such as New York, can regulate bidding and selling practices by banning chandelier and revocable bidding. In fact, law makers in Albany have introduced nine bills over the past 20 years trying to ban chandelier bidding, but each attempt failed to pass.
Regulations will be helpful in lowering the rate of fraud in such a murky and secretive market. However, buyers are often wealthy and well-educated people, who have the power of regulation themselves, especially when working with brokers. If purchasers make it a practice and standard to communicate with the seller and require more transparency from the broker, then fraudulent practices will naturally decrease.
As for now, there has been constant call for action in New York for the past 20 years, but even more so since 2013. Bouvier’s indictment might be just the push needed to get these long-awaited regulations.