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The Veiled Inner Workings of the Art Industry and Money Laundering

Art, Money, Laundering, Sotheby's, Christie's, Freeport, Switzerland, Geneva, Banking Laws

All of us at one point or the other have come across a piece of news so bizarre that it has stopped us dead in our tracks. No, I’m not talking about Kylie Jenner’s pregnancy here, but about how the rich and the uber-elite of the world splurge tens of millions of dollars on artworks that look like they have been drawn up by a child in second grade. Such information is always puzzling to read, because how can the worth of a piece of art be in the millions, and who has enough money to pay so much for that?

The answer’s quite simple here: They don’t. Herein lies the essence of this piece: How the world of art is being, or has been used by people over decades as a front of laundering their money and getting away with it.

The art world is strange; it just doesn’t comprise of paintings being showcased at museums, or the paintings that we read about in our encyclopedias. It is much more complex than that. The Art World comprises of private galleries, auction houses, international buyers and a network of people like appraisers, middlemen and collectors, that are responsible for the existence of one of the most exclusive and wealthy industries in the world.

To provide an overview, here are a few key facts and figures: The industry in 2019, surpassed more than $60 billion in sales, and according to a report by UBS and Art Basel, 44% of those sales took place in the United States of America. Sotheby’s by is lonesome, raked in about $5 billion, with Christie’s selling Salvador Mundi by the ever famous Leonardo Da Vinci for $450 million.

So, now that there is an idea in your head about the grand scheme of things that take place in the industry, let’s direct our focus on how money laundering takes place.

The world is full of shell companies that are involved in the funneling of money across countries, tax jurisdictions and judicial territories to become accessible to those who facilitated them in the first place. The most basics of such money laundering techniques include smurfing, which involves transferring small amounts of money into the global economy in a continuous stream so as to prevent any attention towards the said laundering and to make it seem at the very least, legitimate.

However, the art industry functions in a similar, but albeit on a different mechanism. Since art can’t be “smurfed” it has to be dealt with in a precarious manner. This involves the use of a mechanism, or rather a facility, called a freeport.

A freeport is the best example of how art can be laundered across the world. A freeport is essentially a storage facility that is owned and operated by multiple shell corporations and holdings to obscure its actual ownership. Its purpose? A freeport being a storage facility, is where all the purchased art pieces are stored at, which are officially deemed to be “in transit”. As a result of this, the owner of the said art pieces doesn’t officially receive their delivery, which prevents them from paying any sorts of taxes on them since they haven’t declared ownership of it yet, and are still able to access those art pieces from the freeport facility whenever it is that they can.

Using this method, the rich can officially store their art holdings, deduct their purchase costs, avoid paying any taxes on them since they officially haven’t received their delivery yet, and can still enjoy access to them whenever they so choose to.

The best example of a freeport is the Geneva Freeport. This freeport, operated under the Swiss Banking Laws, is not subject to scrutiny, no matter how much exerted by the international coalition of governments. The contents of this freeport are rumoured to be upwards of a value of $100 billion, which is only 40% of the total storage space of the freeport.

Ironically, after the discovery of the Medici warehouse at the freeport in 1995 and the discovery of illegal Egyptian artefacts in 2003, the laws governing freeports have been tightened by the Swiss government. However, due to the after the Cultural Property Transfer Act of 2003 allowed Switzerland to ratify the 1970 UNESCO Convention of the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property, Swiss law required the users of the freeport to provide their names, as well as the contents of their holdings.

Furthermore, the Antti Money Laundering Regulation in 2016 stipulated that the traders of the said pieces of art must include a credit card company or bank, to remove anonymity in transactions and provide transparency in the flow of funds. The other option provided by the law is for the buyer and seller to keep their names and transactions confidential, but to provide proof that the money being paid for the artwork is legitimate, and have its legality confirmed.

The uses of freeports, as provided in the example above, is the best facility for the wealthy to not disclose their art holdings, and launder money via a network of shell companies, holding companies, middlemen and appraisers to escape multiple taxation jurisdictions and legal systems that span across the world.

However, the use of freeports is not the only example of laundering money via art. Other methods include the falsification of receipts, which disclose the contents of the manifests to be of another nature, that allows people to pay the required excise duty on said manifests at the price stated on the manifest itself, thereby escaping the taxation requirements of the system. An art piece worth $10 million can be stated as a box of shoes priced at $100, as long as the receipts surrounding the manifest are provided and falsified to the extent that they are cleared by customs.

Despite of all such efforts, the enforcement systems of various countries have had successfully clamped down on such transfers, although to their dismay, they still do not know how big the iceberg is, since even its tip seems unnavigable. As long as people in the world stay rich, they will ultimately find ways to stay rich, which is something that the law enforcement agencies across the world wouldn’t like. But as we all know, life’s never fair, and for those who make the rules, there are no rules.

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