Monday, April 11, 2016

How the Very Rich Use Art to Get Richer

“Whether we like it or not, art is used for tax avoidance and evasion,” said NYU economics professor Nouriel Roubini last year. “Plenty of people are using it for money laundering.”

It hardly comes as much of a surprise that amid the high-profile scandals and tales of political corruption in the Panama Papers, art is something of a constant: Mossack Fonseca was constantly helping to shuffle billions of dollars’ worth of art in and out of shell companies based in tax havens around the world.

ICIJ reporter Jake Bernstein has details on some of the more high-profile art-world scandals where Mossack Fonseca has been involved, although multi-million-dollar paintings turn up in other stories, too. Russian oligarch Dmitri Rybolovlev, for instance, incorporated a company called Xitrans Finance Ltd in the British Virgin Islands, to own paintings by Picasso, Modigliani, Van Gogh, Monet, Degas and Rothko. When he split from his wife Elena, he used Xitrans to move the art out of Switzerland – and, not coincidentally, out of the jurisdiction of the Swiss divorce courts.

If Mossack Fonseca’s main job was to keep assets and their ownership secret, then it was tailor-made for servicing the international art world, where dynastic fortunes can be made on the basis of nothing more than knowing who owns what.

Consider the man who sold Rybolovlev most of those paintings. Yves Bouvier is connected to five different Mossack Fonseca companies (Rybolovlev is comparatively modest, with a mere two), and would mark up the paintings he was selling by astonishing amounts. As Sam Knight has reported for The New Yorker, Bouvier started off by buying a Gauguin for $9.5 million and then selling it for $11.3 million, but soon got more ambitious. He bought a Picasso for $4.8 million and then flipped it to Rybolovlev for $34.4 million. He sold the oligarch a Klimt masterpiece for $183 million, including a $60 million profit for himself. There was also a Rothko that he bought for $80 million and sold for $189 million.

By those standards, the deal that caused the end of his relationship with Rybolovlev had a relatively low markup: Bouvier bought a Modigliani from Steve Cohen for $93.5 million, and then sold it to the Russian for $118 million. Add it all up, and Rybolovlev’s lawyers estimate that Bouvier overcharged his client by the hilariously specific, yet eye-poppingly enormous, sum of $1,049,465,009. Call it a nice round billion. (Rybolovlev declined the ICIJ’s request for a comment. A representative for Bouvier told ICIJ’s Bernstein that “his client used offshore companies for well-established legal purposes.” Mossack Fonseca has not yet commented on its involvement in art holdings, but has responded at length to the Panama Papers.)

Whether they were legal or not, those kind of markups could never be found in a transparent market. When everybody has the same information at the same time – in the stock market, for instance – dealers can get away with only the tiniest markups between where they’re buying and where they’re selling. In other areas where you’re selling unique and illiquid assets, like real estate, the markups are bigger, but still not enormous: The intermediary will normally end up collecting somewhere in the 2 to 3 percent range.

In the art world, by contrast, the most transparent companies of all – the auction houses – typically charge sellers about 12 percent, and buyers about 20 percent, for a total commission of more than 30 percent. And in private transactions, the slice taken by the middleman can be bigger still – even when prices get up into the $100 million range, as can be seen with the Bouvier-Rybolovlev transactions.

Such huge transaction costs are possible only because the art world runs on secrecy. There are some legitimate reasons for keeping things close to the chest – if you have a $100 million painting above your sofa, you might not want the whole world to know that fact. Still, on its face, it doesn’t make sense that so many of the world’s collectors keep the art they own a secret.

Knight reports that Bouvier specialized in “setting up offshore companies — Diva, Blancaflor, Eagle Overseas — to enable galleries to buy specific works and mask the identity of other investors in a transaction,” which is a great way to ensure that the buyers and sellers at the end of often long and complex chains are unaware of each others’ identities. The buyer doesn’t know how much the seller is receiving; the seller doesn’t know how much the buyer is paying, and neither one has any easy way of finding out. (Bouvier was finally rumbled only when Rybolovlev bumped into Cohen’s art advisor at a lunch in St. Barts and flat-out asked how much Cohen had sold his Modigliani for. Which is not the way the art world normally works.)

by Felix Salmon, Fusion |  Read more:
Image: Getty