Tax Evasion and Money Laundering in the Art Market

Governments in advanced economies are getting more serious about chipping away at hidden wealth. Admittedly, they have a long way to go. Gabriel Zucman, in his The Hidden Wealth of Nations, estimated that 8% of household wealth, which was $7.6 trillion when he published his book in 2013, was in tax havens. Sometimes people with lots of dough hidden in these lockboxes want to use it, hence the use of shell companies and other devices to make use of the funds without tipping off the tax man. Although real estate has been a big fave for stashing foreign, and sometimes secret, funds in nice safe places like London and New York, art has been another vehicle.

As we’ll soon explain, the UK looks like it is about to crack down on anonymous purchases of art beyond a fairly low threshold amount. The US hasn’t yet joined but as we’ll explain below, the US has recently implemented measures ending hidden ownership of companies so it may not need to do much more with respect to art.

For instance, the last time I was in Paris, I attended a art show at a museum with a top tax maven friend. She recognized quite a few of the paintings, to the degree that she knew which “anonymous owner” pieces never went to the US because the US did have a pretty good idea as to who the owner actually was and would impound them.

The US started down this path with post 9/11 anti-money-laundering and “terrorist finance” reforms, and was able to crack open Switzerland’s bank secrecy. Americans who held Swiss bank accounts were given an amnesty: confess, and pay the taxes and interest due and you won’t be subject to penalties and prosecution. Experts speculate the reason Mitch Romney showed only one year of tax returns was that individuals who had held Swiss bank accounts were require to refile past returns, with the front page of the return “stapled,” making the changes obvious. Had Romney or his wife held a Swiss bank account and filed amended returns, the last year filed would have been the one for the year prior to the one he did publish.

Another click of the ratchet has come with the effective end of anonymously-owned shell companies in the US at the start of 2021. A big impetus for this change came with the publication in 2018 of a New York Times series, Towers of Secrecy, by Louise Story and Stephanie Saul, on condos owned by shell companies in the super luxury development, the Time Warner Center, at the old Coliseum site at the southwest corner of Central Park South. Lloyd Blankfein lived there, for instance. The reporters found quite a few shell-company owned units and for most of them, as intended, they could not find who the actual owners were. But they were successful more often than I would have anticipated, and in every case, the person behind the shell looked pretty unsavory.

The article kicked off a call for reforms, with first New York City and eventually New York State too requiring all real estate purchases by LLCs report who the beneficial owners are (if press accounts are correct, the info is only kinda hidden, it’s not public but can be obtained by FOIL, New York’s version of FOIA).

And now….drumroll…the Feds get in on the act. From Gothamist in January:

On January 1st, Congress passed a measure to end the secrecy around shell companies that has fueled a boom in high-priced New York condominiums. The new law could discourage the flow of international capital into Manhattan real estate, while giving investigators powerful new tools to detect money laundering and other financial crimes.

The National Defense Authorization Act, passed over a veto by President Donald Trump, empowers the Treasury Department to create and maintain a registry of the “beneficial” or true owners of most businesses created in the United States, including limited liability companies. LLCs are a popular vehicle for purchasing real estate, in part due to the secrecy they confer…. (...)

Note that we have repeatedly and energetically stressed that the real estate seller is not responsible for ascertaining if the payment he is getting for his property comes from dirty money or not if it comes via the banking system. Cash in paper bags are another kettle of fish. But I am nevertheless surprised to learn that all cash payments weren’t considered to be covered by “know your customer” rules. This is clearly a regulatory matter and I’m surprised this wasn’t addressed via the Treasury’s new rules. But foreign banks typically have a New York branch, which puts them under the New York state banking regulator. (...)

Now to the UK art market wrinkle, from the Financial Times’ John Dizard:

The art market’s high rollers have created a serious image problem for themselves. Over the past 30 years, and particularly at the beginning of this century, they sold the story of mystery international billionaire buyers and their glamorous hangers-on at flashy evening auctions. Answering slight nods in packed sale rooms, mellifluous auctioneers would post gasp-inducing record prices for works by artists most middle-class people only ever see in museums…

Now the auction houses, art dealers and private advisers face the prospect of emerging from Covid-19 lockdowns only to be enlisted as enforcers of anti-money-laundering (AML) regulations as strict as those in the banking industry. They are not entirely ready for this. They signed up to be courtiers, not investigators.

by Yves Smith, Naked Capitalism |  Read more: