“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.
…the international art world, where dynastic fortunes can be made on the basis of nothing more than knowing who owns what.
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.
The real money in the art world always ends up with the individuals who have the best information.
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.)
And it’s not like Bouvier is some kind of rotten apple. Consider the case of Anthony Marshall, the son of centenarian socialite Brooke Astor. Marshall notoriously sold his mother’s favorite painting, Childe Hassam’s Flags Fifth Avenue, for $10 million, even though Astor had promised it to the Metropolitan Museum of Art. The buyer was the Gerald Peters gallery, which already had another buyer lined up: George Soros bought it almost immediately for $20 million.
Marshall, who was no art-market expert, had no real idea how much the painting was worth, and would never have known that Soros might be interested in it.
Still, it’s not clear why the intermediary should have received $10 million for bridging the seller and the buyer, except that Marshall had good reason to keep the sale as quiet as possible: If he had gone public about wanting to sell the painting, there would have been a major uproar, both from Brooke Astor’s friends and from the Metropolitan Museum. Essentially, the $10 million that he missed out on was the price he paid for keeping the bargain confidential – and, quite possibly, for being able to get away with selling the painting at all.
Similarly, Bernstein tells the story of Seated Man with a Cane, a Modigliani painting which was looted by the Nazis and which is claimed by Philippe Maestracci, the grandson of Oscar Stettiner, a Jewish art dealer in Paris whose collection was seized during the French occupation. The painting was bought at Christie’s in 1996 by a shell company called International Art Center; it failed to sell at Sotheby’s, in 2008, where it carried an estimate of between $18 million and $25 million – but also a note saying that Stettiner was a possible previous owner.
Maestracci has been trying for years to prove that that International Art Center is controlled by the Nahmad family of art dealers, but, unable to do that to a court’s satisfaction, he has found it extremely difficult to claim his painting in US court. By locating the painting physically in Geneva and legally in Panama, the Nahmads have been able to avoid litigating the substantive issue of who the painting belongs to. Instead, they’ve simply said that they can’t respond to Maestracci’s complaints, because they’re not the legal owners of the painting.
Now, with the Panama Papers proving that the Nahmads have controlled IAC at least since 1995, Maestracci’s lawyer is going to be very happy, and there’s a much higher chance that Maestracci will be able to regain control of his grandfather’s Modigliani.
For the time being, however, as Bernstein says, the Modigliani “is tucked away in the Geneva Freeport in Switzerland, another treasure hidden from view.” It shares its location with billions of dollars’ worth of other paintings, all crated in a tax haven, many owned by shell companies. (A lawyer for David Nahmad told Bernstein that “whoever owns IAC is irrelevant. The main thing is what are the issues in the case, and can the plaintiff prove them?”)
Those companies can spring up from nowhere, just to do individual deals: Bernstein talks about how one shell company, Wilton Trading, spawned a whole passel of other shell companies (Tricornio Holdings, Heredia Holdings, Talara Holdings, Jacob Portfolio Incorporated) when it started selling art by the likes of Bonnard, Chagall, and Van Gogh.
The purpose behind such corporate maneuvers nearly always involves opacity: to ensure that no one knows who the sellers might be, or what other art they might own.
Art has become an asset class, even if it’s not a very good investment.
The art market, more than most any other market, is based on information asymmetry: While people love to talk about the importance of “a good eye” and the like, the real money in the art world always ends up with the individuals who have the best information. It’s a market fueled by gossip and speculation, where even museums can be bafflingly coy about what they own, and where it can take decades of hard work to track down the location of acknowledged masterpieces.
On top of that, the art market is characterized by easily-moved goods. (Sometimes, a painting doesn’t even move when it’s sold; the “freeport” simply changes the name of the owner.) The combination of tax havens, portability and secrecy is catnip to money launderers: Add a few layers of shell companies, and you have a way of storing and moving billions of dollars in value in a manner that’s all but untraceable.
The biggest story in the art market over the past couple of decades has been the rise and rise of Andy Warhol, and to a slightly lesser extent other artists of prodigious output like Gerhard Richter. This is a story that inverts the standard laws of supply and demand: Why would the highest prices be paid for paintings by them the likes of Picasso, who seemingly never stopped painting, rather than for much rarer works?
The answer is that if you care more about a painting’s financial value than you do about its artistic value, then what you want is fungibility and liquidity: You want there to be an active market in that artist’s work, and you want to know with a reasonable degree of specificity how much that work is worth. Increasingly, these days, people look at paintings and all they can see are dollar signs. Art has become an asset class, even if it’s not a very good investment.
What kind of person invests in an asset that sits expensively in a warehouse, is never exhibited, and never generates any cash, but can be liquidated for a huge amount of money in case of emergency? To ask the question is to answer it. The secrecy of the art world, enabled by agents such as Mossack Fonseca, is a cancer that withholds masterpieces from public view and that turns the art market into a billion-dollar game of ultra-high-stakes hide-and-seek. Yes, the amount of money in the art world has never been greater. But the Panama Papers are a welcome reminder of the real-world cost of all that money.