Art: A market laid bare

On a late February morning, Yves Bouvier arrived at the Monaco home of one of his best clients. He expected Dmitry Rybolovlev, the Russian billionaire owner of AS Monaco football club, to pay him tens of millions of dollars for a recently acquired Mark Rothko painting, “No 6 (Violet, Vert et Rouge)”.

Mr Bouvier, who owns Natural Le Coultre, one of the world’s biggest specialist companies for the storage and shipping of art, had been selling to the Rybolovlev family for the past decade. With his help, they had amassed a collection of masterpieces thought to be worth $2bn, including works by Leonardo da Vinci, Amedeo Modigliani and Henri de Toulouse-Lautrec. “It is the most beautiful collection of the third millennium,” Mr Bouvier said in an interview with the Financial Times.

Bought for investment purposes, the works were then stored in Mr Bouvier’s vast tax-free storage facilities.

But the fruitful relationship ended spectacularly that February day. Before he had even crossed the threshold, Mr Bouvier was arrested and later charged with price fixing and money laundering by authorities in Monaco. A complaint had been lodged weeks earlier by lawyers acting on behalf of the Rybolovlev family trust. “I was ambushed and put in a gulag.” Mr Bouvier said after being released on €10m bail.

The news of his arrest rocked the art world, which has been captivated by a dispute pitting one of the industry’s best-connected operators against a man who made billions mining potash. The case casts a stark light on to how the world’s most coveted artworks are bought — often through a series of transactions via offshore companies — before disappearing inside maximum security storage vaults housed in tax-free zones known as freeports. It raises questions about whether the obscurity of many art deals, and the lack of transparency on ownership and buyers and sellers, leaves the market vulnerable to manipulation.

And the dispute shows how multi-million-dollar sales of art can be carried out with little oversight and, according to the legal complaint, with no written sales contracts.

Mr Rybolovlev’s rise as an art collector coincided with a stunning surge in the art market. The annual turnover of art was estimated in 2013 to be €47bn, up from €18bn in 2003, according to the European Fine Art Foundation. The growth has been fuelled in part by the steady increase in newly minted multimillionaires in emerging markets, and also by investors’ search for “real” assets in an era of ultra-low interest rates.

As works of art have come to resemble other types of assets — they are used as collateral for loans or as a way to diversify a portfolio — there are calls for it to be regulated like other financial products. Nouriel Roubini, the economist who rose to prominence for predicting the credit bubble, said the art market is prone to abuse through “routine trading on inside information”. He adds that art is commonly used for tax avoidance and evasion, and money laundering.

“You can buy something for half a million, not show a passport and ship it. Plenty of people are using it for laundering,” Mr Roubini, a passionate art collector, told a panel hosted by the FT at Davos in January.

Art industry insiders say Mr Roubini’s claims are exaggerated, though a report by Deloitte into art and finance lists the lack of regulation and transparency as challenges for the ever-expanding art finance industry. Mr Roubini’s views are echoed by law enforcement officials investigating criminal cases who say that art has been a time-tested method of laundering money or storing wealth.

It was only by chance that Mr Rybolovlev discovered that his family may have vastly overpaid for a Modigliani nude, “Nu Couché au Coussin Bleu”. A New Year’s Eve lunch at the luxury Eden Roc hotel with art adviser Sandy Heller led Mr Rybolovlev to discover that billionaire Steven Cohen of SAC Capital Advisors had sold the Modigliani for $93.5m. The Rybolovlev trust paid $118m — more than $20m more — for the same painting.

Lawyers for the Rybolovlev trust allege Mr Bouvier secretly pocketed the difference and reaped similar gains with the sale of dozens of others, including “Salvator Mundi,” a rediscovered da Vinci painting for which the trust paid $127.5m. He attempted to do the same with the Rothko painting, for which the Rybolovlev trust paid $80m and Mr Bouvier invoiced $140m, they claim.

Mr Bouvier denies the allegations, with his lawyers claiming that he carried out the transaction as a dealer, rather than as an agent on behalf of the Rybolovlev trust. “I bought at the best price and I was able to sell at the best price,” Mr Bouvier told the FT. “He was free to choose the price. If he doesn’t like it he doesn’t have to buy it. He’s not my only client.”

Pricing art is itself more art than science. “The price of art is entirely determined by a moment in time when two people are interested in it,” says Marion Maneker of the Art Market Monitor blog. The 10-year compound return for the Mei Moses World All Art Index, a leading barometer of art returns, was 7 per cent between 2003 and 2013, only slightly below that of the S&P 500. For those who can afford it, art remains attractive as a safe haven during times of economic uncertainty. And with it come tax advantages.

Freeports — giant warehouses in tax-free zones such as the ones operated by Mr Bouvier — have benefited from the art boom. Decked out with surveillance systems, climate control and private showrooms, they appeal to wealthy collectors. “If it were a museum, some say that it would probably be the best museum in the world,” declares the website of Mr Bouvier’s company Natural Le Coultre, which operates in Geneva Freeport.

Geneva set up its first freeport in 1854. With help from Mr Bouvier, who earned the moniker “freeport king”, they have been transformed into multimillion-dollar global businesses. As Swiss banks are forced to divulge long-held secrets, some investors are keen to flee the banking system in favour of a more discreet solution. “I respond to a demand,” Mr Bouvier says.

Freeports have become a one-stop shop. Galleries and art lenders have offices in them where clients can view, buy and sell art. Goods sold in them are not subject to value added tax. No withholding tax is collected on capital gains, though sellers may need to report to the tax authority in their country.

Mr Bouvier has exported his concept to Asia, through his company Euroasia Investments. In 2010 he opened a freeport at Singapore’s Changi airport. He also advised on a facility in Beijing and recently signed a deal to develop one in Shanghai. Mr Bouvier is also a major shareholder in Luxembourg Freeport, which opened last year.

Art lovers may decry beautiful works being hidden away in vaults, but those who see it as an investment argue they need to be kept in pristine condition to preserve their value. Freeports have other image problems too: some critics view them as possible havens for money laundering or tax evasion.

“If you’re going to hide art, then the freeports are not a good place to do it”, counters Tony Reynaud, chairman of Singapore Freeport, explaining that all items there are physically scanned and logged. Operators, which include Mr Bouvier’s company, have to keep inventories for review by customs, but information on beneficial ownership is not tracked.

A 2014 report by the Swiss audit office found that it was difficult to assess how effective inspections at freezone warehouses in the country are. “Swiss customs’ duty is to make sure that goods don’t get into Switzerland and not to track changes in ownership,” a Swiss customs spokesman told the FT.

Many in the art world dispute that the art market is more susceptible to abuse than other asset classes, or that it is even a great way to hoard illegal assets. “Art is an illiquid market and knowing that it will appreciate in value requires a great deal of skill,” says Mr Maneker. Some draw parallels with the property market, particularly in London and New York, where foreign money flows into high-end properties, often through offshore shell companies. “In real estate there is a registered deed and even if it’s owned in a name of a corporation, there is somewhat of an ability to trace ownership. There is not a lot of transparency on who is buying or selling art,” says Sharon Cohen Levin, head of the money laundering and asset forfeiture unit at the US Attorney’s office for the Southern District of New York.

Art is portable and easily shipped across borders. Transactions may be brokered by advisers, who are not regulated. “Art advisers can be speculators, or just rich kids with the right friends,” says one art insider.

Dealers and auctioneers are not covered by anti-money laundering regulation, as banks are, but it is a crime to conduct transactions involving the proceeds of illegal activity. In Britain, auction houses have filed 15 so-called suspicious activity reports out of a total of 354,186 in the year to September 2014, according to its National Crime Agency.

In 2012, the Basel Institute of Governance proposed self-regulation guidelines for the art world. “We don’t only focus on provenance of objects, but provenance of funds in our guidelines. We want to close the black money flow,” says Thomas Christ, a board member of the group and co-author of the draft. “If you don’t self-regulate, eventually the state will come and make the law, and the art trade will be worse off.” To date the efforts have come to nothing.

Falling foul of the law or inadvertently selling fake or stolen art carries a devastating reputational risk. Auction houses such as Christie’s and Sotheby’s have large compliance departments, which carry out due diligence on clients and check the provenance and authenticity of pieces. But not all involved in the art trade have the means, or the appetite, to carry out due diligence.

“If I think that the guy in front of me sells drugs or has blood on his hands that is where I draw the line. But when it’s a guy who has undeclared money, as long as the bank accepts the money I do the deal,” says one art dealer who spoke on condition of anonymity. “As long as art is not regulated why should I be the one to fix the rules?”

There are notorious cases that have hurt the market’s reputation. Former Brazilian banker Edemar Cid Ferreira, who was convicted of money laundering and bank fraud, stashed millions of dollars into art, including Basquiat’s “Hannibal”. The $8m painting was smuggled into the US with a customs form saying its contents were worth $100. German art adviser Helge Achenbach was sentenced last month to six years in prison for falsifying invoices and overcharging supermarket tycoon Berthold Albrecht for paintings, sculptures and classic cars. And US lawyer Marc Dreier, who was convicted in 2009 of securities fraud, had assets that included more than 200 works of art, including a Picasso and works by Warhol.

For some the fault does not lie with the quirks of the art market. “The flow of funds is the big issue,” says Mr Maneker. Art is often owned through offshore entities. For some this provides secrecy; for others it is a way to save tax or to structure inheritance planning.

The transactions between Mr Bouvier and Mr Rybolovlev were done via companies registered in offshore tax havens. Two British Virgin Island companies — Xitrans Finance Ltd and Accent Delight International Ltd, on behalf of a Cyprus trust whose beneficiaries include Mr Rybolovlev’s 25-year-old daughter Ekaterina — bought artworks through Mr Bouvier’s Hong Kong company, Mei Invest Ltd.

This structure has so far prevented Mr Rybolovlev’s ex-wife, with whom he is embroiled in a bitter divorce battle, to lay claim to works of art held through it. Elena Rybolovleva last year was granted a record-breaking settlement of SFr4bn in Switzerland.

Friends and business partners of Mr Bouvier told the FT that they believe the complaint against Mr Bouvier is a ploy to allow Mr Rybolovlev to reduce the value of the collection — and by extension his fortune. Tetiana Bersheda, Mr Rybolovlev’s lawyer, rejects this as “total nonsense and distracting tactics”.

“The collection is ultimately owned by a trust, which is not a party to any dispute with the ex-wife of Mr Rybolovlev,” she says. “Therefore, the outcome of the criminal proceedings is irrelevant to determine the amount of the claim of the ex-wife on the divorce.”

As for Mr Bouvier, he is working to rebuild his reputation as he fights the allegations, which have hampered his business ventures. In the meantime, plans for a series of new freeports, including one in Dubai, are on hold.