Depending on who you ask, the global art market is currently estimated to be anywhere from $50 to $70 billion annually. Regardless of the actual size, the market for fine art is growing, as is its preponderance as a recognized asset class. However, there are several serious problems with the art market that are exacerbating fraud and limiting its growth potential.
Although there are many who are against change to the current system, there are exponentially more in favor of it. The secrecy and fraud that is inherent in today’s art world is reminiscent of Wall Street prior to serious regulation, and even that proved to be insufficient at stoping crime.
Currently, the market for Bitcoin and other cryptocurrencies recently surpassed $200 billion, and already there are cries for governments to step in to protect the public. What about the art industry? Why has the art industry, whose net value is in the trillions been left, for the most part, unregulated? Art industry regulation is badly needed to: A) Protect the public from widespread industry fraud, B) Stop domestic and international money laundering rings, and C)Enhance fine art’s reputation as a legitimate asset class. Done effectively, regulation will substantially lower art industry fraud, which will improve investor confidence and lead to overall industry growth.
It is in the public’s (and the global art market’s) best interest to have some degree of regulation. Regulation is needed both domestically and across international borders. Here are a few of the obvious problems in the marketplace and where regulation makes the most sense.
Almost every major deceased artist (and these days living artists’ as well) has an individual or committee that is consider “the” authority for an artist, and thus have the responsibility to determine the authenticity of a particular work. This is all fine and dandy until you look closer into how some of these experts operate.
Almost all experts charge a fee (some quite hefty) to determine authenticity, and/or to issue Certificates of Authenticity. While I agree that they should be paid for their time and expertise, there are other activities they indulge in that should be outlawed.
Purchasing Works they Authenticate: There are experts who actively buy the works they are authenticating. If this isn’t a conflict of interest, I don’t know what is. This practice leads to all kinds of improprieties and needs to be stopped.
Charging to Authenticate Forgeries Multiple Times: There are many experts who will not tell you if a work is authentic or a forgery unless you pay them first. Real or not they still get paid. The problem with this is that an expert will often get paid several times for declaring the same work a forgery. This happens as forged works are sold from one unsuspecting buyer to another. Experts should be required to inform anyone inquiring if they had already seen a forged work, “without charging a fee.” If the person inquiring declines to fork over the fee, thus electing to pass on the experts’ opinion, a transaction may still occur, meaning someone is duped.
Updates to Catalogue Raisonne’s: Experts who publish catalogue raisonne’s should be required to publish annual updates regarding any additions or other changes.
Licensed appraiser’s should not be allowed to receive any third party fees in regards to the sale of artwork they are paid to appraise, “without” full disclosure and approval of the owner. Receiving third party fees creates a serious conflict of interest.
Similar to recognized experts (discussed above), the practice of appraiser’s purchasing works they appraise creates a major conflict of interest, which can often lead to serious improprieties. For example, an appraiser can purposely under appraise a work in order to acquire it at a lower price. If the case of an appraiser directing the sale of a work then, at the very least, full disclosure of any third party fees should be required by law.
Appraiser’s should be held to certain standards in regards to appraising forgeries. Authentication should be addressed “before” an appraisal is given. Not doing so, is putting the cart before the horse. If an owner does not want to pursue authentication, then they should be required to sign a release stating this. Appraising forgeries is commonplace in the appraisal industry, and millions of dollars in fees are paid unnecessarily.
Brokers/Dealers (and Galleries)
Brokerage Fees: Anyone representing a buyer or seller should be required by law to provide full-disclosure and documentation regarding prices paid and fees received from the sale or purchase of any artwork on behalf of a third party. This transparency is badly needed to prevent brokers and dealers from gauging unsuspecting collectors.
There is no shortage of press about dealer’s ripping-off their clients. The most egregious and common offense occurs when a dealer/broker lies about the price they paid for a work on behalf of their client. For instance, a recent New York dealer was caught overcharging her client more than a million dollars in a broker transaction. The dealer overstated the purchase by a million dollars (oops), in addition to charging her normal commission. This was clearly a criminal act and is a common occurrence in the art world. It was only by sheer luck that the client found out.
In a larger case, the financier and dealer Yves Bouvier is alleged to have amassed hundreds of millions in ill-gotten gains in a similar fashion. It was a fluke event that revealed his thievery.
Licensing and Penalties: To protect the public, dealers and brokers (like appraiser’s) should be required to get licensed. They should be required to acknowledge and accept a set of rules that govern fair practices between themselves and the public. There also needs to be serious fines (and in some cases jail time) assigned to specific offenses, in order to effectively discourage fraud.
The last ten years has seen a proliferation of art auctions, mainly on the internet. However, it is not only online auctions that need regulating. The problem with most auction houses is that they fail miserably at protecting consumers. There are a myriad of issues, but one major problem is in regards to forgeries. All auction venues need to be held accountable for selling forgeries.
Auction houses should be required to provide immediate refunds for works that are deemed fake by recognized experts. Many small and midsize regional houses, as well as online auctions allow buyers only 30 to 60 days to get a refund for any reason. As a result, they end-up selling a slew of fakes. Auction houses should not be allowed to put a time limit on making restitution. In addition to reimbursing the buyer, an auction house selling a forgery should be responsible for all legal fees incurred by buyers if they are found culpable.
Under the current system, it is a numbers game for most auction houses. They race to fill-up their auctions, often without any regard for authenticity. These auction venues have lawyers on call, and know that a buyer looking to challenge them will have to pay exorbitant legal fees, in addition to having to fight them in the auction house’s home state. This almost always leaves the duped buyer with no recourse. Another possible protection for buyers would force auction houses to have cases heard in the jurisdiction of the buyers home state.
Across the industry there is a lack of transparency which takes its toll on art buyers and the industry as a whole. This lack of transparency creates conflicts of interest and contributes to activities such as the selling of forgeries, price manipulation, and money laundering. These problems affect the overall health and reputation of the art market.
A glaring issue is that auction houses, galleries, and dealers rarely provide the name of selling parties. Keeping private the identity of the seller or previous owners of a work breaks the provenance chain. This makes it very difficult (if not impossible) for buyers to research the provenance of a work, thus making it much easier for forgeries, stolen works, or works acquired by other illegal means to be identified. It also makes it easier for money launders to operate.
Furthermore, under the current system, buyer’s are completely reliant on the selling venue to protect them from buying forgeries. Clearly, this system is not working, and buyers need access to more information.
Withholding the identity of previous owners not only promotes the illegal activities mentioned above, but it also gives the big auction houses a major competitive advantage. Over the years these houses have accumulated a database of who owns what artworks, thus giving them a major leg-up in the area of private sales. Hence, it’s understandable why these auction houses are against regulation requiring increased transparency.
Another issue is that of guarantees offered by the big auction houses on major works of art. All a bidder is told is that there is a guarantee in place, but no details are given. As a result, the bidder has no idea idea who they are bidding against and prices often get artificially inflated. Guarantees are clearly a form of market manipulation, and rules that increase transparency need to be put in place.
In summary, there are many things wrong with the current state of the art market. It’s seems clear that self-regulation is never going to happen, and for that reason it is necessary for governments to step-in and impose rules and regulations (similar to that of the securities and auto industries). A safer and fairer art market will greatly improve consumer confidence, reduce fraud and other illegal activity, and lead to more robust and sustainable growth for the entire industry.