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Valuable as art, but priceless as a tool to launder money

According to the air bill slapped on the crate that arrived at Kennedy International Airport from London, an unnamed painting worth $100 was inside. Only later did federal investigators discover that it was by the American artist Jean-Michel Basquiat and worth $8 million.

world Updated: May 14, 2013 01:35 IST

According to the air bill slapped on the crate that arrived at Kennedy International Airport from London, an unnamed painting worth $100 was inside. Only later did federal investigators discover that it was by the American artist Jean-Michel Basquiat and worth $8 million.

This painting, known as “Hannibal” after a word scribbled on its surface, was brought into the US in 2007 as part of a Brazilian embezzler’s elaborate effort to launder money, the authorities say. It was later seized at a Manhattan warehouse by federal investigators who are now preparing to return it to Brazil at the behest of law enforcement officials there.

The painting’s seizure was a victory in the billion-dollar fraud and money laundering case of Edemar Cid Ferreira, a former Brazilian banker who converted some of his loot into a 12,000-piece art collection.

Law enforcement officials in the US and abroad say “Hannibal” is just one of thousands of valuable artworks being used by criminals to hide illicit profits and illegally transfer assets around the globe. As other traditional money-laundering techniques have come under closer scrutiny, smugglers, drug traffickers, and the arms dealers have increasingly turned to the opaque art market, officials say.

It is hard to imagine a business more custom-made for money laundering, with million-dollar sales conducted in secrecy and with virtually no oversight. What this means in practical terms is that “you can have a transaction where the seller is listed as ‘private collection’ and the buyer is listed as ‘private collection,’ ” said Sharon Cohen Levin, chief of the asset forfeiture unit of the United States attorney’s office in Manhattan. “In any other business, no one would be able to get away with this.”

Though there are no hard statistics on the amount of laundered money invested in art, law enforcements officials and scholars agree they are seeing more of it. The Basel Institute on Governance, a nonprofit research organisation in Switzerland, warned last year of the high volume of illegal transactions involving art. But regulation has been scattershot and difficult to coordinate internationally.

In the US federal money laundering statutes apply to nearly every major transaction through which illegal profits are disguised to look legal. The art market lacks these safeguards. (Although federal prosecutors last month charged the New York art dealer Helly Nahmad with conspiring to launder $100 million in gambling money, the indictment says that bank accounts, not art, were used for laundering.)

Governments around the world have taken steps to bring illegal activity to light. The US similarly requires all cash transactions of $10,000 or more to be reported. Still, laundering involving art tends to be handled case by case. Federal prosecutors, who usually discover art-related laundering through suspicious banking activity or illegal transport across borders, have worked closely with other countries and aggressively used their powers under civil law to confiscate art that they can establish is linked to a crime, even in the absence of a criminal conviction.

In a forthcoming book, “Money Laundering Through Art,” the Brazilian judge who presided over the Ferreira case, Fausto Martin De Sanctis, argues for more concerted international regulation, saying that if businesses like casinos and gem dealers must report suspicious financial activity to regulators, so should art dealers and auction houses.

But to dealers and their clients, secrecy is a crucial element of the art market’s mystique and practice. The Art Dealers Association of America dismissed the idea that using money to launder art was even a problem. Law enforcement officials complain that dealers are playing down art’s role in a criminal underworld. In Newark, N.J., federal prosecutors in a civil case recently announced the seizure of nearly $16 million in fine art photographs as part of a fraud and money laundering scheme that prosecutors say was engineered by Philip Rivkin, a Texas businessman.

The 2,200 photographs by masters like Alfred Stieglitz, Edward Weston and Edward Steichen more than could fit into an 18-wheeler – were paid for, court papers say, with some of the $78 million that the authorities say Rivkin got from defrauding oil companies like Shell, Exxon, and Mobil.

In New York, victims of the fraud and money laundering scams of the disbarred lawyer Marc Dreier are still in court fighting over art he bought with some of the $700 million stolen from hedge funds and investors. At the moment 28 works by artists like Matisse, Warhol, Rothko and Damien Hirst are being stored by the federal government.

“Hannibal” also sits in storage. That 1982 Basquiat work was part of a spectacular collection that Ferreira assembled while he controlled Banco Santos in Brazil. Some of these works had been exhibited at museums like the Guggenheim in New York.

Like most laundering cases involving art in the US, this one was uncovered when the work was illegally transported into the country. In 2004 Ferreira’s financial empire, built partly on embezzled funds, collapsed, leaving $1 billion in debts. A court in Sao Paulo sentenced him in 2006 to 21 years in prison for bank fraud, tax evasion and money laundering, a conviction he is appealing. Before his arrest, however, more than $30 million of art owned by Ferreira and his wife, Marcia, was smuggled out of Brazil, Judge De Sanctis said.

According to court papers, “Hannibal” was bought for $1 million in 2004 by a Panamanian company called Broadening-Info Enterprises, which later tried to sell the painting for $5 million. It was sent to New York in 2007, passing through the hands of four shipping agents in two countries before landing at Kennedy.

Since merchandise valued at less than $200 may enter the US without customs documentation, duty or tax, “Hannibal,” labeled worth $100, was cleared even before the plane landed.

First Published: May 14, 2013 00:39 IST