Thursday, July 28, 2016

Big Money: "An Auction House Learns the Art of Shadow Banking"

From Bloomberg, July 27:
  • Lending by Sotheby’s tripled to $682 million in four years
  • Malaysian financier in money-laundering probe got a loan
A year before he got caught up in a U.S. money-laundering investigation, Malaysian financier Jho Low was looking to borrow more than $100 million without having to answer all the nosy know-your-customer questions required by U.S. banks such as JPMorgan Chase & Co.

“Prefer the boutique banks that can move fast vs the large ones like JPM,” Low wrote on March 13, 2014, to an employee of a private art dealership that had sold him a painting by Claude Monet for $35 million a few months earlier. The lender “can take all the art no problems,” he wrote the next day. “All in Geneva free port. Speed is the most important and one with a fairly quick and relaxed kyc process.”

Low got his money a month later, not from a bank but from Sotheby’s, an auction house that isn’t subject to the same money-laundering scrutiny by regulators. He pledged 17 works of art, valued between $191.6 million and $258.3 million, to secure a $107 million loan, according to a U.S. Justice Department complaint filed July 20 in an effort to seize more than $1 billion of assets allegedly siphoned from a Malaysian state fund.

As prices for art skyrocketed, Sotheby’s and other firms have become shadow banks, making millions of dollars of legal loans outside the regulated financial system and raising concerns that such financing could facilitate money laundering. Sotheby’s tripled lending to $682 million over the four years ended in 2015. Last year it almost doubled, to $1 billion, a revolving credit facility provided by banks including JPMorgan and HSBC Holdings Plc that it can use to make loans.

Art Crime
“One way to launder is to use art as a security for a loan,” said David Hall, who spent 10 years as a special prosecutor for the Federal Bureau of Investigation’s Art Crime Team and is now a partner at law firm Wiggin & Dana LLP. Hall, who wouldn’t comment about Sotheby’s or the Low case, said the aim is to use ill-gotten funds to purchase assets that can be used as collateral for a loan. “The level of scrutiny you’ll receive from a bank is much higher than you will receive from an auction house.”
Sotheby’s says it has a rigorous compliance program, and the firm hasn’t been accused of wrongdoing in connection with the government investigation. While the company underwrites loans on the basis of the value and title of the artwork, it has a parallel process that looks into a client’s source of wealth and evaluates risk in a manner analogous to banks, according to Lauren Gioia, a spokeswoman. The compliance program is headed by Jane Levine, a former federal prosecutor who worked with the FBI’s art-crime unit.

“This process was in place at the time the loan to Mr. Low was extended,” Gioia said. “As outlined in the complaint, Sotheby’s, like many other entities, including prominent law firms, major banks, real estate companies and corporations in other industries, fell victim to a complex web of transactions designed to hide and disguise the alleged illegal source of funds.”

Indeed, some of the money used to buy Low’s art flowed through a U.S. account at JPMorgan, according to the complaint.

Financing Lifestyles
Art financing has expanded not just at Sotheby’s but at banks including Bank of America Corp. and JPMorgan as well as boutique firms. Art-secured lending has increased by 15 percent to 20 percent annually over the past five years to become a $15 billion to $19 billion market in the U.S., according to Deloitte’s Art & Finance Report 2016....MORE
HT: Art News who also refer us to:

Taikang Life, one of China’s biggest insurers, now holds a 13.5 percent stake in Sotheby’s worth around $233 million. [CNN]
Here's our May post "Deloitte Luxembourg's Art & Finance Report 2016".

And some others that may be of interest:
Carlyle and Banque Pictet Hook Up For Art Financing Action
Art: War Between the 'Freeport King' and the Oligarch and How Dmitry Rybolovlev Made a Quick $300 Million
"Oligarchs and Orchestras: Inside Luxembourg’s Secretive Low-Tax ‘Fortress of Art’ Warehouse"
"(Sm)art Investing: Rich Move Assets from Banks to Warehouses" ($4 trillion in 'treasure' assets)
What's the Scam? Why Did Deloitte Set Up Their Art & Finance Practice In Luxembourg?
"Private Banks Boost Art Advisory Units"
Super Wealth: Barron's Penta Calls For Avoidance Of Geneva-style Freeports
If it were a museum, some say that it would probably be the best museum in the world
Art (and money laundering): Swiss Government's Tough New Controls On Freeports Effective January 1 
In "Liechtenstein Is Using One of the World's Finest Art Collections to Market Its Private Bank to the Chinese" I took the not-too-controversial position that "'Prince of Liechtenstein' is a very good gig."
I'm thinking that Grand Duke of Luxembourg ain't too shabby either.