Artwork for Money Laundering

 

In the current climate of economic uncertainty, the investment focus is increasingly shifting towards alternative investments, which allow to diversify the investment portfolio and spread the risk incurred over various types of investments. Alongside traditional asset classes such as bonds, equity securities, real estate, and gold, new types of investments have emerged over the last decades. Accordingly, more and more investors, investment funds, family offices, or high-net-worth individuals decided to invest in more exotic products such as debt investment, venture capital, wine, cars, watches and other luxury goods, or artworks. After the 2008 crisis, most of investors indeed tried to reallocate their resources in safe investments, among which art was perceived as the newcomer.

Until recently, the fine art market fascinated the general public. However, the barriers to entry were high and access to art was reserved to the most upper class. However, through various phenomena such as crisis, globalization, new forms of investment pooling, and access to information, a much larger community has started to invest in art and collectible assets. Fine art markets have been in continuous evolution, expanding to new countries and new customers. This increase of customers can be explained by the increase of ultra-high-net-worth individuals (UHNWI), which are expected to rise 43 percent to 275,740 by 2026, but also by the arrival of new market entrants which is facilitated through new ways of less restrictive investment (e.g. crowdfunding).

 

Let’s have a look at this (not so) “exotic” (anymore) investment, which remains however a very particular asset that continues to inspire passion, and its characteristics.

 

Art as a heterogeneous and physical product. Artworks are unique. Therefore, any damage to an artwork could have a much bigger impact than for other products. The physical and movable nature of such assets also triggers specific risks and costs, as the artworks need to be physically transported from one owner to another, from an exposition to the restoration room, etc. For each transaction, the transport and insurance of the artworks need to be considered carefully, representing costs that can be much higher than for other goods because of their unique feature.

 

In addition, artworks are exposed to incorrect attribution, forgery, fraud and theft. Protecting these assets should therefore be a priority. Thankfully, artworks can be insured against most (if not all) of the above-mentioned risks.

Art is illiquid. Art is an illiquid good. It is sold on a segmented market and does not pay dividends or interests. The selling of other types of assets such as gold, oil, or publicly traded stocks is indeed much easier as it is facilitated by the nature of the asset or the market on which the asset is exchanged.

 

Artworks can be very difficult to sell. Art business is affected or at the mercy of erratic public taste and short-lived trends.

 

Art is volatile. The volatility of artwork is a common perception. Indeed, the price of an artwork can fluctuate over time. The volatility of an artwork is influenced by the rate of the artist, the latter being volatile as well, the number of similar artworks at the same time, marketing expenses linked to the artwork sold, trends, etc. Depending on the art category, volatility could however remain within certain limits. As an example, private banks and asset-based lenders accept certain artworks as collateral for loans, which show that financial institutions are ready to give a minimum value to artwork that should not be undermined.

 

Art is difficult to value. Valuation is one of the most critical points when offering investment products in artworks. In finance, the price of a financial asset is determined by the market, an index or some specific factors. However, there is currently no standardized art valuation methodology.

 

Art is opaque. Art markets have neither self-regulated nor public statutory authority supervised exchange of artworks, which leaves the art market unregulated. No centralized system exists to gather the artwork transactions, and the tracking of data in relation to purchase and sale is much more complex than for regulated investments. However, some jurisdictions have imposed anti-money laundering requirements on art dealers in order to preserve the market from abuse, which allows to gather some data in relation to artwork and its exchange in the art market. Moreover, a group of art market businesses and specialists has formed the Responsible Art Market Initiative (RAM), the first of its kind. RAM seeks to provide art stakeholders with guidelines that aim to raise awareness of a growing number of operational and reputational risks faced by the art industry. Art offers unique values. Art assets offer values that no other investments offer. Among art investors, artworks can sometimes be seen as an investment product that could raise substantial economic benefits. However, in addition to a potential increase in value, artworks can enhance other needs and desires for the investor among which we can count the satisfaction of the investor’s motivations, the aesthetic value of artwork, the passion for collecting, the representation of a social status, a certain prestige, or social responsibility by financing/funding art (e.g. promoting young artists, promoting culture).

 

The knowledge of the general public about artworks and its characteristics have grown among the years. Economics professors at the University of Luxembourg notably observed a low but often slightly positive correlation of art with the broad financial markets, whereas art has a negative downside Beta. Investing in art could serve as a useful function in a diversified portfolio, by hedging against financial market risk. However, investment products offering an exposure to the art market are still very limited.

 

Art can nonetheless represent a significant opportunity in a holistic wealth management approach. Wealth allocated to art assets is increasing and services around wealth protection, monetization, estate planning, and philanthropy are in demand but require substantial knowledge and expertise of the art market ecosystem. Private banks, family offices, and other investors need to build an adequate strategy in order to efficiently serve art assets. We noticed that more financial institutions are actually seeking to develop their knowledge and adapt their services to respond to this asset investment market trends and client demands.

 

The remaining mystery and fog surrounding the art market—which is not as well-known as other sectors—on top of the individual considerations proper to each complex transaction, thus require a deeper understanding and a closer cooperation between the financial and art business actors. Building a bridge between these two traditionally separate universes would allow to create synergies which should be beneficial and allow to share each other’s expertise. In this respect and for 10 years now, 

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Wuhan conspiracy theories aside, diplomatic traction is the reward.

 

A week or two ago we wrote an article "Conspiracies & Ripples" which focused primarily on conspiracy theories and kicked off with the rather obvious statement that a conspiracy theory is simply a theory without the facts i.e. just a theory.  Within that we highlighted that ‘flavour of the month’ theorist’s delight, the origins of the Coronavirus and its links to Wuhan.  This echoed our views published in February which, as many did, ponder the chances of this remote coincidence maybe actually being true.  Since then there have been swathes of articles on the topic citing all sort of sources and from numerous ‘renowned’ scientists.  We have also recently had the opinions offered by those whose opinions really count, that this virus originating from the labs in Wuhan may not actually be so far-fetched after all.

We do tend to agree, or at least we did.  That was then and this is now and in the world of Politics things move quickly and one does have to look at the reality of the situation.  If there is enough fog between you and your destination, then sometimes the route you take can change, leaving you all sorts of options.  If the objective was originally to circumnavigate through uncertain waters to establish who, what, why and when the virus came about – then that is now lost in the fog.  It is arbitrary.  Now we have something that is far more concrete and tangible to use to our advantage – we have uncertainty.  We now have enough debate and conspiracy to render the findings of the scientists open to interpretation.  And that… is a diplomat’s dream come true.   This particular carcass will feed many and although the WHO will go in, on the ground, and no doubt find yet more uncertainty…it really is irrelevant.  You will certainly not find individual government’s chomping at the bit to send their representatives into Wuhan anytime soon, and even if they did, why?  Wuhan is not some sleepy suburb in leafy Northamptonshire… it is in China.  Whatever was there has long gone, if indeed it was ever even there.  So perhaps it would be wise to assume that at least for the next few decades this is a conspiracy that will never find out those salient facts. 

Now, listening to the scientists, there is an overwhelming urge to say, “shush now”.  Step back ladies and gentlemen and look at the bigger picture at play.  Nobody is actually interested whether or not the virus started in Wuhan, intentionally or not.  As long as it is open to debate, it is far more valuable.  The scientists have debated at length and argued, but there is still no unequivocal proof either way that satisfies all parties…and why could that be?  Scientific fact is not open to debate or questioning, that is a given.  However, to say Science is correct, is not true.  That is because Science has Scientists, and Scientists are human beings who in turn are fallible and motivated by many many other factors.  In China for example, one might say that scientific fact is exactly what they want it to be.  Indeed, who is to say it ends in China.

 

So why is uncertainty such a blessing in this case?  It provides an additional bargaining chip and a weapon in the armoury for all Governments to now use against the Chinese.  Maybe on the other side of the fence their own initial conspiracy theory that a foreign Government (the US) planted the virus in their midst, is being written about in their own press.  Or maybe not. The fact is it is a safe bet to assume that no body will ever know.  There will be no compensations or admissions of guilt in this case sadly…however the capillaceous network that is politics, diplomacy and economic negotiations will be the real beneficiaries.

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