April 13, 2011

Wednesday, April 13, 2011 - No comments

Part V: The Use of High Value Art and Collectibles to Launder and/or Transfer Capital

by James A. Bond,
ARCA Class of 2011

CONCLUSION

The relationship between humankind and capital is unique and complicated. Capital in the form of M2, having both a high use and exchange value, is the oil that keeps the world of commerce working. However, this usefulness as a tool can only explain part of the relationship of humankind’s attachment to capital in the form of M2. While M2 may pay the bills, the enjoyment and utility of capital in its other forms, particularly high value art and collectibles, has found a particular niche in the human psyche. Charles Hill, writing about the wealth of nations, aptly conveys why this has happened.

You can regard art as economic added value...Purely economic, political, and social history add narrow tunnel vision dimensions to our societies. Art, architecture, music, and literature, within and outside religious contexts, all add wider dimensions. Our civilizations reflect high culture as well as monetary wealth.

Over the last three decades, the ‘added value’ Hill referred to has come to represent different utilities for different segments of the population. For Japan, it was a signal to the world that their nation was back as a world leader. The baby boomers utilized it to announce their arrival as a type of scorecard in the game of intergenerational rivalry with their parents, purchasing art both for the enjoyment of ownership and as an investment. Criminals came to recognize it as an alternative way to launder M2.

This subtle change in perception of the utility of different types of capital has been fostered by globalization that provided some with excess capital, which in turn acted as a catalyst for the art markets. The world is just now beginning to feel the effects of the developing middle classes in Asia who, in addition to wanting to be rich, also want the trappings of wealth that high value art and collectibles represent. As the nations of the world restructure their economies in response to the 2008-2009 financial crisis the amount of capital available and how it will be distributed will cause people to adjust so that they can protect their net worth.

Crime and the proceeds from its activities will always be seeking new ways to convert illegal money. Because of government response to drugs and the terrorist threat, the financial industry, which was the traditional means for money laundering, has been severely constrained. As early as 1998, because of the tightened banking regulations, criminals began utilizing property, art, or gold markets to launder money. Crime and the money it produces will always be present. With the traditional channels in the financial sector fairly well constrained other venues will be tested including but not limited to high value art and collectibles.

Little direct evidence was found to substantiate this papers hypothesis that high value art and collectibles have been used to transfer and or launder money. Much anecdotal speculation exist today, as it was when Conklin wrote Art Crime in 1994. As pointed out previously the art market thrives in the shadows and is protective of its customers who, in the main, want to remain anonymous. Auction houses, insurance companies, stamp and coin collectors, and gallery owners were loathe to discuss whether this type of capital transfer has, has not, or is taking place.

Several factors however point to the possibility that capital in a form other than M2 will be increasingly utilized in the future. First, the traditional venue through financial institutions has become restrictive and expensive. Illegal capital will always be around and will always need a way to be laundered. Second is the fact that it has been used in the past. Third is the opaque nature of most of the transactions and the lack of regulations. The final factor is the never-ending desire for humankind to maximize and protect net worth from taxation and economic cycles and the unrelenting quest by criminals to make dirty money clean.

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