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April 10, 2011

Sunday, April 10, 2011 - No comments

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

James A. Bond
by James A. Bond, ARCA Class 2011
"Capital is money, capital is commodities. By virtue of it being value, it has acquired the occult ability to add value to itself. It brings forth living offspring, or, at least, lays golden eggs." 
“Capital is that part of wealth which is devoted to obtaining further wealth."
For both Karl Marx and Alfred Marshall their understanding and conceptualization of capital evolved during the industrial revolution in the mid 19th century as nations and individuals began the struggle to come to terms with the uses and nature of this new instrument called capital. During this period, capital came to be recognized as another pillar of capitalism and was becoming more integrated into the economic equation that heretofore had focused primarily on land and labor. As can be seen, especially in the quote from Marx, capital was considered unique. It was able to replicate itself when it began to bear interest and create wealth by combining with other assets to produce a new product, the final value being greater than the sum of its parts. Over time economist began to see that there existed many types of capital other than the monetary capital or M2, the traditional measure of the actual supply of money in each country. Today’s economists recognize that there are different categories of capital that can provide opportunities for individuals and businesses to transfer, protect, and nurture this unique economic instrument that Marx described with its “occult ability to lay golden eggs.”

Capital is productive either asleep or awake. It provides the incentive for capitalism, the reward for ingenuity, and a measure of where we are as an individual or nation. It also provides a measure of where we have been. Some types of capital are malleable, being easily morphed from one form to another virtually anywhere on the planet. This ability to maintain value in various forms has made it valuable to individuals and companies when capital needs to be transferred, or laundered as a criminal endeavor. In this age of globalization and slowly increasing prosperity, it could become a more widely recognized tool as businesses, individuals, and criminals seek alternative means to launder or transfer capital in order to protect their net worth and standard of living.

Every nation has capital of different quantities and different types, as does every individual. The word capital when used in a financial context is invariably conceptualized in monetary terms represented by the symbol M2. However, other types of capital exist and can be corporeal or incorporeal. One of the most important types of incorporeal capital existing within each nation is its intellectual and human capital, which exist alongside a form of corporeal capital represented by natural resources like minerals, energy, and water that derive from the land.

Art capital, existing in the public domain at museums, universities, and government repositories, represents a significant part of national and international wealth and is frequently overlooked as a type of capital because it is thought of in terms of public art. However, art capital exists in varying quantities in all nations as combination of public and private art and collectibles, the percentage mix affected by laws and the relative wealth and age of the nation. The United States, being a very young nation, had little indigenous art, which meant the great portion of art wealth had to be purchased by either institutions or individuals.

Art capital in the public domain represents only a small fraction of the total art capital within each nation. The amount of art capital held privately by the public will never be known, not only because it is privately held, but also because a true value for each piece can only be determined if it is ever sold and the price made public, which is rare for private sales. This is not an unusual occurrence in the art world where 70 percent of art sold at auction is sold anonymously. The price then dependent upon the art fashion cycle, supply and demand, and the world economy.

The fact that there is no complete record of the type and value of the private art within each nation is an important element to consider when evaluating the uses and utility that art capital represents for each nation and the individual. This invisible yet ubiquitous quality coupled with the relative ease of monetization gives high value art and collectibles a unique cachet in the world of capital.

High value art and collectibles have been and will continue to be used to mask capital appreciation and assist in the discrete transfer of capital while at the same time providing a safe haven. This is especially true in the current age of globalization and the increasing transnationalization of crime. Specific events like 9/11 and the financial crisis of 2008-2010 have caused governments to change the way M2 is regulated opening the door to other venues of capital movement. This happens for a variety of reasons including escaping taxation, the laundering of money, to decrease tax liability, and protect accumulated wealth for both individuals and businesses. This trend will surely be exacerbated in coming years for the following four reasons. 
1) Governments will continue to refine currency transaction laws governing the movement of M2 to further restrict funding for terrorism and control the profits generated by transnational crime. 
2) New sources of revenue will be needed by governments to replace the revenue lost in the wake of the 2008-2009 financial crises and to fund entitlement programs that will be fully populated in this decade as the baby boomers retire. This will be an ever-growing problem for many nations for a variety of reasons including; underfunded entitlement programs, immigration policies, national demographics, and excessive national debt service requirements. 
3) The risk of inflation, which always realigns capital allocations. 
4) The process of adjusting to an evolving world order, which will require integrating an ever more prosperous and populous India and China and their growing middle class as they begin to accumulate assets and enjoy their new wealth.