Due diligence in an art transaction is about verifying what you are buying and who you are dealing with, so as to minimise your exposure to risk. Our Expert Guest, Pandora Mather-Lees from ArtOnSuperyachts.com gives some essential advice for collectors.
Our previous expert interview dealt with reputation management in the art world and discussed how art collectors can protect their public personas in a world of scurrilous sensationalism, where the scent of unsubstantiated scandal can quickly go viral, especially through social media.
The art market is a relatively small and tightly connected community such that the damage to reputation and a perceived loss of integrity can in some cases be irredeemable. One would therefore expect that extraordinary care would be taken with every transaction to avoid any unnecessary or careless mistakes.
Nevertheless, stories abound of collectors or their advisors, agents or galleries being tricked, misled and defrauded despite considerable knowledge, ability and many years’ experience in the business. In some cases, previously revered dealers have disappeared after being found to be the perpetrators of fraud, sometimes unwittingly.
Occurrences include consignment fraud, title fraud (selling without passing clear title or selling to multiple parties) authentication fiascos (where auctions houses have been accused of dealing in fakes), unpaid commission due to poorly defined contracts, egregious profiteering or downright unethical practice.
This list is by no means exhaustive; it excludes the domains of money laundering, tax evasion and export sanctions regulations. Let us not forget either the creators, the artists themselves, who have been victims or perpetrators.
This shows how the art market can be a quagmire for the unwary, and how honest and knowledgeable participants come up against nefarious interlopers and professional criminals.
Criminality in the art market must be taken seriously, whether it is money laundering, theft, forgery or extortion with masterpieces used as either currency or for ransom. Art crime is linked to arms dealing, drugs and other forms of abuse.
Fine art is often treated as a commodity and an investment vehicle. It has attracted the attention of wealth managers, bankers, financiers and hedge fund managers.
‘Super collectors’ have emerged onto the market eager to acquire works by famous artists. This has divided the market into intellectuals who enjoy the intrinsic quality of their works of art and others who are more interested in a return on investment or simply want the kudos from owning works by iconic artists.
We are now witnessing the advent of expert due diligence in the art market – a methodology once the preserve of corporate M&A and specialised areas of business.
Extended due diligence before buying works of art, with input from independent third parties, is vital in minimising risk.
Nevertheless, buyers investing seven or eight figure sums very often do not follow the same protocol that they would when purchasing property or land for much lesser amounts. The checks may be sketchy, barely scratching the surface, and missing a profusion of ‘red flags’ or indeed may not be done at all.
What does due diligence in an art transaction look like? In simple terms it is about verifying (i) what you are buying and (ii) who you are dealing with, so as to minimise your exposure to risk.
The London-based Art Due Diligence Group (The ADDG) comprises ten interlinked entities designed to assist with protocols such as;
The team is multi-disciplinary, bringing expertise in art, litigation & contract law, stolen art checks, art recovery, art forensics, fraud investigation, brokerage, general guidance and training.
When it comes to acquiring an artwork, its toolkit includes supporting the collector with access to artworld professionals; subject experts, provenance research, tracing an object’s history back to the artist’s studio, scientific analysis to verify the preceding two steps and to provide a consensus of opinion.
Assuring that the buyer, seller and intermediaries are bona fide, the ADDG provides confidential oversight. The consensus is critical in a world where a sole opinion can rebound with litigation should an owner be informed a piece is not ‘right’.
Art lawyer Jessica Franses, director of the Art Due Diligence Group has encountered several examples where solid contracts did not exist or were not watertight with little recourse if something goes wrong.
Members of the group have found that title is problematic too; title insurance and checks are not the norm. Worse still, transactions may be conducted outside of escrow where millions of pounds can be handed over, effectively on trust.
It is therefore important for professionals and collectors to demonstrate a measured approach, not least because the financial sector is taking an interest in the market as values have soared and the art collection can be a significant part of an individual’s portfolio.
Deloitte’s Art & Finance Report (2019) suggests that many wealth managers experience lack of trust in art market practice, being used to more reliable data, analytical research and rigorous procedures to ensure a successful deal. The art community needs to step up to respond to the standards familiar in the City.
The ADDG’s protocols adopt a methodology employing a multi-tiered checklist, clients are guided through the process with individual attention. When most professionals are aware of the tools required to conduct a safe contract, why would a dealer or advisor, even one who has already been ‘burned’ still opt to take risks rather than take the steps necessary to safeguard their pockets and their reputation?
The Fifth Anti-Money Laundering Directive (AMLD5) introduced this year has imposed some safeguards by law. KYC must now include investigation into, among other things source of funds for any transaction over €10,000, a very low threshold as most dealers have lamented.
Red flags cannot go unnoticed for fear of criminal penalties which includes the liability of intermediaries to the transaction.
The administrational burden of AMLD5 is an example of reluctance to follow through on enhanced due diligence. Others are cost, tradition and velocity of sale.
Buyers eager to own a chosen piece will conclude a hasty sale during an art fair preview rather than risk losing out to another, hoping their lawyer will come to the rescue if something goes awry.
Unravelling a problem after the sale can take months if not years and is unpleasant, but this is clearly not a deterrent.
Buyers and art professionals often act on trust. Faced with a ‘Monet’, the assumption is to accept it, rather than question another professional’s integrity. The gentlemen’s agreement and traditional handshake might have worked over lunch in Mayfair between friends, but cannot work in what is now an international playing field.
A bad apple on the other side of the globe offers limited options for recourse in a crisis.
The barrier of costs is significant, since due diligence requires investment. Having negotiated the best possible price, additional authentication checks are unwelcome and cause delays. Rarely is the artwork itself, let alone the accompanying documentation tested scientifically for example, and there is the risk of moving the object and associated potential leaks in confidentiality, all genuine concerns.
Another motivation for avoiding technical analysis, shocking as it is, is that some simply don’t wish to know the truth in case a forgery is uncovered; there is just too much at stake.
Inevitably transactions include intermediaries in the chain between buyer and seller expecting commission or referral fees. The chain obfuscates the process and adds a layer of anonymity.
The crux of many transactions is that when it comes to cost of due diligence, these intermediaries won’t undertake the costs in case the sale does not conclude. This is understandable, for the art market has its portion of ‘tyre kickers’ and time wasters who don’t follow through and purchases break down for many reasons.
Embarking on a full due diligence process and advancing funds until one knows that a sale is certain will risk delays with the piece going to a more ready buyer. This is problematic, but so too is the alternative, so the question of where due diligence fits into the transactional process is then an indisputable impediment. Who pays? When do they pay? How are costs apportioned and who is liable if the sale doesn’t conclude?
The unsatisfactory result is to assume that provenance research and a cursory check with a stolen art register (with nominal fee) will suffice – which it cannot.
Most buyers will also set about discreet research with associates and it is common to conduct a viewing and enlist an expert to confirm the piece is genuine. Unfortunately, there is a tendency to rely on instinct and the process is not always thorough leaving gaps and red flags in its trail.
Whilst the art market has undergone criticism for a lack of standards, it has evolved to embrace better practice and indeed many laws govern different aspects of the transactional process.
Efforts continue to ensure that the community adheres to trade associations’ rules and global art fairs schedule vetting days. Conferences such as The Art Business Conference educate and encourage a higher scrutiny of objects and adoption of better controls. Nevertheless, it is still not enough.
Due diligence is essentially about managing risk, it is also about assuring a significant level of comfort when investing substantial sums in a piece of wood, canvas and paint, the materials of which might barely exceed a few pounds.
A more rigorous approach is now being driven by the treatment of art as an asset class, greater capabilities in technical analysis and regulatory compliance. With the growing threat of legal action against experts, now fearful of offering opinion, the full suite of due diligence which provides a consensus, managed by a due diligence organisation, must surely be the future.
Buyers and sellers can now be better protected and enjoy the peace of mind of a smoother path to a successful sale.
Pandora Mather-Lees is an Oxford-educated art historian with a background in art publishing, having over 20 years’ experience in the commercial art sector with galleries, museums, auctions houses and art related platforms.