Pricey collectibles such as art, wine and classic cars are high on the shopping lists of the ultra-affluent—and fraudsters are only too happy to provide them.
Collectibles crime is a global industry that generates billions annually. The recent run-up in prices at international auction sales and the ease with which collectibles are transported across borders have fueled a burgeoning market for forgeries. Forty percent or more of the collectibles sold worldwide are likely counterfeit, experts estimate.
“That’s a frightening statistic,” says art historian and provenance research expert Jane C.H. Jacob, president of Chicago-based Jacob Fine Art.
Jacob thinks the number of forgeries, especially counterfeit fine art paintings, is increasing because of the growth in global wealth and disposable income. “There’s more money being spent in the collectibles market than ever before in history. Where there’s money, there’s crime,” she says.
Recent examples of high-profile collectibles forgeries include those involving Knoedler & Company, one of New York’s oldest private galleries until it closed in 2011. Knoedler sold over $60 million worth of forged paintings that were passed off as masterpieces by artists such as Jackson Pollock, Mark Rothko and Robert Motherwell. The unsuspecting buyers included hedge fund managers and CEOs. In another prominent scam, celebrity wine dealer Rudy Kurniawan was convicted in December of mixing cheap wines in his kitchen to mimic the taste of pricier wines and making millions selling it to wealthy collectors, including billionaire William Koch.
According to a 2012 survey by Barclays, the rich collect primarily for the emotional gratification of owning one-of-a-kind pieces. Yet they increasingly view their treasures as a store of wealth and a source of capital growth. The survey Profit or Pleasure? Exploring the Motivations Behind Treasure Trends found that wealthy individuals have an average of 9.6% of their wealth in 10 different kinds of collectibles, including paintings and pictures, sculptures, tapestries and rugs, antique furniture, jewelry, classic cars, wine, stamps, coins and precious metals.
Fortunes And Forgeries
The recent run-up in prices for some collectibles has been staggering. In The Wealth Report 2014, London-based real estate brokerage Knight Frank said its Luxury Investment Index of major collectibles grew 179% over the 10 years ending with the third quarter of 2013, a compound annual growth rate of 10.8%. All nine categories in the index rose in value, except collectible furniture, which was down 19%. Vintage cars performed best, soaring 456% over the 10-year period, followed by stamps, coins, art, wine and jewelry, which rose 250%, 227%, 193%, 176% and 156%, respectively.
High-end collectibles may be excellent long-term investments, but they carry risks. They’re relatively illiquid and notoriously difficult to value. Their returns can be volatile, and they’re subject to the whims of changing artistic tastes, as well as fads and bubbles.
Yet the most significant investment risk may very well be the increasing likelihood of buying a forgery. The market for collectibles, including fine art, is the largest unregulated market in the world.
New wealth creation in the BRIC countries of Brazil, Russia, India and China is allowing collectors to repatriate exquisite treasures that were sold abroad years ago. As prices have skyrocketed in response to demand, so have the number of counterfeits. Experts say the collectibles market in China is particularly susceptible to fraud because the pace of wealth creation has been too rapid for regulators to manage.
Nevertheless, it’s a mistake to think that all the newer forgeries are coming from China, says Annelien Bruins, chief operating officer and senior art advisor at New York-based Tang Art Advisory, which assists private and corporate clients in buying, selling and managing fine art and other collectibles. “The art market is so international, you can produce forgeries anywhere,” she says.
While it’s hard to say precisely which collectibles are most often counterfeited, criminals who forge fine art paintings seem to favor the 20th century. For one thing, older paintings, such as those from the Renaissance period, require more skill to counterfeit. The forged works of some modern artists, Pablo Picasso and Salvador Dalí, for example, are also easier to pass off because the artists were so prolific.
Counterfeiting wine is a relatively new deception. It began in the late 1970s when prices escalated for high-end wines from France’s Bordeaux region. Some criminals print sham labels and put them on bottles of cheaper wines. Others buy the empty bottles and corks of prized vintages (often from sommeliers at high-end restaurants), then refill and recork the bottles.
Counterfeit U.S. coins have been produced in China for decades. “The counterfeits used to be crude, with easily detectable errors, pitting and tool marks. Now they’re much more sophisticated and harder to detect,” says Matt Erskine, a fourth-generation estate-planning attorney and principal in Worcester, Mass.-based Erskine Company.
Erskine, whose family has been collecting rare coins and other valuables since the mid-1600s, says there’s a middle-market sweet spot where fraudsters can earn enough money to make the risk worth it, without attracting too much scrutiny. It takes counterfeiters a fair amount of time and effort to make decent forgeries. “They tend to copy collectibles that will bring enough value to compensate them for making the items, but are not so valuable that they attract a lot of attention. The easiest things to forge are those that were made in the thousands, if not hundreds of thousands—coins, stamps, books—because you can take one and modify it slightly to make it look rarer.”
Tip-Offs To Rip-Offs
Modern science has made fraud detection somewhat easier through technologies such as ultraviolet fluorescence, infrared analysis, X-rays and carbon dating. There are, however, limits to the usefulness of these tools. Autograph forgers, for example, have been known to put the signatures of Babe Ruth, Lou Gehrig and Mickey Mantle on old baseballs. Authentication requires more than just determining the age of the balls; it takes an expert in baseball memorabilia.
Forging artists’ signatures and putting counterfeit paintings in old frames stamped with the names of prominent auction houses are timeworn tricks. But fraudsters are also using new ploys, such as leaving items outdoors to weather-age them and adding authentic pieces to otherwise forged antique sculptures and furniture to subvert carbon dating. “They’re becoming smarter at circumventing technology,” says Bruins.
Not surprisingly, many fakes that start out as harmless replicas are later hawked as authentic works by unscrupulous collectors, dealers and auction houses. The fraud occurs when sellers portray the items as real, when they know they’re not.
Industry insiders say a code of silence exists when it comes to forgeries. Some wealthy collectors are simply too embarrassed to admit they’ve been duped. Others who suspect that their pieces are forged want to avoid casting doubt on the authenticity of the works, thereby reducing their value. Rather than come clean, some attempt to unload their forgeries on others.
Jacob, who has worked with the FBI and Interpol to help stop collectibles crime, says she once telephoned a client to report that a fine art painting was not genuine, then added it to her database of fakes and forgeries. When she sent a written report on the piece’s inauthenticity by courier (which the client asked her not to send), the client refused delivery and retuned the package unopened. “What do you think that person is going to do with that work of art?” she asks.
Trust, But Verify
There are only two sure ways for clients to avoid forgeries—either become connoisseurs in the items they’re collecting or hire recognized experts to vet the items.
Becoming an expert takes time and diligence. With some collectibles, it’s particularly hard to gain the proficiency to distinguish genuine items from clever forgeries. The taste of wine, for example, can vary greatly depending on how well (or poorly) it was stored. The labels or corks might be a better indicator of authenticity. Incompetent fraudsters have been known to misprint château labels and place the wrong corks in bottles.
A number of services exist that can help advisors and their clients authenticate various items, such as the Certified Guaranty Company, which grades comic books and magazines, and Professional Sports Authenticator, which evaluates memorabilia such as trading cards, balls and uniforms. Companies that grade coins with numismatic value and weed out forgeries include Professional Coin Grading Service and Numismatic Guaranty Corporation.
Locating competent and independent experts may require some serious detective work. Anyone can claim that a collectible is authentic, based solely on personal opinion. If an “expert” is wrong, his or her opinion may not necessarily be legally actionable. Jacob says it’s crucial to get recommendations and check credentials. “There are people who have held themselves out as experts who have not written a book, put together an exhibition in any museum or contributed to any kind of scholarship,” she says.
Bruins, whose firm performs research to ensure that clients don’t buy a forgery or overpay for an item, recommends getting a second opinion on very expensive pieces. “Price information is not always easy to come by. Two experts may disagree on the value. There’s a level of subjectivity in art valuations,” she says.
For well-known works, due diligence often starts with checking the artist’s catalogue raisonné, a comprehensive scholarly reference text that includes each work known to have been created by a particular artist, with information such as the title of each piece and any alternative titles, along with inscriptions, dates, mediums, sizes, exhibition histories and the “provenance” of each item. Provenance is essentially the chronology of ownership, custody or location of a work since the artist created it.
Verifying provenance doesn’t just help determine whether a work is authentic, it also provides clues about who has legal title to the piece. Many collectibles are subject to theft, wartime looting, archaeological looting and smuggling. Clients who purchase costly collectibles should at minimum check stolen property databases such as the Art Loss Register, a worldwide catalogue of over 400,000 pilfered paintings, sculptures, jewels and other items.
But Judith Pearson, president of New York-based ARIS Title Insurance Corporation, says stolen items account for only 25% of title exposures in the collectibles markets. Seventy-five percent of the risk comes from encumbrances, such as creditor and tax liens, and issues involving lack of legal authority to buy, sell, give, donate or loan items. Title insurance helps protect against the risk of title defects that could result in the loss of multimillion-dollar pieces through litigation.
Pearson cautions that common phrases on provenance documents, such as “owned by a private collector” and “sold by a dealer,” are signs of the market’s opacity. Although wealthy collectors often wish to keep their ownership of important works confidential to avoid becoming targets of thieves, vague terms can also mean trouble. “Those red flags, or what we would call ‘gaps in ownership,’ may be really small gaps, or really big gaps, but gaps almost always exist,” says Pearson.
Pearson says ARIS can reduce the risks of title defects through underwriting protocols and access to confidential ownership information that transacting parties often don’t, or won’t, share with each other. “We identify the gaps, determine how defensible they are and insure over them,” she says.
Erskine recommends that his clients ask for title insurance policies when purchasing expensive collectibles, in part because even buying through reputable auction houses is not enough protection. Auction houses perform some due diligence, but as the seller’s agent, they can typically rely on the seller’s representations about ownership without assuming legal title risks. Unless they’ve committed fraud, the limited warranties that auction houses provide will generally absolve them of responsibility for selling items with title defects.
In the “buyer beware” world of collectibles, the greater a client’s desire to believe that a unique piece is a once-in-a-lifetime buying opportunity, the more caution an advisor should likely urge.
As Erskine puts it, “There are probably new scams being thought up every day. And the number detected is nowhere near the number actually being perpetrated. Even the most experienced collector can get scammed, so if the deal sounds too good to be true—it probably is.”