Why Fine Art Investors Need Due Diligence in an Opaque Market | First Advantage
2026-03-01 21:49 Diff
https://fadv.com/blog/why-fine-art-investors-need-due-diligence-in-an-opaque-market/

By Andy Kachel, Investigative Researcher at First Advantage

iStock photo

INTRODUCTION

Despite the rise of NFTs and AI-generated art, warning signs of a recession, and nagging inflation, the fine art market reigns supreme. In fact, 2022 was a record-breaking year for fine art sales, with Christie’s ($8.4 billion), Sotheby’s ($6.8 billion), and Phillips ($1.3 billion) each raking in record profits[1]. Paintings by iconic artists can fetch eye-watering amounts. Due to a surge of interest in Black artists, “The Sugar Shack,” a painting by Ernie Barnes and valued conservatively at $200,000, went for $15.3 million at Christie’s in 2022 [15].

However, just like in any other high-stakes, speculative industry, the fine art world is riddled with fraud. The path to successful fine art investment is far from straightforward for wealth managers, corporate collectors, high-net-worth individuals, and institutions like banks, museums, and endowments. Fine art is a commodity, and, as with any high-priced commodity, both its buyers and sellers must be held to the highest ethical standards. To safeguard themselves and others from fraud, it is imperative that investors conduct due diligence on art dealers before any transaction.

For those unfamiliar with the fine art market, there are three main players at work in a transaction: sellers, dealers (who are also gallery owners), and investors. Typically, sellers are private individuals who own fine art. Sellers sell their pieces to art galleries, which are run by dealers, who in turn sell artwork at a profit to investors.  Art dealers are able to sell artwork at a steep markup because of their expertise in the fine art market and their connections to serious investors.

To better demonstrate the relationship between sellers and dealers, imagine the following scenario: A seller enters a small high-end gallery. Other than the carefully mounted paintings on the walls, the space is unassuming. The off-white walls are spackled and re-painted, and the clean looking trim runs the length of the warm hardwood floor. The seller approaches the gallery owner (or art dealer) and tells her he’s looking to sell an early Jackson Pollock piece. There’s only one problem: the early Pollock isn’t a real Pollock, and the seller knows it’s fake. The wisdom, wit, and savvy of the gallerist are the only things preventing the seller from passing this piece off as genuine. Does the gallerist have a process in place to catch the con, or are their business practices lax, leaving them vulnerable to fraud? Without being in the same room at the time of sale, what recourse do investors have for gauging a gallerist’s performance in this situation? Art dealers are supposed to vet sellers; however, there are no industry-standard processes in place for investors to vet art dealers.

At First Advantage, we deliver innovative solutions and insights that help our clients manage risk and make sound investment decisions. When investors partner with us, they may gain valuable information about a potential art dealer’s past performance and business acumen. As we know from more than two decades of experience, past business performance is often evidence of future results. Understanding an art dealer’s methods, qualifications, and legal entanglements may help to inform responsible investment decisions.

ART GALLERIES AND FRAUD IN THE NEWS

The art world consists of a close-knit and highly guarded market of eager buyers who, if they wish to invest in fine art, must conduct business in an industry that values expedience and discretion.  Recent news items paint a damning picture of ongoing fraud in the art world:

  • The New York-based Knoedler Gallery was the topic of Netflix’s 2020 documentary, Made You Look: A True Story About Fake Art. Starting in 1995, this famed gallery allowed $80 million worth of forged art to pass unencumbered into the market for over a decade. The gallery’s approach to certifying these works was, to put it mildly, a bit lax.  In lieu of asking scholars and experts to vet the paintings in person, the gallery sent them pictures instead. (One expert called a painting “beautiful,” which seemed to “constitute a proxy authentication.”) The experts and Ann Freedman, the gallery owner and an art dealer, were duped because a master forger, Pei-Shen Qian, was reproducing these works.  During these transactions, the seller’s identity was never revealed to Freedman, because an intermediary approached her to sell the works. (Transacting through intermediaries, instead of directly communicating with the seller, is not considered abnormal in this industry.) The intermediary for the transactions almost managed to escape scrutiny altogether – a Long Island woman, Glafira Rosales, “who didn’t have much of an art pedigree but claimed to represent a wealthy anonymous collector”[2][3].
  • In 2016, the Revolver Gallery in California, “the largest Andy Warhol gallery in the world,” purchased two fake canvases from Warhol’s “Shadows” series for $80,000. Brian Walshe, an art seller, listed the paintings on eBay. He claimed that he had overpaid for the two Warhols and that going through an auction house would take too long, thus offering the reduced price online. The gallery owner and art dealer, Ron Rivlin, did not want to complete the transaction on eBay because the site charges a fee. Instead, the gallery flew employees out to Massachusetts, Walshe’s home state, to pick up the art.  When the employees arrived, “the authentication stamps were not visible because the frames were covering the back of the paintings.” The employees took photos of the art and sent them to Rivlin, who “was in his car at the time and did not have the original eBay photographs with him to make the comparison. But he thought the photographs looked like the ad’s [sic.] so he authorized the purchase.” Walshe received payment for the fake art. Later, when the frames were removed, their authentication stamps were missing, and the con was exposed. Separately, Walshe was indicted for the murder of his wife in late 2022, for which he remains in prison [4][5][6].
  • From 2005 to 2020, brothers Donald Henkel and Mark Henkel allegedly “forged or modified works of art, music collectibles, Hollywood memorabilia, and sports items” and profited by the use of “straw sellers.” Purportedly, the brothers modified the items and recruited other parties to act as the owners of the pieces. While in other schemes the owners were said to have been unnamed parties with intermediaries acting on their behalf, in the Henkels’ scheme, the owners’ identities were fabricated to create an air of authenticity. Three unnamed buyers of the Henkels’ forgeries collectively lost just shy of $1 million, while the Hirschl & Adler gallery reportedly lost “$500,000 on paintings.” As the director of Hirschl & Adler put it: “This is every dealer’s nightmare” [7][8].

We recommend conducting due diligence on art dealers. When art dealers purchase forgeries from private sellers, they may lose tens to hundreds of thousands of dollars, suffer reputational risk, and contaminate an artist’s oeuvre[2]. Very little shields art galleries from this danger. Con artists benefit from a dealer’s need to complete a speedy transaction, lest the opportunity be lost to a higher bidder, and from a dealer’s untested belief in a piece’s authenticity[9]. All art galleries, both large and small, are at grave risk of bad actors, no matter how well-intentioned, passionate, and enthusiastic they may be about fine art.

WHY DOES THIS TYPE OF FRAUD OCCUR?

Consider the galleries’ position in the fine art market. According to the 2016 Global Art Gallery Report, “Art galleries are small enterprises in terms of employment numbers. A companionless 11% of gallerists run their business with no assistance, and only 25% employ more than four people.” What’s more, “40% of art galleries do not have a full-time employee…and only a small minority of 8% have more than four full-time employed staff members.” Practical factors like outrageous commercial rent costs are cited as a deterrent to bringing on full-time, well-paid staff[10]. These small businesses are tasked not only with managing high-end commodities, which can sell at the same price as a new car or starter home but also with fending off bad actors and staying competitive in a market that values expedience and discretion. No wonder there is an issue with fraud!

A strong majority of professionals in the art market agree that the industry needs to change.  According to Deloitte’s Art & Finance Report 2021, “83% of wealth managers said lack of transparency was a key factor that undermined trust in the art market (compared with 77% in 2019).” For younger respondents, the number was 86%, suggesting that as a younger generation enters the fine art market, the expectation of transparency will increase[11].  However, these statistics are at odds with one word repeatedly used to describe the current state-of-the-art market: opaque. [12a,b,c] Although many industry insiders agree that greater transparency is needed, the art world remains a mirky swirl of color in which any investor can easily get lost.[13]

How many forgeries pass undetected into the art market? The exact number will always remain unclear, but experts peg the number at around 50%, and a Fine Arts Experts Institute expert has said that between 70% and 90% of pieces that go through their laboratory come out as fakes”[14].

DISCRETION VS. DUE DILIGENCE

Anyone hoping to invest in high-end art needs to conduct proper due diligence before working with art dealers. A dealer’s reputational and professional history, as well as that of their employees, must be made known for proper due diligence to be conducted.  This, however, is not industry standard. According to attorney and art law expert Daniel Weiner, “‘[art investors] are stepping into an exclusive world,’ and are thus inclined not to overstep boundaries while seeking acceptance from key players in this unfamiliar—and largely unregulated—territory.”[5]  Discretion is what undergirds this market, not transparency (and thus, not due diligence).  To curb fraud, the industry must develop a desire for transparency and adopt new practices for due diligence, which will in time become definitive industry standard practice (as in the hedge fund world, which many art investors also inhabit).

Some would argue that there is legal precedent and competitive reasons for discretion. According to Tom Christopherson, Head of Art and Law Studies, Sotheby’s Institute-London: “Confidentiality will continue to be the valid commercial choice of participants and might also be their legal obligation. How so? In commercial terms, knowledge continues to be key to a dealer or auctioneer’s business, from protecting key clients and their business from competitors and counterparties to a dealer’s ability to monetize their research and knowledge about an object and its market in the form of a margin between acquisition and sale prices.”[12a] Discretion for legal and competitive purposes are certainly valid, but discretion for fear of “overstepping boundaries” should not be the chief characterization that defines this billion-dollar industry.  Are there any better options?  When discreetly presented to interested parties, knowledge of an art dealer’s background can go a long way in helping to separate poorly run, careless galleries from galleries with deservedly sterling reputations.

THE FIRST ADVANTAGE PROCESS

First Advantage’s BackTrack® Report has been an industry leader in the field of investigative due diligence since 1993.  Our background investigations provide clients with important insights that help them manage risk and make important investment decisions. We are uniquely positioned in the market to partner with any institution wanting to invest in high-end art. Our signature BackTrack Report can provide insight into the following questions held by investors about their potential business partners in fine art investment:

  • Verification of an art dealer’s education and past employment qualifications. What qualifications does a dealer have for running a gallery? Are there any omissions or exaggerations in their professional history?  Have they worked at a gallery that was exposed to fraud, only to leave and start another gallery? These answers can lend insight into a dealer’s character, as well as past business performance.
  • Comprehensive adverse media searches. Once a dealer’s education, professional history, and affiliations are known, we use these identifiers to cull through several decades’ worth of news.  Has a dealer ever worked at a gallery that purchased forged art?  Were they forthcoming or dismissive about the matter to the press?  What are the gallery’s purchasing practices?  In their personal life, has a gallerist ever had any run-ins with the law, such as a DUI/DWI?  News articles can lend further color to lawsuits found in our litigation searches.
  • Comprehensive litigation searches. The results of our litigation searches can reveal a dealer or gallery’s legal entanglements with purchasing forged art.  Is an art gallery currently entangled in business litigation?  Did they sue their sellers for selling them fake art?  In their personal life, are they involved in divorce litigation?  Have they had multiple divorces in short succession? How might these issues detract from an art dealer’s ability to perform their job effectively?
  • Understanding of gallery and dealer’s financial history through judgment and lien, bankruptcy, and credit history searches. Management of personal finances can lend insight into how an art dealer may handle a gallery’s finances.  Is an art gallery experiencing issues with liens, foreclosure, or bankruptcy?  In their personal life, is an art dealer struggling financially with the same?  How might these issues detract from an art dealer’s ability to perform their job effectively?
  • Targeted criminal searches. In addition to a nationwide search of criminal matters, we also search the National Sex Offender Registry, Office of Foreign Asset Control, and Politically Exposed Persons databases. Conducting these searches may help protect you and your institution from reputational harm.

Investors have the potential to transform the fine art market by conducting routine background checks on art galleries and dealers.  While art dealers are often depicted as the only victims of fine art fraud, the real victims are investors and artists.  Dealers have an important role to play within the market, that of gatekeeper.  If that duty is neglected, either due to sloppy business practices, inexperience, or legal entanglements, dealers open themselves up to con artists.  If investors gain the confidence to buck the trend and conduct due diligence on art dealers, high-risk and shady dealings with gallerists will become remnants of the past, and a once-opaque fine art market will thrive amid transparency.

Sources:

[1] Sullivan, Terry . “Why the Fine Art Market Soared Last Year.” Yahoo. March 7, 2023. https://www.yahoo.com/lifestyle/why-fine-art-market-soared-140049374.html.

[2] “Duped You: The Story of Knoedler’S $80m Art Fraud – Netflix.” Artlyst. February 28, 2021. https://artlyst.com/news/duped-story-knoedlers-80m-art-fraud-netflix/.

[3] Gleiberman, Owen . “‘Made You Look: A True Story of Fake Art’ Review: The Most Spectacular Art Forgery Ever?” Variety. February 23, 2021. https://variety.com/2021/film/reviews/made-you-look-review-barry-avrich-1234913471/?sub_action=logged_in.

[4] Dutton, Jack. “Brian Walshe Had History of Art Fraud, Meddling With Inheritance.” Newsweek. January 13, 2023. https://www.newsweek.com/brian-walshe-art-fraud-meddling-inheritance-1773550.

[5] Pease, Alexander. “Warhol Fakes Become National News.” The Mass Media. UMass Boston, January 14, 2023. https://umassmedia.com/16040/art-lifestyle/warhol-fakes-become-national-news/#.

[6] Cristantiello, Ross . “Brian Walshe Indicted for the Murder of His Wife, Ana.” Boston.Com. March 30, 2023. https://www.boston.com/news/local-news/2023/03/30/brian-walshe-indicted-murder-wife-ana-cohasset/.

[7] Kuta, Sarah . “How Fraudsters Allegedly Fooled the Art World in 15-Year Scheme.” Smithsonian Magazine. May 2, 2022. https://www.smithsonianmag.com/smart-news/three-men-charged-in-art-and-sports-memorabilia-fraud-scheme-180980005/.

[8] “Three Men Charged With Scheming To Create and Sell False Works of Art and Memorabilia.” Justice.Gov. United States Attorney’s Office Northern District of Illinois, April 21, 2022. https://www.justice.gov/usao-ndil/pr/three-men-charged-scheming-create-and-sell-false-works-art-and-memorabilia.

[9] Mather-Lees, Pandora. “The Problem with Due Diligence in the Art Market.” ArtRatio. May 25, 2020. https://www.artratio.co.uk/due-diligence-art-market.

[10] Resch, Magnus. 2016. The Global Art Gallery Report. New York, NY: Phaidon Press Limited.

[11] 2022. Art & Finance Report 2021. 7th ed. Deloitte Private. pg. 280, 287.

[12] Regarding the word “opaque,” it appeared in numerous sources and is an apt word to describe the fine art market.  To further demonstrate the point, quotes from various sources that use the word to describe the market appear below.

Art & Finance Report 2021:

  • “In the still opaque market of art, collectible and luxury items, the challenges faced by family offices that manages these assets are vast and often complex.” pg 139
  • “If art is to be treated as a financial asset, we must be in a position to measure and communicate risks with appropriate financial metrics. This could allow the unlocking of a vast opportunity, moving beyond what is today a highly manual, subjective, opaque, and unregulated activity.” pg 218
  • “In 2020, the global stock of artwork and collectibles was estimated at US$1.7trillion. However, the main constraints of this stock are its extreme illiquidity and opaque profiles, which makes it difficult to fully take advantage of the asset class’ specificities.” pg 249
  • “Although there are signs that certain areas are being addressed, in many cases the threats have amplified, such as the art market’s continued opaqueness.” pg. 287
  • “…international payment flows in the art market are becoming increasingly complex and opaque.” pg 297
  • “This major step toward greater transparency aims to shed light on the art market, which is often perceived as obscure and opaque…” pg 300
  • “Compared with other sectors, the art market is seen as opaque…” pg 308

[12a] Christopherson, Tom . “Art Law and the Art Market: Disclosure or Discretion?” Sotheby’s Institute of Art. Sotheby’s, October 2, 2017. https://www.sothebysinstitute.com/news-and-events/news/art-law-and-the-art-market-disclosure-or-discretion.

  • “While the art market has traditionally been regarded as somewhat opaque…”

[12b] Adam, Georgina . “Is the Art Market Corrupt to the Core? Balderdash.” The Art Newspaper. December 2, 2021. https://www.theartnewspaper.com/2021/12/02/is-the-art-market-corrupt-to-the-core-balderdash.

  • “Its opaque deals and lack of transparency provide plenty of opportunity for fraud, forgery and the like.”

[12c] Porterfield, Carlie . “Pulitzer Prize-winning Photojournalist Says He Was Conned in Dealer’S $1.6m Art Fraud Scheme.” The Art Newspaper. February 13, 2023. https://www.theartnewspaper.com/2023/02/13/pulitzer-prize-winning-photojournalist-says-he-was-conned-in-dealers-16m-art-fraud-scheme.

  • “Cases of art dealers defrauding artists and collectors have repeatedly made headlines in recent years, prompting some to suggest that the opaque nature of the art market makes it an ideal arena for such behavior.”

[13] “Four Takeaways on BSA/AML Reform under the Anti-Money Laundering Act of 2020.” Thomson Reuters. August 9, 2021. https://legal.thomsonreuters.com/en/insights/articles/4-takeaways-on-bsa-aml-reform.

[14] Bambic, Ana . “ART FORGERY – More Than Half of Art Is Fake?” Widewalls. October 19, 2014. https://www.widewalls.ch/magazine/more-then-half-of-art-is-fake.

[15] Sullivan, Terry . “Why the Fine Art Market Soared Last Year.” Worth. March 7, 2023. https://www.worth.com/why-the-fine-art-market-soared-last-year.

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