Fraud, fakes and misattribution of fine art – a guide for avoiding problems.

Regular commentator in these pages, Matthew Erskine (previous examples of his writings are here and here), a lawyer in the US and expert on many of the needs of HNW and ultra-HNW people, examines every art collector’s nightmare – buying a fake. This article is one of several we’ve carried about aspects of the art market as it affect private clients. (See examples here and here.)

There is plenty of actionable information here that we hope readers can take away into the profession. As always, such articles are designed fuel debate and conversations, so please get involved. The usual editorial caveats apply. Email tom.burroughes@wealthbriefing.com and amanda.cheesley@clearviewpublishing.com

In a recent, unsettling article in The New York Times, Robin Pogrebin reported on how landscape artist Emma Webster believed she had successfully sold a painting to pop icon Lady Gaga but came to realize that she had been scammed. An email from a seemingly legitimate Gaga-associated address praised Webster’s work, attaching a selfie of the celebrity herself. After finalizing the $55,000 sale, with the requirement that the buyer hold the painting for at least five years, and shipping “Happy Valley,” Webster discovered two years later that the artwork had been consigned to auction at Christie’s by an unrelated third party, prompting an FBI investigation. The buyer was not Lady Gaga but an impostor looking to flip the artwork, with similar works going for more than $300,000 at auction. This incident highlights a troubling truth in the art market: there are few measures in place to verify buyer identities or enforce artists' resale preferences. 

Similarly for buyers, the expense in time and money to validate the authenticity claims of a seller can be prohibitive and deterring. The ongoing case against a Florida art dealer, Leslie Roberts and his gallery the Miami Fine Art Gallery, is described in an ArtNet article, raising concerns about the seemingly increasing counter-party risk of high-value art pieces. 

This raises a critical question: how can artists, collectors, and advisors prevent such fraudulent activities?

The dangers of private sales
Unlike traditional financial assets, artworks are often sold through private transactions without a third-party registration or transfer process, as is the case with real estate transfers. As demonstrated in the Webster and Roberts cases, elaborate schemes can deceive artists into selling, or collectors into buying, valuable pieces, with fraud only coming to light long after the sale. Additionally, artists and galleries often reserve several artworks for high-profile collectors or museums because these collectors tend to increase the artist’s rating. In exchange for the privilege, sellers stipulate non-flip or minimum holding periods in the terms of sale to protect against speculation and market manipulation. The challenge comes in the form of enforcing these terms in an opaque market, as described by Bloomberg about a Chinese collector buying through his museum and flipping to private collectors. 

This issue is not limited to emerging artists; resale misattribution or provenance loss poses significant reputational and financial risks for collectors, family offices, and estate planners.

How digital titles can help
Digital titles in the form of NFTs can unlock opportunities that would bring the art market to a new level of trust and liquidity. Although NFTs are still associated with the speculative bubble of the Covid-era, they are powerful tools for authentication, compliance, and control in art transactions. Here’s how:

1. Proof of ownership: Minting an NFT with a digital title of ownership and provenance record alongside a physical artwork can help establish and maintain the authenticity and ownership history of a piece.
2. Smart contract enforcement: NFTs can encode terms of sale, such as:
-- No transfer without the seller’s consent; 
-- Holding period requirements; 
-- Right-of-first-refusal; and 
-- Royalty payments on resale.

By using either a “legal wrapper” or by legally requiring the owner of the artwork to hold its associated NFT, artists or their representatives receive alerts if the terms are breached.

As mentioned, NFTs are not a substitute for legal contracts or identity verification. In Webster’s case, an NFT might have revealed the auction resale sooner but wouldn’t have prevented the fraud. Therefore, Smart NFTs should be paired with buyer know your client (KYC) verification, legally binding resale agreements, and escrow or trust-based custody during sales.

The role of secure marketplaces and advisors
To ensure NFTs are enforceable, trackable, and legally meaningful tools, additional layers are necessary. Platforms like Artory, Verisart , and more recently the launch of Arcual by MCH Group and Art Basel, mark a noteworthy step forward in the art ecosystem. These initiatives aim to empower artists by ensuring greater ownership and transparency in their careers, aligning with the accelerating digital transformation in the arts. Escrow services, such as Crozier, provide transactional oversight and risk mitigation. As leaders in the industry embrace innovative approaches, the art market is poised to evolve towards a more traceable future, where blockchain technologies safeguard investments and enable sustainable growth. 

The future of art-tech startups looks promising as they address critical gaps in the current art market infrastructure. These startups will play a pivotal role in driving innovation, enhancing transparency, and protecting the value of artworks. Importantly, partnerships between startups, established platforms, and institutional stakeholders can accelerate the development of comprehensive solutions that meet the evolving needs of artists and collectors in the digital age. However, there is currently no integrated, user-friendly platform where NFT-based digital titles can be mandated, buyers can be verified, legal agreements attached, and resale controlled. This gap presents an opportunity for the next generation of art-tech startups – and a new mandate for professional advisors

Conclusion: The future of art transactions
As the art market evolves, embracing technology like NFT-based digital titles could revolutionize how art is bought and sold. By integrating NFTs with robust legal frameworks and identity verification, artists and collectors can protect their investments and ensure that their creative intentions are respected. The development of comprehensive platforms that combine these elements is not only an opportunity for innovation but a necessity for safeguarding the authenticity and value of art in a digital age.

I would like to acknowledge the help of George Fortin and his staff at Title Collections for their invaluable help in the research and development of this article.