Publish in Perspectives - Wednesday, October 30, 2013
Jean-Michel Basquiat’s Hannibal formed part of the art collection of Edemar Cid Ferreira, former proprietor-manager of Brazil’s Banco Santos.
Edemar Cid Ferreira (far left) at a 2003 art exhibit with then-Brazilian President Lula da Silva and Sao Paulo Governor Geraldo Alckmin. (Photo: Sao Paulo State/Sergio Andrade)
How FraudNet lawyers helped recover $500 million owed to creditors of Brazil’s failed Banco Santos.
FraudNet member Martin S. Kenney is managing partner of Martin Kenney & Co., Solicitors, British Virgin Islands (BVI). He has become one of the world’s leading asset recovery attorneys through his ground-breaking use of pre-emptive remedies,multi-disciplinary forensic and accounting teams and professional litigation funding to trace and freeze the proceeds of fraud hidden in multiple asset classes in multiple jurisdictions.
The FraudNet Report: Why is the fine art market an ideal vehicle for laundering the proceeds of large-scale fraud?
Kenney: Because million-dollar art sales are conducted across borders in secrecy with virtually no oversight. Regulation has been scattershot and difficult to coordinate internationally. For instance, many art transactions involve both the seller and the buyer being listed as “private collectors.” Also, the pricing of artwork is subjective and may be raised or lowered by millions of dollars, and art pieces may easily move between countries. A more opaque and ideal mechanism for investing, hiding and moving the proceeds of fraud hardly seems imaginable.
Does FraudNet have any experience tracing and liquidating victim assets invested in fine art?
Yes, we have experience at the cutting edge of this challenging and sophisticated asset recovery niche due to our services to the high-profile Banco Santos bank insolvency. In 2006, Edemar Cid Ferreira, former proprietor-manager of Brazil’s Banco Santos, and one of the foremost art collectors in his country, was convicted of money laundering and bank fraud. He was sentenced to 21 years in prison. However, any hope the failed bank’s creditors had of recovering their missing USD $1.5 billion from the bankruptcy estate appeared to be wishful thinking.
A few years later, the estate began to focus on the potential of recovering assets Ferreira had reportedly converted into a 12,000-piece art collection and retained lead counsel from several FraudNet members. This potential source of victim recovery simply seemed too good to pass up, considering that Ferreira, himself, had spent approximately $1 million to publish a glossy book cataloguing and publicizing his vaunted “Cid Collection.”
But couldn’t the Brazilian government seize the art and sell it?
Brazilian criminal investigators quickly found that a large portion of the collection was missing. An INTERPOL White Notice was issued to try to block dealings in some of the art.
What actions has FraudNet taken to trace and recover the missing art?
In 2010, FraudNet members brought in by the Banco Santos estate began to orchestrate an international asset tracing investigation directed against Ferreira, his family members and companies formed for them offshore. Our first order of business was getting a U.S. Bankruptcy Court in Miami to recognize the international bankruptcy estate and its officers’ powers to recover assets in the U.S. After that, we were able to ascertain that much of the art had been shipped through the U.S. using false customs declarations, and had been distributed to art storage facilities in the Netherlands, U.K., U.S., France and Sweden. This was possible through the expert teamwork of FraudNet members on the ground in most of those countries. We also obtained Norwich Pharmacal/Bankers Trust disclosure orders in the BVI and The Bahamas, which assisted the estate in obtaining evidence relating to the transfer of the art through the U.S.
What complications and challenges did FraudNet have to overcome?
Because of the false customs declarations in the U.S., the U.S. Department of Justice (DOJ)’s Office of International Affairs (OIA) entered the fray and issued mutual legal assistance treaty (MLAT) requests to the governments of the U.K., France and Switzerland, where much of the remaining art is being held – in addition to a location in the U.S. Also, upon learning of the impending return of valuable art, the Brazilian Criminal Court Judge ordered that the Cid Collection be turned over to a museum for the public good, instead of being liquidated to repay victim creditors.
What innovative legal approaches did the Banco Santos estate and FraudNet employ to overcome these challenges?
The estate, acting on behalf of the fraud victims, successfully argued in front of the Superior Tribunal of Justice in Brasília that the art should be used to compensate the losses of defrauded creditors of the estate. And in the case of the criminal seizure actions in the U.K., France and Switzerland, the U.S. Department of Justice OIA cannot legally hand the art directly over to the bankruptcy estate. However, FraudNet members in Brazil and the U.S. are working on a model in which the OIA would hand over the artwork to their Brazilian counterparts in New York, who would, in turn, hand the art over to the estate. This solution has two advantages: First, the art could then be immediately liquidated in New York—the leading art market in the world. Second, that would avoid years of delay in realizing value from the art for victims. In connection with this, FraudNet members are assisting the DOJ with investigations tied to DOJ’s criminal forfeiture actions. Separate forfeiture proceedings are currently being prepared with regard to a large number of pieces in the U.S. or awaiting repatriation from England or France to the U.S.
Did FraudNet find any shell companies being used to move art around to hide it from the DOJ’s criminal forfeitures?
Yes. An art storage facility in the U.K. is facing a claim from a Panamanian company that says it bought the artwork in storage there from Ferreira. FraudNet members have obtained a Brazilian freeze order on the assets of the Panamanian company, which is believed to be a shell company owned and controlled by Ferreira. This freeze order should help the U.K. storage company refuse to release the artworks to the Panamanian shell company until a bankruptcy extension order over that company can be obtained in Brazil, then recognized in the U.K. One specific piece involved with the Panamanian shell company is Jean-Michel Basquiat’s Hannibal, a 1982 painting estimated to be worth $8 million. The painting was bought for $1 million in 2004 by the Panamanian company, Broadening-Info Enterprises, which later tried to sell it for $5 million. Before passing through JFK Airport in 2007 and later being found in a Manhattan warehouse, it had been passed though the hands of four shipping agents in two countries.
The fact that it takes a freeze order in Brazil and then separate bankruptcy extension orders in two countries to keep fraudsters from moving art from one warehouse really shows what you’re up against.
Yes, as you can see, because of the international nature of asset laundering, the governments and courts of multiple nations may all need to be involved and act in a coordinated fashion to trace, seize and restore (in this case, liquidate or monetize) assets for victims. FraudNet members are uniquely experienced in recovering assets multi-jurisdictionally through the civil courts of many nations, as well as by cooperating with criminal asset forfeiture officials on every continent. Fraudsters create complexity for the purposes of subterfuge. But experienced anti-fraud professionals can unravel that complexity, and we can beat these sophisticated criminals at their own game.
What’s the bottom line for the Banco Santos creditors?