Thomas Jefferson’s fake wine, art fraud, and a lesson in risk management

There is more connecting the dark underworld of high-end art forgery, fine wine, and risk management in financial services than meets the eye. A lesson to draw is that having a variety of more diverse voices around the table will improve the outcome.

How to prove a Van Gogh is a Van Gogh?

Not long ago, but back when we could still physically congregate, I attended an event in New York City on the $6bn art fraud industry. The panel included expert speakers in Art Forensics and specialists from the FBI.

The Dutch master has been the subject of some high profile fakes based off sketches he made but never transformed into paint.

This industry uses the term ‘provenance’ when describing parts of their diligence and investigation process. Questions such as, ‘Where does the art come from?’, ‘Who was the previous owner?’, ‘What evidence of purchase do they have?’ all feed into the sometimes complex task of tracing a piece back to its original artist. If a long-lost artefact is being investigated, the question becomes, ‘What is the story?’ (i.e. did Pollock leave a canvas in the family storage locker of one of his close friends?) This methodology of tracing is surprisingly applicable to due diligence in the financial services space.

“In the end, the truth will out…” But only if those involved want (and can afford) it to

What I found so interesting from my crash course in art fraud was just how often frauds go unannounced even when they’ve been exposed by the experts. Oftentimes, when a piece of art is found to be fake, nobody wants to admit that they were the one who got duped. Not the art collector, not the auction house, not even the seller who is often a victim too. More often than not, the final owner quietly eats the loss to avoid the scandal and embarrassment.

Sadly, ego trumps financial loss and truth.

As reported in the New Yorker

One standout exception is a now infamous bottle of wine purportedly ‘owned’ by Thomas Jefferson, and bought by billionaire Bill Koch for $400,000 in 1985. After the purchase, Koch’s experts discovered the wine to be fake, and he spent over $35 million chasing the fraudsters and bringing them to justice. He was fortunate enough to have the resources to pursue those who had duped both him and the experts. It’s amazing he spent 87x the original loss to establish accountability.

The same dynamics are at play in financial services

Financial services are subject to their fair share of manias, booms, and busts. Here there is the same reluctance for anyone to appear uninformed or ignorant of what has value or importance as in the art world. This constant need to appear up to date and in the flow means attention is often diverted to the flavour of the day with the boring basics being left by the wayside (sound like the makings of the 2007 credit crisis? Or the 2001 internet boom? Or paying AML fines of over $1bn for failings in process?).

Of course, financial services are a heavily regulated industry, so direct parallels with the art world cannot be drawn as a full comparison. However, it still has its share of opaque qualities — especially with technology, analytics, and the internet of things pushing businesses forward at a velocity that one person could never account for. We are all drowning in news and data and are struggling to find enough hours in the day to keep on top of everything. Given this overload, it is no wonder that bad actors and frauds like Wirecard or Theranos could slip through the cracks. Try as you might, you may never know who you are doing business with.

For me, it all comes down to how we think about managing risk

Risk of art fraud, risk of wine fakes, risk of dodgy business dealings, risk of financial misdoing: risks will always exist. We need to think strategically about how we can try and look around corners and mitigate them.

The lesson I took away from the less regulated art world was to understand provenance and embrace diverse thinking in the management of risk functions. In art fraud, the person who discovers the fakes is often outside the establishment. For example, most of the prominent Art Detectives and experts in this field are women when the art world still is dominated by men.

The same is true in financial services industry where Oliver Wyman estimates only about 17–19% female representation in risk and finance roles globally.

Here are some quick-fire thoughts and opportunities I see for improvement

1. Improve diversity on risk teams: Despite great strides in recent years, women are still underrepresented in the world of risk management. Most committees do not reflect modern society. If we do not have diversity of thought, we won’t be able to see all the risks we have to manage.
2. Probabilities vs absolutes: Risk management is not about a single point estimate. It is about ranges of probabilities and outcomes.
3. No single version of the truth: The ‘truth’ in a complex financial services organization is always subject to provenance, context, taxonomy, and other factors.
4. Culture vs modelling: Risk management and risk control is as much about culture and operations as analytics and modelling.
5. The rise and rise and rise of tech: We must be better at keeping up with new technologies because your competitors as well as the fraudsters are.