"CHRISTIE'S are gentlemen trying be dealers, Sotheby's are dealers trying to be gentlemen." Such was my introduction to the differing identities of London's two most prestigious auction houses the day I started work for Christies' in the early 1970s. A banal epigram maybe, but whatever way you cut the art market cake, it underlines the commercial truth that the Savile Row suits, cut glass vowels and Mayfair addresses are just gilding on a deal frame.

This week the art world has been caught with its hand in the till and it is smarting. The culprit was Sotheby's. But no doubt Christie's, and the other auction houses are torn between "there but for the grace of God" and "it couldn't have happened to a nicer guy".

For those who've just tuned in, this is a story about good old fashioned smuggling which - until the advent of serious drugs - has always had a whiff of the buccaneer about it. No one loses, except the Revenue.

Smuggling in the art world still has that racy, man against bureaucracy edge. It is most rife in the sale of antiquities; newly excavated relics rarely come complete with provenance or receipt. And in areas of extreme poverty it is easy to understand the temptations.

I know personally of a post impressionist in ownership in the former Yugoslavia that found its way to an American collector via a London dealer. Seller, dealer and buyer, all were satisfied. It goes on all the time. But usually in the privacy of Impressionist lined studies, not prime time TV.

THE story begins when a former employee of Sotheby's, peeved after having been arrested for theft, decided a bit of tit for tat was in order. Over the years he had amassed an impressive collection of 592 documents, fingering the oldest, and possibly the most prestigious auction house of them all. He took his evidence to investigative arts journalist Peter Watson, for whom this was manna from heaven.

In 1994, in conjunction with Channel 4, a trap was sprung. An Italian old master painting - of the middle rung - was bought in Naples. It was then taken to Sotheby's Milan office for sale - the whole thing filmed through a crafty fish eye lens in the putative owner's brooch - where a nice young man, Mr Kollewijn, suggested she might get more for it in London.

But Italy forbids any such exports. You can take a work of art out of the country only if it is valued at less than $500 - which would hardly get you a fifth-rate old master drawing.

A few weeks later Nogari's Old Woman With a Cup is delivered to an address in London. No paperwork, just £200 cash in hand. Then it is off to Sotheby's again. This time in Bond Street for a tete a tete with the next name up the ladder of corporate conniving, one George Gordon who Kollewijn has already primed. ("`Oh how nice, what a surprise'; he knows but he doesn't... if anything goes wrong he'll say `I saw those pictures in London. I didn't know the owner exported them illegally'," explained the loquacious Kollewijn. One can just hear the glee as Watson heard the ultimate own goal.)

And thence to auction where it sold on July 3rd last year to another member of the "sting" team, at £7,000.

"Sotheby's cannot condone actions against the law or the firm's strict rules," managing director George Bailley said this week. But note the lesser "cannot condone" rather then condemn. The whole art market is rife with sleight of hand.

When I began to work at Christie's I was amazed to discover that not all bids are genuine. The auctioneer works for the seller who sets a reserve. (No one wants to sell something for £100 that is worth £1,000.) This reserve remains secret and God forbid anyone should know how much it is. (When I was at Christie's the reserve was always written in a code so that only people directly involved were allowed to know.)

So the bidding starts. The auctioneer turning his head, from left to right, taking bids "off the wall". With everyone facing front (except the staff) nobody knows these bids are pure invention designed simply to raise the bidding. If a picture fails to reach its reserve it's "bought in". No one in the saleroom is put out at this deceit. It is simply part of the ritual.

In my day bids from clients not able to be there in person were put "on the book". One of my jobs was to enter them in the auctioneer's catalogue. To my knowledge all these bids were genuine. But they needn't have been.

Dealers are no better. There are the notorious "rings" - where competitors agree not to bid against each other at auction then conduct a private auction between themselves later. This is now illegal, but it still goes on, if in a less organised way than in the past. To keep the price of their artist high, dealers have been known to sell the work at auction anonymously and buy it back again, for an inflated price which then becomes part of the record.

Just as the dealer's job is to keep the prices up, the auctioneer's is to get the highest price for the vendor and thus for himself. (Which is why the hapless Kollewijn in Milan suggested the Nogari be sold in London.)

Even more important than individual prices is a solid and regular turnover. It is this threat to the art market's combined livelihood which has given them the jitters, turning a minor storm in a teacup into front page news.

Their behaviour is, of course, not to blame. It is all down to the EU which is soon to enact three new areas of legislation: droit de suite - a levy on contemporary art sales; unidroit - a treaty which returns stolen goods; and our old friend VAT. When you're dealing in tens of thousands VAT even at 5 per cent adds up. The squealing of the UK in 1994 led to a reduced rate of 2.5 per cent and even that, it is alleged, has pushed sellers to Switzerland and America who have no such tax burden.

SOTHEBY's and Christie's would survive - both are now multinationals with in New York and Zurich - but the sideshoots of the art market, smaller auction houses and Cork Street dealers, would be badly hit if London lost its role as art capital of the world.

Dealers in London are finding life increasingly tough. Italy's export controls are extremely tight. And in France, it is nearly as bad. There is nothing more exasperating, after an adrenaline fuelled successful bid, than to hear the cry "preemption, de musee du Louvre" coming from the back of the room. The museum - and its satellites - has the right to buy at the hammer price whenever they want something you as a foreigner have bought.

But for all their cut throat competition, you won't hear Christie's publicity department gloating in the columns of the press - or indeed saying anything very much at all - over Sotheby's discomfiture. Like the gentlemen they all are, when it is down to the wire, there's nothing to separate them.

A few years ago a major investment bank, disappointed at the performance of the contemporary art market - in which it was a major investor through bankrolling galleries when prices were ridiculously high - decided to cut its losses and call in the loans.

Fewer then a third of London galleries were affected but no one would talk. To realise these loans they would have had to sell their stock, at huge losses and fast. Not only that, the market would have been flooded. The result, rock bottom prices which would affect every dealer in London. Not to mention the world. Publicity would be disastrous and would precipitate the equivalent of a run of the bank.

The story never got out. The art market may be going, going, but it's not gone yet.