Art Basel Dives into Anti-Money Laundering Regulations

On 19 April 2021, by Carine Claude

On February 25, Art Basel staged a conference to shed light on how art professionals were coping with new anti-money laundering regulations on both sides of the Atlantic.

Art Basel at Miami Beach, 2019.
© Art Basel

One year later, there is still a struggle to adapt. Since January 2020, Europe's "fifth anti-money laundering directive" has applied to art market professionals in the Union, including the UK. While Europeans are still finding their bearings, the effects of this new regulation designed to combat money laundering and terrorist financing are now impacting the US. To align with the new European legislation, the US Treasury Department issued a notice to US art market participants in October 2020. This notice is still raising a host of questions from American professionals, who, unlike their European counterparts, are not used to governments intruding into their business practices.

On both sides of the Atlantic, professionals now have to adapt to the changes brought about by the implementation of these Anti-Money Laundering (AML) regulations. The contemporary art fair Art Basel seized the opportunity to tackle this complex subject during an online conference on February 25. Led by Noah Horowitz, its America Director, the event entitled "How will the new anti-money laundering regulations impact the art market?" brought together a panel of lawyers, experts and gallery owners, including Roland Foord, Senior Partner at Stephenson Harwood in London; Bona Montagu of the London Skarstedt Gallery; New York gallery owner Andrew Schoelkopf, who is also President of the Art Dealers Association of America (ADAA), and Harry Sandick, an American lawyer at Patterson Belknap Webb & Tyler. Among the core issues discussed were the consequences of EU regulations for the global art market, an overview of European, and especially British, adaptations, and how American professionals would negotiate the change.

Moving Towards a Stronger AML System
As intermediaries, art professionals are required to declare and verify any artwork sale of over €10,000, excluding furniture, numismatics and philately. While American art dealers are not subject to the same obligations as their British counterparts at present, they view the coming directive with a jaundiced eye. "In the US, anti-money laundering measures fall under the Bank Secrecy Act and do not apply to gallery owners, for the moment. However, they do apply to the antiques industry," says Harry Sandick. He explains that Congress has asked the government, the US Attorney General and the FBI to look into the workings of the art market to determine whether or not it should also be subject to this provision—because one of the main sticking points of this directive and its adaptation to the US concerns the procedures for checking buyers' identities. In addition to having to detail the origin of the funds, dealers have to obtain a certain amount of sensitive information regarding their customers, like the end recipient of the purchase. "In the US, the country's very history means that small businesses are often exempt from this type of regulation," says Schoelkopf. "And given the way the American art market has grown up, it's clear that very few galleries have over 500 employees. In addition, we are always selling works to people we've known for over thirty years. Asking them where their money comes from and demanding their social security number and driver's license worries us, because it goes against the usual framework of relationships nurtured by the art business from the outset."

Another thorny issue concerns liability, because AML cannot be delegated. Numerous databases already exist for anti-corruption and terrorism, but even if professionals look at them when carrying out their checks, this does not exonerate them from responsibility. "You are not only responsible for collecting information for the person you are selling to, but you also need to know their end customer if they are selling through a middleman. That then becomes a privacy issue," says Bona Montagu. This is inconceivable when the customer base "does the business". She gives a concrete example: "If I sell through Christie's, and I ask them the name of the final buyer because I need that information to fulfill my obligations, they won't tell me, because of their terms and conditions..." And that's an insoluble situation.

Two-Tier Regulations?
The British gallery owner also points out the risk of two-tier regulations for the primary and secondary markets, especially with a "very low" threshold at €10,000. "The primary market is a dynamic market of emerging artists who are often supported early on by small and medium-sized galleries. If we follow the regulations to the letter, what happens if an artist decides to leave them with his or her buyer base information to join a bigger gallery?"

"Today, American art galleries are not subject to specific anti-money laundering regulations," says Harry Sandick. "I think there is much more transparency and professionalism compared with thirty or fifty years ago. We work ethically with our customers. If I'm selling a work for $5 million or more, we discuss the terms precisely; we know every detail of the sale mechanism, and how the work will be shipped and insured. We aren't groping in the dark. So, in practical terms, it's not going to turn my world upside down, or the way I work, except that we'll have more paperwork and compliance to deal with."

Another issue concerning all participants is the question of fairs, which were canceled in 2020 because of Covid, but are the main source of new customers for gallery owners. And verification formalities are likely to weigh heavily on transactions when normal operations resume. "If you have to wait five or six days for a new customer to provide you with information, or if they are not familiar with the procedure, it can slow down or even jeopardize the transaction, because we can't invoice until we get the data," says Bona Montagu, suggesting that fairs could set up a pre-registration system to make procedures less cumbersome.

To conclude, ADAA's president fears above all that this regulation will put a brake on young market players. "The authorities are making decisions based on a context they don't fully understand. We constantly draw their attention to the fact that 'yes, we have software that tracks compliance of information, as in the UK'. We'll find a balance, but I'm afraid that it's going to get increasingly expensive and difficult to get into this business. We must not discourage those who want to invest in it. We must never forget how important a role they play in a nation's cultural heritage. "

Worth knowing
The entire debate can be viewed on the Art Basel website: www.artbasel.com/stories/aml-conversations

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