Several colleagues and fellow appraisers have sent me two articles recently posted on artnet news about possible congressional legislation which may impact the transparency of the art market and how it operates. Much of the rationale is due to money laundering issues, and sellers of fine and decorative art requirements of knowing your client. A lot is still unknown about the US House of Representatives Financial Service Committee and their plans. But the bottom line may be if there are not industry wide improvements and sales checks, restrictions and administrative burdens may be instituted.
Source: artnet newsOn Wednesday, my colleague Eileen Kinsella reported that prominent art law firm Pearlstein, McCullough & Lederman sent a memo warning its US clients that Congress may be on the verge of subjecting all American art sellers to some of the same regulations as licensed financial institutions.
The rumored activity by the House of Representatives Financial Services Committee would force everyone selling art and antiquities—galleries, dealers, auction houses, and more—to implement what are broadly referred to as KYC (“Know Your Client”) measures, as a means of cracking down on money laundering. The memo states that the rumored bill would “likely” reach the House floor during the week of May 14.
If ratified, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) would then “draft regulations to lay out how dealers in art and antiquities are supposed to establish their anti-money laundering programs.” Possible requirements include ongoing “due diligence and monitoring” measures, some of which would require staff to cross-reference buyers with government watch lists and report “suspicious activity” to federal officials.
Although I’ve been vocal about the need for better professionalization in the art market, this outside-in regulation strikes me as a possible nightmare scenario. Two weeks ago, I wrote the following after a discussion of industry best practices at the Art Business Conference in New York:
But if other spheres of the art market don’t raise the bar themselves, it increases the odds that external regulations will be imposed by clueless politicians whose efforts could actually make matters worse, as longtime art lawyer Jo Backer Laird expressed (in more diplomatic terms).
As a thought exercise, just look at the dangerous blind spots in the US’s recently passed Stop Enabling Sex Trafficking Act, or run back through the lowlights of Congress’s bumbling questions to Mark Zuckerberg about how Facebook works. Then ask yourself how much havoc could result if more scandals motivated someone like Ted Cruz… to legislate the art industry after reading two Jonathan Jones reviews and half-watching “Exit from the Gift Shop.”
To be perfectly honest, I’m not that worried about whether the richest sellers have to implement some annoying bureaucratic compliance measures. For one thing, they have the resources. (Major auction houses, for instance, already abide by anti-money laundering measures.) More importantly, they’re also the sellers that could realistically be used in money laundering schemes.
Neither of the above is true for most galleries and dealers. They are already stretched too thin from a staff and expenses standpoint, as we were reminded again at Frieze New York this week. Having to bolt on a heavy, federally approved monitoring arm could tip some of these struggling small businesses over into the abyss.
This would be especially unforgivable because their sales reach neither a volume nor a price threshold useful to fraudsters. The Pearlstein memo mentions that the House committee heard testimony from New York’s district attorney about cases of money laundering in the art trade, highlighted by an alleged $50 million scam centered on a $9 million Picasso. Granted, I wasn’t in the room. But I’m willing to bet that none of those cases involved increasingly desperate mid-level or emerging galleries hoping to turn over a few hundred thousand bucks in sales for the year, i.e. the rank and file of American art sellers.
To me, this is why it would be insane to subject the entire industry to the same federal regulatory regime. It would be like a corporation suddenly notifying all of its employees that they have to pass a physical to keep their jobs, but the exam would be the same one the Navy uses in SEAL team training.
Next thing you know, Joyce in human resources is getting pink slipped for failing to swim a 17-mile lap around an island, and the retirement party being planned for Dave in accounting has to transform into a memorial service because the poor geezer’s heart exploded while he was trying to haul a 150-pound raft atop his head across a scorching beach.
In fairness, there’s a lot we don’t know about the rumored legislation. Kinsella’s requests for comment elicited a denial from the FinCEN resource center and no response at all from a House Financial Services Committee official. But if the Pearlstein memo is accurate, I fear the results could be more harmful than helpful to most businesses in the trade.
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Source: artnet newsThe art world has been put on notice.
After years of whispers—and a lot of grumblings—about the need to achieve greater transparency in the ultra-secret, multi-billion dollar art market, US lawmakers appear to be moving fast on new legislation to do just that. With more and more trophy artworks tipping the seven- eight- and even nine-figure mark, the stakes have never been higher.
Days after the European Union voted to adopt tighter restrictions on the art trade, US clients of a leading art law firm were warned on Monday that legislators have their sights trained firmly on art dealers and the market.
“The House Financial Services Committee is drafting legislation that would add ‘dealers of art and antiquities’ to the list of regulated financial institutions,” according to a memo that art experts Pearlstein, McCullough & Lederman sent to its clients on April 30. The increased oversight would fall under the umbrella of the Bank Secrecy Act, which already monitors a variety of players ranging from financial institutions, brokers, and insurers to jewelry and precious metal dealers.
“This is the first type of regulation in the US that will affect the entire art market,” attorney Michael McCullough told artnet News. “So it will have a major effect on dealers large and small. We have had regulations in different areas—antiquities have been regulated and authorities have put restrictions on cultural property. This is the first that covers the whole market so I do think its significant.”
A representative for the House Financial Services Committee did not respond to artnet News’s request for comment.
“The new law would zero in on the beating heart of the art market: the financial relationship between dealers and their clients,” said attorney and art law expert Thomas C. Danziger, of Danziger, Danziger & Muro in an email to artnet News. “The underlying assumption,” he says, “is that much of the strength of the market comes from its anonymity, and the fact that expensive works of art can easily be bought, sold, stored, and shipped around the world without anyone knowing who the owner is.”
The committee will likely introduce the legislation during the week of May 14, according to the memo. Once the legislation is passed, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) will draft regulations to lay out how dealers in art and antiquities are supposed to establish their anti-money laundering programs, the memo states.
In an email responding to artnet News’s request for more information, the FinCEN “resource center” wrote that, as of now, it has not proposed any new rules for dealers:
FinCEN has not propose[d] a rulemaking to include dealers in art and antiquities under the definition of a ‘financial institution’ that would be subject to Bank Secrecy Act regulation. While there has been plenty of discussions about the potential benefits that could result [from] subjecting a number of different industries to BSA regulation. . . upon searching our website, you will find that there is little, if any mention of that industry in particular in any FinCEN publication.
That doesn’t align with the Pearlstein client memo, however. At a minimum, the memo suggests that anti-money laundering laws will require dealers to establish Bank Secrecy Act compliance programs and customer due diligence and monitoring programs. It will likely also require that they screen for potential problems or clients against a list generated by the Office of Foreign Assets Control (OFAC), as well as other government lists. In addition to anti-money laundering programs, dealers will also need to establish suspicious activity monitoring programs and reporting processes, the memo asserts.
The latest push to regulate the art market follows testimony at a closed-door session of the House Financial Services committee three weeks ago. According to the Pearlstein memo, prosecutors from the Department of Justice and the New York District Attorney’s Office gave testimony about recent cases. One such case was reportedly the indictment in New York of UK art dealer Matthew Green along with several finance experts in a $50 million money laundering scheme, which included a $9 million Picasso titled Personnages (1965).
This isn’t the first time FinCEN has tightened regulations for dealers. In 2005, the body announced regulations for dealers in precious metals, stones, or jewels, requiring them to establish anti-money laundering programs. Those regulations, however, excluded auctioneers, who could be included in the upcoming legislation.
McCullough, who spent a decade at Sotheby’s as associate counsel, says major auction houses such as Sotheby’s and Christie’s already have anti-money laundering protocols in place. The extent to which the houses would be affected by new, tighter oversight is unclear.
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