New and Impending Art World Money Laundering Regulations


Steve and Katie speak with British art lawyer and General Counsel of Phillips auction house Martin Wilson about European anti-money laundering regulations applicable to art market participants and their recent implementation in the UK.  Generally, these regulations require art dealers, galleries, and auction houses to register with the government and undertake due diligence on every art transaction over a certain threshold amount, including with respect to the identity of all ultimate beneficial owners of the transacting parties.  Steve, Katie, and Martin discuss the practicalities of compliance, the general secrecy of the art market and the reasoning behind such regulations, and Martin’s recently published book, Art Law and the Business of Art.  Steve and Katie also discuss the anti-money laundering regulatory environment in the United States as it applies to the art market and what may be just around the corner.

Resources:

https://www.amazon.com/Art-Business-Elgar-Practical-Guides/dp/1788979893

https://tbamf.org.uk/portfolio/anti-money-laundering-guidelines-2020/

https://www.nytimes.com/2020/01/10/arts/design/uk-art-money-laundering.html

https://www.theartnewspaper.com/comment/anti-money-laundering-risk

http://responsibleartmarket.org/guidelines/guidelines-on-combatting-money-laundering-and-terrorist-financing/

https://www.nytimes.com/2000/09/23/business/art-auction-houses-agree-to-pay-512-million-in-price-fixing-case.html

https://www.nytimes.com/2021/01/01/arts/design/antiquities-market-regulation.html

https://news.artnet.com/art-world/what-will-stricter-us-oversight-of-the-antiquities-trade-look-like-1935081

U.S. Senate Subcommittee Report-The Art Industry and U.S. Policies that Undermine Sanctions


Episode Transcription

Steve Schindler:   Hi, I’m Steve Schindler.

Katie Wilson-Milne:   I’m Katie Wilson-Milne.

Steve Schindler:   Welcome to the Art Law Podcast, the monthly podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne:   The Art Law Podcast is sponsored by the law firm of Schindler Cohen and Hochman LLP, a premier litigation and art law boutique in New York City.

Steve Schindler:   Hi, Katie.

Katie Wilson-Milne:   Hi, Steve.  We’re back and talking about one of our favorite topics today.

Steve Schindler:   I know, we’re talking about money laundering with a fantastic guest that is joining us here today.  We’re pleased to welcome as our guest Martin Wilson.  Martin is a leading art and cultural property lawyer, and for 20 years, he has worked in the in-house legal departments at global auction houses, heading the legal and compliance departments, first at Christie’s, and now as Chief Legal Counsel at Phillips.  As one of the first lawyers to specialize in the legal aspects of the global art business, he has experienced and participated in the development of the discipline of art and cultural property law.  He is highly experienced in all the legal aspects of art transactions and disputes and has a particular interest in the ethical, political, and cultural questions surrounding the creation and ownership of art.  And added to this long list of accomplishments, he’s the author of the 2019 book, Art Law and the Business of Art, which was published to great reviews by practitioners and laypersons in the art world.  So welcome to the podcast, Martin.

Martin Wilson:   Hi, Steve.  Hi, Katie.  Thank you so much for inviting me.  I’m absolutely delighted to be on, and what an introduction as well.  That makes it sound like I’ve done a lot more over the years than I have.  But thank you, and I’m a big fan of the podcast so it’s great to be invited and a real privilege.

Katie Wilson-Milne:   And we should add that one of the exciting things about having Martin on to talk about this topic is that, you bring a European—a UK but also European perspective to this.  And what has been happening in Europe, which is slightly ahead of what we expect or fear/expect, is going to be changing in the United States.  So, that is a welcome perspective, and I think will be a little different from past discussions that we’ve had around this topic.

Steve Schindler:   Yeah, and let’s start first with your book, Martin.  I have to say, as someone who practices full time, as I know you do, I’m always impressed when someone has found time to write a book and a book as comprehensive as yours is, Art Law and the Business of Art.  Tell us a little bit about the book and how you came to write it.

Martin Wilson:   Well, how I came to write it is probably the starting point.  Actually, in terms of finding time for it, I had an extremely long commute to work for many, many years and realized that I had to do something better with my time on a train than just answering emails.  So I decided to write a book.  And really the reason I did it was because, like you I guess, I just feel really lucky to do the job that I do.  And I have a lot of people asking me all the time about how to be an art lawyer.  How do I get a job like that?  And how do I work in the art business?  And what are the issues that you face?  It was really written with people like that in mind, to give them a background on the really interesting aspects of what we do, like cultural property, the sort of complex financial deals that we work on.  And obviously also the disputes, of which there are a few along the way.

I wanted to almost write a handbook for people that was kind of aimed at multiple audiences.  It was aimed at law students.  It was also aimed at lawyers who were practitioners.  I guess it’s also possibly helpful also to US lawyers who want to understand a little bit about the UK art law landscape as well.  Although, as I wrote it, I began to realize just how similar our two landscapes really are, the US and UK.

Katie Wilson-Milne:   Martin, tell me a little bit about how you got into this work.  You know, you started at a time where I think the concept of an art lawyer was less defined, not that it’s that well defined now, but was even less defined.  How did you get into this career track that you’ve now been on, you know, for a couple decades?

Martin Wilson:   Well, when I joined Christie’s legal department I worked with, amongst others, Joe B— who, of course, everyone knows in the US art law community.  And Joe and I and my boss at the time, and one other lawyer were the full extent of the Christie’s legal department.  And at the time, that was really the start of where auction houses were beginning to realize there were some legal aspects to their activities, which really needed to be monitored.

And at the time, there was no such thing as an art lawyer.  I don’t think people referred to art lawyers as a thing.  But shortly after that we had the competition scandal between Christie’s and Sotheby’s.  And that was followed then by the development of far more Holocaust restitution claims, the complexity of such—

Katie Wilson-Milne:   Martin, just to interrupt in case our listeners don’t know, could you just give a couple sentence summary of that antitrust debacle?

Martin Wilson:   Yeah, the competition scandal took place at sort of at the end of the 1990s, when it was discovered that there had been collusion between the two major houses, Christie’s and Sotheby’s, in connection with the charges which they were charging to sellers.  And that was a breach of competition law.  And as a result, there was an investigation, which led to sanctions being imposed on both houses.  It was a very serious matter at the time, and it certainly shaped the auction houses’ attitudes to compliance over the years to come.

Katie Wilson-Milne:   Yeah, I would say it was a wakeup call and a shift in terms of how at least the auction art world viewed attention to legal and compliance matters.  And you know, as you describe in your book, there were then other things that happened in the 90s, that further pushed a focus on those in-house departments and getting legal advice.

Martin Wilson:   Absolutely, and those in-house legal departments grew as the complexity of the issues grew.  And so you now have certainly in the largest of the of the auction houses, really quite significant legal teams dealing with a variety of different aspects.  But at the time, when I started, we did everything from the employment law issues through to the compliance issues through to contractual issues.

So I think really, the legal landscape has become, not just in auction houses but throughout the market, it’s become much more sophisticated over the last 20 years.  And not unlike in other industries, but I think particularly the art industry, because it certainly had a level of informality in the 80s and 90s that marked it out as ripe for concentration on compliance issues later on.

Katie Wilson-Milne:   Yeah, I mean, we’ve seen that the auction houses somewhat embrace that reality.  I don’t know that in the private sale market, we’ve seen a real shift yet.  I think perhaps it’s being teed up.  But I don’t know that we’ve seen a real cultural shift yet out of that kind of informality.  And I think we’re at an interesting point, to see whether over the next 10 years that that really changes as well.  And that leads us into the topic we want to focus on with you today, which is the changing landscape around actual money laundering in the art world.  But also the perceived risk of money laundering in the art world and customer due diligence and the sort of imposition from the outside of non-art participants in regulatory bodies waking up to the peculiarities of what a high value industry—like the art world, how it behaves.

And imposing some new guardrails on that.  I mean, and that’s happening first in Europe, we’re seeing kind of a beginning steps towards that in the United States.  So it’s a really interesting moment to talk about these issues, and to discuss whether it could be a catastrophic shift in the way the art market works.  Who can stay involved because of the regulatory burdens?  Or whether that’s a little overblown, and the art market will just adjust and grow up like other industries have before?  So I guess we should start by asking is there a problem with money laundering in the art market?  And if there is, what is it?

Martin Wilson:   Well, I think as a lawyer, we’re all trained, and I think this is the right approach, to look at the evidence.  And the concern is the possibility of an extensive use of the art market for money laundering purposes.  I tend to think if that was the case, we would be seeing a lot of evidence of it, and repeated sort of scandals and prosecutions, which we haven’t seen.  And so I guess what I would say is that right now, there’s no obvious evidence that the art market is being used in any kind of extensive way for money laundering.  But also, there’s quite good reasons why that should be, I think, because all the auction houses have had in place, really, for the best part of the last decade, voluntary, global anti-money laundering programs where they carry out checks on buyers and sellers that have mirrored the sort of checks that banks have in place.  That would make it difficult right away for money laundering to take place.  And also underlying that is the nature of money laundering itself is that it’s designed to take place in secret outside of the public eye.  So in a way, high value sort of unique artworks purchased in a public way at an auction, for instance, would be kind of the antithesis of that.  So it doesn’t surprise me if money laundering is really much less prevalent than people worry about.

But is the art market exposed to the potential of money laundering?  Well, I think it is vulnerable in the same way as any industry where you’ve got high value transactions and a great sort of culture of discretion.  So I feel it really is incumbent on all of us, particularly in the large auction houses to take that risk really seriously, and to do what we can to mitigate it.  So in a nutshell, I feel this is to be welcomed.  Transparency is ultimately a good thing.  It avoids conflicts of interest that makes it difficult to hide wrongdoing.  But equally, as you know, in our market as well, privacy and discretion are important for good reasons as well, for people’s security, not least, but also for commercial reasons.  And so a balance is required, I think, between discretion and transparency.  And in answer, I think, to your question, is this the beginning of the end, for some players?  Is it going to be difficult?  Of course, I think it will be difficult, as with any regulatory regime to adjust to it.  But actually, I think it’s something which we will all be able to do.  And in fact, many of us have been doing for quite some time now.  So I’m not anticipating that it’s anything more than an adjustment.

Katie Wilson-Milne:   Why Martin, I think you’re identifying an interesting duality, which is that I think it’s hard to say the art market, just because of its culture of privacy and unpapered transactions, at least in the non-art auction side of things now, that it’s not uniquely vulnerable to money laundering.  But the vulnerability does not mean that it actually is a huge problem in the art market.  And I think it’s difficult sometimes when we’re reading about these topics, and we’re reading, government reports and investigations about the potential dangers to distinguish between those two things, the vulnerability and the actuality.  I also think it’s interesting, I agree that at auction houses, it is more difficult, and they are less likely to want to and engage in transactions where there is significant money laundering occurring.  Not that it’s impossible through numerous shell companies to dupe an auction house, but there’s a lot of the market that’s still in private hands.  And I wonder if that activity has just moved to private sales.  And if you have a view of that, that maybe the money laundering risk is just sort of—or activity has really just concentrated itself in the private sale market.  And I don’t know that we would know if it’s happening or not.  How would we be able to evaluate that?

Martin Wilson:   Let me put it this way, I’m not really in a position to judge what happens outside of the auction houses, so I don’t know.  But the vulnerability that I talked about earlier, exists.  And it’s really for that reason, I think that the authorities in Europe and the US increasingly are taking the view that you need to regulate everybody to ensure that that vulnerability doesn’t result in misdeeds.

So I think this is the direction of travel, whether we think the art market is being used for money laundering or not, it is sensible to take measures to ensure that it is not used that way.  And if there is any concern that not everyone is taking those measures, then laws and regulations are usually the things that governments look to.  And so I think that is really what’s happening here.  And I think also to your earlier point, it is slightly in response to a perceived concern about it, even if there isn’t any obvious evidence, and governments sometimes have to take action where there is a perception, even if there isn’t necessarily the evidence that something is going on.

Katie Wilson-Milne:   Great.  So maybe we should take a step back and when we say money laundering, for our listeners, the concern in the art world is that proceeds from illicit illegal activity are being hidden through the purchase of artworks where that illegal profit can be stored for some period of time, in an invisible way, in a way that someone can’t just put these illicit proceeds in a bank that easily.  And so we know that it’s possible, even if we don’t know how prevalent it is.  Maybe now Martin, you could walk us through a little bit how this got on the red flag of regulators in the UK/Europe, and then we’ll talk too about what’s happening in the United States, which is sort of one step behind.  So in the US, we’re eagerly watching how this all plays out.  Mostly in the UK, because that’s the primary analogous market just to see what we have ahead of us.

Martin Wilson:   Yeah, I could even roll it back a little bit further, Katie.  Because I think it was really around about 2010, I think, that auction houses in general began to realize, even in the absence of any regulation, that money laundering risks were there in the art market.  And for reputational, and also for legal reasons they put in place these processes to be able to limit that risk, mostly in terms of identifying who they were ultimately dealing with.

Katie Wilson-Milne:   What happened in 2010, that’s fascinating, right?  That the Auction House voluntary AML, anti-money laundering compliance programs would have proceeded any kind of legal nudge.  Do you have an understanding of why?

Martin Wilson:   Well, I do slightly.  I can speak to it from the UK perspective.  In 2002, we had a piece of legislation called the Proceeds of Crime Act, which essentially was very broad and said to every business regardless of where they were that it was an offense to arrange, to acquire, or possess criminal property, even innocently.  So at that point, people began to think, “I’ve got to be careful here not to get caught unwittingly by this legislation.

And the first people to worry about it were obviously banks, and possibly accountants and lawyers.  And it was a sort of developing process and eventually, those concerns also reached the art market where I imagine lawyers at some point said to auction houses you need to be aware of this as well.  And I think that’s what triggered it.  But I suspect a lot of it was also a realization that auction houses depend on their reputations as well.  And so it was important to auction house leaving aside the legal aspects not to be found to be in any way connected with this sort of wrongdoing.  And so that’s where it started.  And as I said earlier, I think it was a process.  It really started with some basic measures and over the years since then, it has really developed to something much more sophisticated, to the point where really the regulations which are being introduced in the EU, and in the UK, largely mirror what has been in place, certainly with the auction houses for quite some time.

Katie Wilson-Milne:   Martin, is the Proceeds of Crime Act from 2002, was that applicable to auction houses and private individuals?  I mean, that would affect the auction and the private sale market equally, right?

Martin Wilson:   It does.  It affects everybody.  And a lot of people ask, well, “what’s the change that’s now come in with the fifth anti-money laundering directive?”  Which came into effect, certainly in UK, in January 2020.  That was a European directive and for your listeners—when Europe decides that it wishes to impose forms of legislation throughout all of the European countries, it takes the form of a directive, which basically says to each country you have to enact laws in your country that achieve the following goals.  So in response to that, the UK has introduced its own legislation in the UK, which now as of January 2020, covers art market participants.  And for that, what that means, in practice is that all art market participants who deal in the sale or purchase or storage of artworks with an individual value of €10,000 or more will be covered by this new law.

So what does that mean in practice?  Well, in a nutshell, it means that they will be subject to a regulatory framework, which is overseen by a regulator.  And there are a number of quite important steps which need to be taken in order to comply with it, so you need to register with the regulator, but probably most important out of all of those things is you’ve got to do your customer due diligence.  And in non-legal terms that we can all understand what that really means is asking the question, “who am I really dealing with here?”  And so, particularly in the context of the art market, where you have quite often transactions involving agents, and where also you have corporate entities, you need to be asking under this new legislation, “who is the physical person standing behind this agent, or standing behind this company?”  And you need not only to identify them, but you need to verify their identity too.  So all of this, it’s a big change for a lot of art market participants.  It is risk-based, so it doesn’t—if you’re a small dealer, you obviously don’t have to put in place the same extensive measures that a large Auction house does.  But it’s nevertheless a regulation.  And it involves a burden of administration that wasn’t necessarily there before.

Katie Wilson-Milne:   Martin for these new requirements, does it apply just to dealers and auction houses?  Or does it apply to individual collectors that might do a deal directly?

Martin Wilson:   No, it applies to people whose business is the art market.  So really, this is for the purposes of what we’re talking about here, you need to think about it in terms of auction houses, and dealers, that is only like I say, triggered at the €10,000 mark.  But that is a relatively low trigger, given the values in the art market.

Katie Wilson-Milne:   Is it possible to avoid the headache of these regulations as a small dealer by doing what we would advise at least art advisors to do anyway, which is not handle the money?  I mean, can they just introduce the buyer and the seller and then have them deal directly and have a contract to get paid a fee at some later time and avoid this?

Martin Wilson:   Well, I think it goes back to the wider point, which I think you’re alluding to, which is there is a tension between the fact that in the art market, confidentiality is important to agents, because their business depends upon the relationships that they have with their principals.  And therefore, what you may be asking somebody to do, whether it’s an auction house, or a dealer, or anyone really, is to disclose to a counterparty, who may be a competitor, the identity of your client.  And that’s a difficult ask.  Certainly, historically, that is not the way that this worked in the market.  And so there has had to be an adjustment.  Certainly in the UK, what we have seen, and I imagine it may be very similar in in the US is that, actually people have made that adjustment and they have become more comfortable with disclosing that information, knowing that it is purely for compliance purposes.

So whereas at the beginning, there was a concern that it rendered the whole agent model unworkable, we’ve not seen that.  And agents have been able to deal with that situation.  But there has been nevertheless, a big debate about who does the KYC [Know Your Client] on whom, where you get a large chain of people involved in a transaction.  And there is a concern to ensure that everyone is not KYC-ing each other.  And that actually, there is some level of focus.  And where we’ve ended up in the UK certainly is to say, there’s usually one person at the hub of the transaction.  So let’s say an obvious case is in the case of an auction house, it’s usually the Auction House which is at the hub.  And so it is their duty to reach outwards to both wings of the transaction to pull in the know your client data, which the law requires it to do.  But it’s not for one person at one end of the transaction to ask for KYC data in relation to somebody right at the other end of the transaction, if you have somebody at the hub there who’s doing that job.

Katie Wilson-Milne:   So Martin, am I correct that before the directive and in the UK, its effectiveness through national legislation that went into effect in January 2020, there was nothing requiring anyone in the art world, including auction houses with respect to know your client KYC procedures or anti-money laundering preventative measures, is that right?

Martin Wilson:   I wouldn’t go that far.  I think there was no regulatory framework, which was as specific as what we’ve now got in place.  But I think auction houses for all the reasons that we were just discussing, were taking measures to protect themselves and their clients and their business, because there were reputational issues and also ancillary legal issues as well.  So I think it would be wrong to say there was absolutely no incentive for people to do anything.  I think people were aware of the risk, and they weren’t taking measures.

Katie Wilson-Milne:   And that’s true in the US, too, right?  It’s still a crime to be engaged in money laundering, it’s just that there’s no non-criminal regulatory requirements that people follow.  And so they think if they’re not engaged in a crime, then they don’t have to worry about it and do anything.  But I wonder if we should take a step back and explain to our listeners who may not be working in the art industry, the fine art industry directly. why there is this sort of secrecy bias in terms of the identity of purchasers and sellers?  Because I can imagine someone listening might think, “why is this a big deal at all?”  Like, “of course, you should know who’s on one end of the transaction.  Isn’t that always how it works?”  So in your experience, Martin, why is this secrecy a component of the art world?  And why is it developed and stuck very strongly to how things are done?

Martin Wilson:   I think this is a really good question, Katie.  Because I think in the world outside of the art market, there is a perception that confidentiality is somehow suggestive of something untoward.  But it might help if I explained my experience of it, which is that art sales are very often triggered by things which are not life events that you would necessarily want to broadcast.  They can be triggered by debt, they can be triggered by family issues, they can be triggered by death, just to name some of them.  So it’s kind of understandable that people don’t want necessarily to be telling the world that they are selling their assets in any of those circumstances.  And, as I said earlier, there is a genuine concern that people who buy valuable things which they put on their walls or display in their houses are exposed to security risks if they do that very publicly.  And I don’t think that’s an unreasonable kind of concern either.

And I often think it’s probably best compared to the kind of confidentiality that people expect from a bank, there’s nothing untoward about expecting your bank to keep your salary details confidential from the outside world.  These are quite reasonable expectations.  Not only that, and I think this is a really important thing for people to bear in mind, is that the fact that they—this information is not made public does not mean that it is not available in the event of an investigation, or in the event of some other good reason for the authorities to be looking into it.  So there’s a difference really, I think that needs to be borne in mind when one thinks about confidentiality between complete non-disclosure and disclosure in circumstances which are legally permitted.

Katie Wilson-Milne:   Yeah.  I think that’s a really important point, because I do expect my bank to keep my information secret, but they expect me to tell them my information.  So there’s a level of complete disclosure in that scenario, but then the expectation that who you’re disclosing it to, will keep that information private.  And so it’s sort of a safety mechanism.  And that hasn’t really existed, I guess that trust, borne out by legal requirements, hasn’t existed in the art world that participants know that if they disclose everything to a dealer, that dealer will keep it secret and not disclose it and use it to their advantage.  So yeah, that’s a tension.

Martin Wilson:   But it’s interesting, because it was a tension which was really under discussion between the authorities, the regulator in the UK, and the art market representatives in the run up to the legislation coming into force.  And I think I was quite heavily involved in the discussions with the regulator during that time.  And the regulator had to understand that sort of tension, and we had to find a balance.  And so what I would say, certainly to US art market participants who are concerned about impending legislation in the US, is really engage with the regulator as much as you can, because usually regulators have no interest in negatively affecting the businesses that they regulate.  What they do need to do, though is understand where those tensions are.

And so we had a very successful discussion, I think, with the regulator in the UK, explaining to them that you needed to be sensitive to the need for discretion, and that discretion and transparency are not necessarily mutually exclusive.  And so what I imagine is going to happen in the US, and what I hope is going to happen in the us is that there will be a dialogue between art market participants and the legislators and regulators to ensure that that same balance is achieved.

Katie Wilson-Milne:   I’m interested that you say that that balance was achieved in the UK because there are some I’ve read some commentary that the art market participants, dealers, concerns were actually not taken into account.  So do you think—I’m just curious in what ways were the regulators sensitive to the concerns of the art market and how that changed or shaped the regulation to be more palatable and doable?

Martin Wilson:   I think any new legislation, particularly a new regulatory framework, is not going to make everyone happy.  And ultimately, it is an additional burden on those who are being regulated.  And so I don’t think you’re ever going to get the regulated sector saying that they’re 100% happy with the way that things have been introduced.  But what I can say is that we spent almost a year with representatives of the dealer community, the auctioneer community, and the British Art Market Federation, having extensive discussions with the Treasury.  And in fact, the British Art Market Federation itself produced practical guidelines to how to navigate this legislation, which was blessed by the government.  And the importance of that is that what it ensures is that while that is not a government document, the fact that it’s been blessed by the government means that if you have complied with those practical guidelines, as a non-market participant, it brings you some considerable protection in the event that there is a prosecution or something to be able to say I complied with those guidelines is very useful.

So direct answer to your question, I really do think that the concerns of the art market were taken account of, but, of course, the objective of the legislator here is to ask our market participants to reveal information which they did not previously necessarily reveal.  And therefore that, of course, is difficult, and in some cases going to be unwelcome.  But it is the objective of the legislation.

Katie Wilson-Milne:   So I guess turning to the more practical, I think, the auction houses and major galleries have capacity, if they want to, to do this.  And they can hire the right advisors to put these systems in place.  But there are so many, I mean, just it’s incredible how many solo dealers there are then you realize, when you start to work in this field. art advisors/dealers who work on their own or with one other person, and they don’t really have a corporate structure that they work from, and there’s always risk involved in that.  And it’s usually they’ve decided, I guess, it’s fairly low risk with the tax and maybe contract issues that may come up.  But now they’re subject to all of these requirements in the UK.  And I’m just wondering, Martin, like, is it remotely realistic to expect all of these smaller dealers to put these systems in place?  And what does that even look like if you are in an office with one other person or just an assistant or even just yourself?

Martin Wilson:   I think you’re right to raise that point.  And it is a real issue for smaller operators that are not in the same position as auction houses.  However, and again, I think this is quite an important lesson or point of maybe for the legislature in the US, if they’re looking to introduce legislation of this kind in the US is in the UK, it’s very risk-based.  And so what they’ve said throughout, and the guidance is very explicit on this, is you look at the risks that the business is facing, and you tailor what you’re doing to those risks.

And so that sounds very wide.  But in terms of what that looks like, on the ground, if you’ve got a sole trader, it’s efficient that they should have committed somewhere their policy on what they will do to verify people’s identity.  That they should keep a record of the passports or the information that they get in, that they keep themselves up to speed on their obligations, and that they register with the regulator.  And so that is not anywhere near as complex as the requirements on an auction house.

And so the idea is that it should be scalable.  But of course, as we said earlier, it’s an additional piece of administration.  And I think one of the main problems with any form of regulation is that it places an administrative burden, usually quite a significant one on the people being regulated.  The aim of discussions with the legislature and the regulator should be to try to reduce that burden without reducing the effectiveness of the legislation.

Katie Wilson-Milne:   I wonder, actually, in somewhat of an ironic fashion, these broad industry-wide regulations will enable smaller dealers to ask the kind of questions that they wouldn’t have had the leverage to ask before.  Because, I mean, at least what we see in New York is you have small dealers desperate to make sales, and they don’t have the leverage to say to a very wealthy seller or buyer, “I’m sorry, I’m not going to make this sale for you unless you disclose who you’re working for.”  If it’s a company who the—not only who the directors are, but who’s the ultimate beneficial owner?  And can I see that person’s passport?  It’s just there’s absolutely no way that I can see that these smaller shops can do that, because they’ll just lose the business.  But if everyone is now required to do that, that won’t be such a scary ask or something to avoid so much.  And that normalization may be very helpful in terms of, you know, people’s willingness and comfort with asking those questions.  And I know, that’s one of the aims of the regulation.

Martin Wilson:   Katie, I think you’re absolutely right.  Well, there’s two things to that.  The first is, as you say, it is much easier to say, “I’m obliged, under the law to obtain this information,” than to request it without the support of the law.  I’m sure you’re right about that.  But the second point, which is an interesting one, in terms of how people behave is there was an understandable concern in the UK, and not just following this legislation but previously, when the direction of travel was that we were beginning to ask people for identity documents, that clients would take that request very badly, particularly given the tradition of confidentiality.  And certainly my experience is that actually, because clients were being asked for this kind of information in other spheres, particularly in banking, and in large financial transactions, there was very little pushback.

And actually, the clients did not have any difficulty providing that information or objection to it.  And so once you’ve crossed that threshold, it isn’t quite as daunting as perhaps it seems at the outset of the conversation, that’s certainly my experience in any event.

Katie Wilson-Milne:   And how is noncompliance enforced?  So let’s say a dealer doesn’t do any of this KYC stuff and does a deal and there’s no real problem with it, they don’t find out that there was some criminal underpinning to the entire operation, but they just don’t follow these procedures.  What happens?  I mean, is noncompliance going to really be enforced in a way that incentivizes every actor to comply?

Martin Wilson:   Well, it will.  HMRC, the regulator will be conducting audits on a regular basis.  And so you can’t hope to stay under the radar for any period, at some point, it’s going to come to light that you haven’t complied.  And if you are registered, which you have to be under this new system, the regulator can take away your license.  So that’s obviously quite a major concern, and there are fines.  But I think in a way, the concern isn’t so much around, what happens if you don’t comply with the letter of the new AML regulations in the UK, it’s much more around if something happens, and you do get caught up in a money laundering scandal, then you’re into the sort of criminal sanctions around the Proceeds of Crime Act.  And those are very serious, those go as far as imprisonment.

So I think generally, and I think this is throughout the art market, everybody is doing their very best to avoid being caught up in these kinds of situations.  And so I don’t think that there is any resistance other than resistance, possibly, to the administrative aspects and also the necessary adjustments around client relationships, to the principle that the art market needs to protect itself against being used, whether it is being used or not, by money launderers.

Katie Wilson-Milne:   And I guess finally on this, you’ve had a year of this regime in place, how is it working?  I mean, I remember there being huge fears about the art market in Europe, completely shifting to France or not that—it would be interesting to know what France is doing to comply with this directive, too, or Germany. That there would be a—just people wouldn’t deal in art in the UK if they had to do all this.  Has there been any shift in business or market changes and how is this compliance working so far?

Martin Wilson:   I don’t get that sense at all.  I think it sort of comes back to what I said before, as a sort of client service-focused industry, we’re all concerned about anything which is inconvenient to or difficult for our clients.  And so provisions like this make us naturally nervous that we may see clients go elsewhere, territorially, or elsewhere in a business.  But actually, we’ve just not seen that, and the reason largely for that, as far as auction houses are concerned, is that our anti-money laundering policies are and have always been global.  So the policies that we have in place and use in the US are the same ones as we use in the UK.  So clients certainly don’t have any incentive to go elsewhere.

But more importantly, I don’t think they have an inclination to go elsewhere, because this is something which we are all obliged to do in various spheres of our life is, particularly with the growth of the online world, to identify ourselves and verify who we are.  And so the art industry is not that different in that sense.  And we will adjust to it, and our clients probably have already adjusted to it.

Katie Wilson-Milne:   Yeah.  And I think what we won’t see yet, because am I correct that the registration requirements just went into place, either early this year or late last year? So there wasn’t a complete rollout all at once.  And now—

Martin Wilson:   Yeah, it’s a gradual rollout.  And because of COVID, it’s been slightly extended as well.  So really, I think the moment when everything is going to be in place at the moment is June this year.  The mechanism is not quite in place, there is still some tweaking being done around the guidelines and there’s still an ongoing discussion with the regulator about how best to implement them and where there are difficult points, we’ve got an open channel of communication.  And by we, I don’t mean the auction houses, I mean, the art market with the regulator.  And so that is all positive.  And even if there are some growing pains around this initial period, I think we will all get there over the next 12 months.

Katie Wilson-Milne:   It will be interesting in a couple years to see how this has shaken out.  And I think it’s possible if not likely that it’s rolled out quite easily.  And people have adjusted better than they thought, particularly interested for me and seeing what happens to the smaller dealers and how they either learn to outsource these responsibilities or learn to take them up with ease.

Martin Wilson:   Well, what we have seen, and this may be of interest as well, is the growth of a number of businesses, which advise small dealers in particular—and larger dealers—on the requirements around this and on a day to day basis.  And that takes a lot of the pain out of the setting yourself up to comply stage of the process.  And I imagine if you have similar legislation in the US, you’ll see similar businesses being set up to help with compliance.

And then the other thing I was going to say—there needs to be a reporting structure of suspicious transactions, because otherwise, you have a situation where people know something, and they have nowhere to go with that information, which is uncomfortable and dangerous legally.  And you also need, I think, to think about having at the moment, as I understand it, what’s being envisaged in the US is this idea that if you have an LLC, you need to tell the authorities who the ultimate beneficial owner is of that LLC, but you don’t need to tell the art market participant that you’re dealing with.  And which is all fine at some level but I can’t see how the art market participant can protect themselves against dealing with a sanctioned individual, if that’s the way it works, because actually they need to know to be able to protect themselves against that risk.

Katie Wilson-Milne:   Well, Martin, thank you so much for your time.  I think it’s important and extremely interesting for US art market folks to hear about the experience of European, especially the UK, practitioners watching all of this rollout.  And maybe we’ll talk again as these regulations develop further.

Martin Wilson:   Absolutely.  Thank you, Katie and Steve.  It’s been a real pleasure and a really interesting conversation.  Thank you.

Steve Schindler:   So, Katie, let’s talk about money laundering in the United States.  We got some good insight from Martin, about how they’re handling this issue in the UK and in the EU in general.  The US is a little slow on the uptake here, but in fact, we’re getting here.

Katie Wilson-Milne:   Which may be good.  No judgement.  Many art market people think that’s great.

Steve Schindler:   Yeah, I mean, there’s been a call for a long time for more transparency.  We’ll see if people really like it once they get it.  So I think the first place to start is to say that at the moment, the anti-money laundering procedures built into the Bank Secrecy Act, do not yet apply to auction houses and art dealers.

Recently, they have been applied to dealers of high end antiquities, and we’ll come back to that in a minute.  Of course, it is still a crime in the United States to engage in money laundering.  And we had an episode where we discussed that—something sometimes is viewed as trade-based money laundering, where you knowingly take the proceeds of a crime, and then you purchase other assets in order to hide the fact that—the source of the money.  And to do that with knowledge, either as a participant or even knowing that the transaction that you’re engaging in is part of a money laundering scheme, is a federal crime punishable up to 20 years in prison.

Katie Wilson-Milne:   So the distinction you’re making is like, we’re not allowed to launder money, but the procedural sort of administrative requirements of the Bank Secrecy Act that financial institutions have to follow in terms of internal procedures and compliance and reporting, the art world doesn’t have to do all of those steps.  But it’s not like they can launder money without consequence.

Steve Schindler:   Right, you can’t launder money knowingly without fear of going to prison.  So—and I think we have both seen the last 10 years, we do see participants in the art market, art galleries particularly, being a little bit more sensitive to the issue of money laundering.  And seeing when red flags go up, about money being wired to places that don’t necessarily have any connection to the purchaser, a little bit more sensitivity around at least understanding who the purchaser is, although there is, as we know, in the art market, there is still a lot of secrecy.

But I do think that galleries have become more sensitive to this problem.  And of course, as Martin told us, the auction houses both here and abroad, because they really are international organizations themselves have adopted internal money laundering processes.  So really, what we’re talking about here now is both the actual legal application of these processes to auction houses, even though they’re already more or less following them, and then applying them to the art market.

Katie Wilson-Milne:   I think we’ve also seen in the non-auction world, where there are sale contracts, more and more provisions requiring representations about legal use of funds.  No one being on the OFAC list.  I think it’s more common now to see those reps, which is a good idea than it was even a couple years ago.

Steve Schindler:   Right.  And of course, just as it’s illegal for any art market participant to engage in intentional money laundering, it is also illegal to be involved in a transaction that is a sanction transaction to a party from a country on the OFAC list is still a crime.  And so it is right for galleries and, of course, auction houses to be aware of that.

Katie Wilson-Milne:   Steve, why are the auction houses voluntarily complying?  You know, it’s kind of an interesting thing that they’ve developed.  We’re not saying that their procedures are in compliance with the Bank Secrecy Act.  But there’s certainly standardization,  compliance departments, due diligence, interest in ultimate beneficial owners, reps about use of funds, but why are they doing that?

Steve Schindler:   Yeah, well, I think there are a couple of aspects to it.  One is, as I indicated before, these are international organizations doing business both in the United States and elsewhere.  So to some extent, having a set of policies that work in different jurisdictions, makes a lot of sense.  And then I also think that there is a reputational piece to this, that the major auction houses at least want to be seen as good citizens, as entities that are doing their part to make sure that their organizations are not used as a conduit for money laundering or any other kind of illegal activity.

I think we’ve seen that they are very sensitive, even to the possibility or the perception of some sort of illegality.  I think we’ve seen situations where auction houses walk away from transactions where there’s just a concern that they have that there could be some kind of a legal issue.  I think they just have a heightened engagement with being seen as highly ethical institutions.

Katie Wilson-Milne:   Yeah, there’s kind of a PR component to it as well as a legal component.

Steve Schindler:   Yeah, and of course, when Sotheby’s was a public company, it’s now a private company.  As a public company, I think it was under even more pressure to have a vigorous compliance department.  And in fact, we know that it certainly did and still does.  But they had a compliance department that was really built by a former US Attorney, Assistant US Attorney in the Southern District, Jane Levine.  And I think it was considered to be a premier, state of the art, worldwide compliance department.

Katie Wilson-Milne:   And I think as you said, Steve, it’s worth just saying again, these systems the auction houses built are also mechanisms to make sure they don’t run afoul of federal criminal law.  So there is a legal reason they’re doing this, which is that they really can’t be helping launder money, or they’ll be criminally—potentially criminally liable.  And this is a way for them to protect themselves criminally.  Even if the Bank Secrecy Act-type practices and procedures aren’t required.  And so in a way, maybe it’s a sign that those practices and procedures that have been laid out, you know, as federal regulation in other contexts, maybe are pretty good if the auction houses are mimicking them.

Steve Schindler:   Yeah, I think that’s right.  Although I think it’s worth just acknowledging at the outset that the auction houses are large organizations, they’re well-funded organizations, and they have the economic resources and the people to really put these kinds of processes in place.  It’s not easy, and it’s not inexpensive.  And it requires a great deal of supervision.

And so it’s one thing for Sotheby’s to put into place, these kinds of anti-money laundering practices, it’s another thing for a medium-sized gallery in New York City to do it, that’s going to be the difficulty in applying these same kinds of rules to galleries.  Just as a reminder of some of the processes that the auction houses have in place are they have anti-money laundering and know your client policies, training for the people who are involved in implementing the policies, customer due diligence, who are we really dealing with?  Who are the beneficial owners of objects that are being sold?  And what do we know about entities that are bidding in high value auctions?  Record keeping is required, sanctions vetting, and then ultimately, suspicious activity reporting.  These are all the things that the Bank Secrecy Act will require, if applicable, but they’re resource intensive.

Katie Wilson-Milne:   Yeah, so a lot of those things are what the auction houses are already doing.  They’re not doing suspicious activity reporting in the United States, but they are doing something like the others.  And on the training point, what’s really important is like, the compliance and the legal departments, they’re great, they’re important, but they’re not the star of the show in any of these auction houses.  And so getting buy-in from all of the commercial actors at these houses, into what they see is a huge pain in the butt like, difficult with client relations, slowing deals down.  I think that is a continued challenge to make sure that compliance and legal actually know all the promises that are being made.  And it’s not perfect.  It’s not perfect in Europe, and it’s not perfect here and that’s going to be a challenge, I think.

Steve Schindler:   Right, I think there’s still a view in some quarters that the compliance officers are the killjoys of the auction process.  And as soon as they get involved, the people on the business end are not always excited about that.  And so there is that tension there.  I think there’ll always be that tension until it becomes commonplace.  And I think it’s the same tension that is going to be an obstacle in enrolling these kinds of practices out to auction houses.

Katie Wilson-Milne:   Yeah, I think—and we agree, we’re much more interested in art dealers and galleries and how they are going to be affected.  We’ll see in Europe first, but then potentially, in the United States, as these regulations expand, which we expect them to.  And as we discussed with Martin, I mean, if the threshold is 10,000 pounds, euros, dollars, something around there, that is pennies, in the art market.  Every at-home, work-from-home solo dealer is going to have to take a look at these new regulations.  And that’s really different than a big auction house who already has a legal department, if not even a compliance department.  And it could have a massive effect.  I mean, we’ll talk about now is what the state of affairs is currently in the United States, which as you said, the Bank Secrecy Act regulates financial institutions, does not regulate the art market, but the art market still acts in the shadow of the criminal law.  But we’re kind of seeing the creep into the art world now of regulating practices and procedures.  So what’s going on now, Steve?

Steve Schindler:   So one of the interesting things that happened last year was the release of a report from the Permanent Subcommittee on Investigations of the United States Senate, then chaired by Rob Portman.  This was done in the last year of the Trump, or at least released in the last year of the Trump presidency, and while the Republicans were still controlling the Senate.  And this was a very detailed staff report, and we’ll post a link to the report on our website, because it’s fascinating reading.  But it basically takes a look at how the art industry and US policy work to undermine US sanctions.  And in particular, what this report focused its gaze on was the ability of certain Russian oligarchs to avoid the sanctions that were placed on doing business with Russia, in the last years of the Obama Administration.  Remember that sanctions were placed on Russia for their invasion of the Ukraine and subsequent activities there.  And what this report was able to do with heavy cooperation, particularly from the auction houses, was to take a look at the use of offshore entities, anonymous entities that were able to be set up and to allow Russian individuals who are on the sanctions list to engage in numerous art transactions, using anonymous entities that were set up by lawyers.  And one lawyer in particular, operating in the UK.

Katie Wilson-Milne:   Entities that had no technical, legal link to the United States, right?  That were BVI [British Virgin Islands], Bahamian and then we run out of Europe.

Steve Schindler:   Typical shell companies.  And some of what we saw, of course, was a continuation of the release of the so-called Panama Papers, which also focused on these Russian individuals and how they’re able to operate using offshore shell companies.  And they are able to do that, frankly, because participants in the art market, including the auction houses, who more or less acknowledge some of the weaknesses that they had in this report, that they were able to use these kinds of entities, because the auction houses and galleries simply weren’t asking very tough questions.

And so as a consequence of this report, at the end of 2020, we saw an Anti-Money Laundering Act of 2020, which was attached to the National Defense Authorization Act, which was passed at the end of 2020, which basically extended the requirements of the Bank Secrecy Act to antiquities, dealers, advisors, and consultants.  Now, it’s a little unclear to me why they chose to extend the BSA, Bank Secrecy Act, to antiquities dealers, and not to art dealers at the same time.  But I think that there is a kind of a sense out there that the art industry is not far behind.  But one of the interesting things I think to watch for is because antiquities dealers are going to be subject to regulations of the Bank Secrecy Act, our Financial Crimes Enforcement Network, sometimes referred to as FinCEN, is now charged as a result of the 2020 Anti-Money Laundering Act to come up with regulations.  And through those regulations, we will see how they apply these Bank Secrecy Act requirements to antiquities dealers, I should also say—

Katie Wilson-Milne:   We don’t have that yet, right?  That’s not—

Steve Schindler:   We don’t have it yet.  They’re working on it.  And I think that’s going to be an interesting thing to see.  I should also mention that the act itself calls for a study to assess whether the Bank Secrecy Act should be expanded to cover the art market.  Which is why I think everyone believes that it’s just a matter of time before that actually happens as well.

Katie Wilson-Milne:   Yeah, these two things happening together are, I think, pretty indicative of what’s coming.  I mean, the Senate report was—I mean, it’s 150 pages, I think, or something like that.

Steve Schindler:   Yeah.  About that.

Katie Wilson-Milne:   It reads to me, Steve, like totally reasonable skepticism—I’m not saying it’s not—but it reads to me as just like if a bunch of people who had never heard of the art world and had no idea what its norms were, were suddenly thrown into the middle of it and their reaction is,  “this is crazy.  How can this be?”  And then they just write a report about how insane this market is.

It’s been like this forever.  What’s different is more wealthy people are putting assets into art as a way to store those assets.  And that’s usually legal so is the use of shell companies, whether we like it or not.  Most of the Panama Papers stuff, totally legal.  Query whether it should be, but it is.  What’s worrying is that it opens up the possibility that illegal actors will use shell companies and use the norms of the art market, to launder money and hold that laundered money in works of fine art that are less detectable than other assets.  Now, we know that’s happened sometimes, the example in the Senate report with the Rotenberg family, which is the Russian oligarch Steve was referring to, that happened, and they were able to exploit a number of loopholes.

What I don’t know is if any kind of procedures that will reasonably be developed, that art market participants can reasonably follow will prevent parties who are determined to launder money from doing so.  And my skepticism about that is based on the fact that we do observe corporate formalities in the United States, as they’re observed in Europe.

And so if a wealthy family moves money prior to being sanctioned, as the Rotenberg’s did, to offshore entities that are technically owned by other parties who have directors, who do not have anything to do with the family, and then those entities go and buy art.  What are we asking dealers to do?  Like we’re asking them to investigate who owns the entity, but if who owns the entity isn’t the illegal actor and they’re somehow involved way in the background, are we asking them to do some kind of explosion of corporate formalities?  And it’s hard to imagine how they could always get that, right.

Steve Schindler:   So I think that the key here is going to be can we pass regulations that are sensible, that manage to accomplish some of the objectives of making sure that the art market is not complicit in illegal activity, whether it’s money laundering or engaging in transactions with sanctioned entities, while minimizing the administrative burden of compliance?

Because having some of these types of compliance procedures apply to banks is one thing, auction houses may be another thing.  But the average or not even the average, just about every art dealership that I’m aware of, is going to have tremendous difficulty, staff wise, resource wise, to implement the kind of regulations that are now in place for banks, for example.

You know, I’m not completely sold on this, but I understand why we’re moving in this direction.  But I think there’s a lot to be seen, as to whether or not this is both feasible, and also to your point, Katie, that whether or not we’re going to be engaged in a lot of activity that is going to be burdensome for 98% of the art market that is not engaging in illegal activities, and yet the illegal actors who have the resources, and the ability may still be able to circumvent some of these rules.

Katie Wilson-Milne:   Yeah, and as Martin said in the UK, it’s critical that the art market engage now with FinCEN.  I think, even around how antiquities regulations are going to look.  Because to be honest, there’s some differences, but not that many in terms of how money laundering concerns are going to be dealt with.  And that engagement as the regulations are being shaped, I hope will mitigate some of the burden.

But what we’re talking about, if regulations like this are applied to the art market is written policies, so lawyers are going to get a lot of work, initially, having someone on staff who’s going to administer those policies—because as we tell clients all the time, having a policy is really no good if you don’t follow it and no one on your staff understands.  And these are often very young, art school art history graduates working at galleries, and they have absolutely no experience with these kinds of issues.  So getting that training in place, so that they buy in.  And then the discomfort of asking clients saying, “I will lose a big deal if I can’t get this information from you,” and it’s going to be a cultural shift.

Steve Schindler:   Yeah, well we’ll see.  We’ll have something to look forward to in 2021.

Katie Wilson-Milne:   Look forward to, not look forward to, but definitely curious about it.  And as we said with Martin, it’s a unique position to be in to watch this a year in advance or a couple years in advance unfold in Europe, specifically the UK, which is really the sister market to New York.  And we’ll have an idea, before things get going here.

Steve Schindler:   It’s a bellwether, we’ll see what happens.

And that’s it for today’s podcast.  Please subscribe to us wherever you get your podcasts, and send us feedback at podcast@schlaw.com, and if you like what you hear give us a five-star rating.  We are also featuring the original music of Chris Thompson.  And finally, we want to thank our fabulous producer Jackie Santos for making us sound so good.

Katie Wilson-Milne:   Until next time, I’m Katie Wilson-Milne.

Steve Schindler:   And I’m Steve Schindler, bringing you the Art Law Podcast.  The podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne:   The information provided in this podcast is not intended to be a source of legal advice.  You should not consider the information provided to be an invitation for an attorney-client relationship.  You should not rely on the information as legal advice for any purpose and should always seek the legal advice of competent counsel in the relevant jurisdiction.


Music by Chris Thompson.  Produced by Jackie Santos.