Steve and Katie speak to anti-money laundering and sanctions expert Paula Trommel of Corinth Consulting about Russian sanctions and their impact on the art market in the short and long term.
Resources
https://www.corinthconsulting.com/who-we-are/
https://www.reuters.com/markets/europe/uk-introduce-new-economic-trade-sanctions-belarus-2022-07-04/
https://www.nytimes.com/2022/03/11/business/russia-luxury-exports.html
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, a 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. Hi, Steve.
Steve Schindler: Hi, Katie. What are we doing today?
Katie Wilson-Milne: So we have a brand new full-length episode, and we are dealing with Russian sanctions in the art world.
Steve Schindler: Fantastic.
Katie Wilson-Milne: So we’ve kind of touched on some of these issues before when we talk about money laundering, especially some of the investigations that were going on in the US with respect to money laundering in the art world, but we are focusing on sanctions today and we have a fabulous guest who’s going to tell us what sanctions are and how they’re working and all we need to know.
So we’re joined today by Paula Trommel, Deputy Director of Corinth Consulting. She brings with her a unique blend of art market, legal, and regulatory experience. She has extensive international experience in designing and implementing compliance sanctions and anti-money laundering programs as part of her work at the UK regulator (also called the FCA), the Fine Art Group, and Christie’s auction house.
Paula holds an MA in Arts Management from SDA Bocconi in Milan, as well as a Bachelors in Laws from Hanse Law School and King’s College in London. So welcome, Paula.
Paula Trommel: Thank you very much.
Katie Wilson-Milne: We’re happy to have you. So maybe before we dive into the substantive conversation about what sanctions apply to Russia, how they work, why we’re talking about this in the context of the art world, can you tell us a little bit both about Corinth Consulting and also how you got into this field of work?
Paula Trommel: Yeah, of course. So at Corinth, my colleague, Rena Neville, and I basically advise the art market on anti-money laundering, financial crime in the arts, and now also sanctions since the invasion of Russia in the Ukraine. And I, for one, always knew I wanted to work in the art industry. My parents are art traders, so this is how I grew up. And I studied law with the idea of going into the arts. So, I very early on specialized in art law and started my career at Christie’s. And it was around that time of the, you already mentioned it, of the implementation of the 5th Anti-Money Laundering Directive in Europe that I thought it might be helpful to learn a little bit about the, let’s call it the darker side of the art industry: potential financial crime or money laundering. And that’s when I joined the UK regulator, to learn a little bit more about investigating financial crime, including the art market. And after a couple of years at the FCA, I met Rena Neville, who was the first compliance officer at Sotheby’s, and we set up Corinth Consulting. And now for the past two years advising the art market mainly about anti-money laundering in the arts.
Steve Schindler: Who are your clients mostly?
Paula Trommel: Yeah. There can be one person, just an art advisor, and they have maybe four big deals a year to major global auction houses. So it can really be anyone. Mainly based in the UK and Europe at the moment, simply because of the scope of the anti-money laundering regime, but recently because of the sanctions we are also looking more at the US or Swiss market, because it’s becoming more and more relevant to conduct those checks on your clients to really understand who you’re dealing with.
Katie Wilson-Milne: So it sounds like the sanctions advising is related, at least in theme, to the anti-money laundering work that you’re doing. Let’s start, Paula, by explaining what are we talking about when we’re talking about sanctions?
Paula Trommel: That’s actually a very good question because my mother asked me the same question the other day.
Katie Wilson-Milne: Perfect.
Paula Trommel: For me it makes perfect sense and I’m like, how have you never heard about this? But I guess it’s not so common for everyone to know about the sanctions regime. So just to give a little bit of background, well, following the invasion of Russia in the Ukraine, the EU, the UK, the US as well as Switzerland have reacted with strict sanctions to really prevent the sale of goods to Russia and Belarus.
And that means individuals or entities are being added to a list which means you cannot do any deals with them anymore. This obviously also applies to the art market, not only the financial market, et cetera. So if you are, let’s say, an art dealer and one of your clients has been added to a sanctions list, you can’t transact with that person anymore. So the sale is really off. Yeah.
Steve Schindler: Can I just ask you one thing when you say you can’t transact with someone, so we can just break it down in the context of an art transaction. Let’s say one of those individuals has consigned a work to a gallery for sale and they have a contract and their, sort of, gallery is holding the work. What happens then? Does that work have to be returned? What do you do?
Paula Trommel: That is a very good question, and I have a lot of unanswered responses to be honest. I’ve seen this a lot, that the contract is done, the deal is done, and the gallery or the auction house are still holding the art, and they can’t do anything. They can’t give it to the client, because you’re not allowed to release the property, at least in the UK. So what happens is technically that Russian individual is the owner of the artwork, but it cannot be released to that person. So that’s on the consignment side— on the buying side, but there is major differences across the different sanctions regimes.
Katie Wilson-Milne: So as you were explaining this, sort of how sanctions came up in the case of the war in Ukraine, obviously these sanction regimes predate that. It’s just that they’re now applicable or they’re enhanced sanctions with respect to Russia. So maybe you could even step back a half step further and explain what’s the preexisting sanctions regimes that the Russian case fell into or was applied to when the war began and the countries you mentioned reacted? And also when we talk about sanctions, we’re talking about official government prohibitions— or would they have the force of law in terms of what private citizens can and can’t do, right? So maybe just give us some more background.
Paula Trommel: Well, maybe an interesting background story that shows that sanctions are not new to the art market is the case of the Rotenberg brothers—
Katie Wilson-Milne: Right.
Paula Trommel: —in the US. They were added or targeted by the US sanctions since 2014, because they are known to be close friends to Vladimir Putin, and therefore they were added to the US sanctions regime a couple of years back.
Katie Wilson-Milne: Which we call the OFAC list, right?
Paula Trommel: Yeah, exactly. It’s the OFAC list. So it’s no news that the sanctions exist, and it really means that whenever you, in this case, transact with a Russian individual, you need to be very careful to do all your KYC and background checks, just to make sure that this individual is not mentioned on any of the sanctions lists.
Katie Wilson-Milne: If they are on the list, you couldn’t do business with them in any way, sell, buy, loan money.
Paula Trommel: Exactly.
Katie Wilson-Milne: Okay.
Paula Trommel: And with the current situation, the sanctions being on individuals on a sanctions list, that’s a really extreme example, but that’s only one part of the current sanctions regime. The other part is the luxury goods ban, which also was introduced in the US, UK, Switzerland, and EU. And that really means—that doesn’t mean that a person is added to a sanction list, it’s more broadly meant to prevent the sale of luxury goods to Russia or Belarus. So the sanctions regime is even going a step further now. It’s not only—
Katie Wilson-Milne: And when did that start, Paula? When did the luxury ban come into play?
Paula Trommel: In the US it was introduced on March 11th this year, and it was followed later on in March by the EU and Switzerland, and in April by the UK. So it’s very recent. And it only shows that the whole regime is now much broader than it used to be. Because before it really just looked at individuals on a sanctions list, while now you need to determine every single transaction with a Russian client to see whether the client is actually based in Russia or if the property is being shipped to Russia.
Katie Wilson-Milne: That’s a sweeping change.
Paula Trommel: Yeah.
Steve Schindler: And does that luxury ban, as you’ve described it, also tie into art transactions as well or is that separately defined? What’s a luxury transaction.
Katie Wilson-Milne: Yeah. What is the luxury ban?
Paula Trommel: Yeah, that’s quite interesting, because luxury goods are defined differently in all the different countries. So yes, art broadly falls in all the jurisdictions under the luxury ban.
Steve Schindler: Okay. So if I’m an art gallery, then in addition to just checking individuals as we once had to do to see whether they’re on the sanctions list, as I understand it then, I cannot transact business or I can’t send art or buy art from anybody in Russia. Is that right?
Paula Trommel: So currently the regime is really looking more at the sales side. So you cannot sell or ship to Russia.
Steve Schindler: Okay.
Katie Wilson-Milne: But you could buy a work of art from a Russian dealer? That’s—
Steve Schindler: If he’s not on the sanctions list.
Katie Wilson-Milne: If he’s not on the sanctions list, yeah.
Paula Trommel: Potentially you could, although it looks like consignments might be added to the sanctions regime at some point.
Katie Wilson-Milne: It does seem logical.
Steve Schindler: Yeah. It does seem like it should, because it makes little sense to have a one way set of sanctions that doesn’t apply in the other direction.
Katie Wilson-Milne: Right, especially when you’re sending money to buy something.
Steve Schindler: Yeah, exactly.
Paula Trommel: Yes, you couldn’t send money to, or you shouldn’t send money to a Russian bank of course, but it’s very likely that the Russian gallery also has a bank account outside of Russia. So it still— does it make the situation any better? I’m not sure.
Katie Wilson-Milne: I see. So there’s separate sanctions rules that would prohibit that just because you’re not allowed to send money to a Russian bank. So there’s many different areas in which sanctions can be applied to prohibit our transactions with anyone or any business in Russia. So you mentioned earlier, Paula, that there are many jurisdictions that have implemented these types of sanctions, including the luxury ban. Do they differ, and how do they differ in terms of what the precise sanctions rules are?
Paula Trommel: They do differ, unfortunately. So that’s not making the situation any easier. I would say Switzerland and the EU are fairly similar. Mainly Switzerland is implementing slightly delayed whatever the EU has implemented before. The main differences are really comparing the UK to the EU, US, and Switzerland, because the UK has gone a step further compared to the other jurisdictions. I mean, the UK is the third largest global art market and they have added really an interesting twist to the general trade ban on luxury goods. So the UK legislation expanded the ban making luxury goods available for any sanctioned individuals to prohibiting the trade with any person connected to Russia.
Katie Wilson-Milne: What does that mean?
Steve Schindler: My reaction exactly.
Katie Wilson-Milne: As litigators Steve and I are just like, wow.
Paula Trommel: So it’s really—it’s extremely difficult, the situation, because what does it mean to be connected to Russia? I don’t know. There is no legal definition of being connected to a country. Does it mean you were born in Russia? Does it mean you live in Russia?
Katie Wilson-Milne: Your mom was born there, your grandmother, you visit twice a year? You—
Paula Trommel: So it really is an extremely difficult situation, and I always try to look at it. Obviously we have a legal background, for us it might be a bit more easy to look at it, but just look at an art dealer or small gallery, how would they know? How could they determine if someone is connected to Russia?
Katie Wilson-Milne: Right. And what questions would they have to ask? Because it wouldn’t be— let’s say you’re dealing with someone who lives in London, they don’t have a Russian name, how would you know what questions to ask?
Paula Trommel: It’s really tricky. And as I said, there is no clear guidance from the government, which is not very helpful. But I would generally say if you assume the person might be born in Russia, which usually you can see receiving the passport, which you would do under the anti-money laundering regime anyway. So you could see where was the person born or where do they have their residential address currently? So you do get an indication receiving your standard KYC information.
And once you establish the person might be connected to Russia, you would need to ask further questions. You would need to ask, but where do you currently live? Do you hold any other passports than the Russian passport? And most importantly, I believe, is the question where do you pay taxes? Because it’s very common that people who can afford certain art not only have one residence. They’re not only living in Russia. They have residences in the UK—
Katie Wilson-Milne: Of course.
Paula Trommel: —in the US, et cetera. So to really determine where the person is a resident is probably the tax residency.
Katie Wilson-Milne: But that’s much narrower than “connected to Russia.” That seems like the diligence you’d do if you were under the other regimes. And maybe you can also just explain for us and our listeners what is the standard regime in the US and the EU?
Paula Trommel: It just prevents the sale, supply, export— directly or indirectly— of luxury goods to Russia and Belarus or individuals. So what that means is what you’re prohibited to do is to deal with a person that currently is based in Russia, or to send the goods to Russia. The UK regime goes further. You might be currently in the US, you want to ship the property to the US, but you pay taxes in Russia. So the deal might still fall through because you are technically connected to Russia being officially a tax resident in Russia.
Katie Wilson-Milne: Or it could be something else too, right? Like you spend a significant part of the year or your whole family is there.
Paula Trommel: Yes. So you should really determine how much time is the person actually spending in Russia? What are the passports? Where are the taxes? So you do need to ask a lot of very— I would say very private questions as well.
Steve Schindler: Sure.
Paula Trommel: It’s a very fine line of obliging with the law or potentially discriminating against someone simply because they have Russian roots, et cetera. So it’s quite difficult.
Katie Wilson-Milne: What a bizarre thing for an art dealer to have to do. Can you imagine you’re just like— you’re at Art Basel and—
Steve Schindler: Where do you pay taxes, sir?
Katie Wilson-Milne: —well, and you’re talking to an art advisor and you’re like, who is your client and where do they pay taxes and how much of the year do they live in Russia—
Steve Schindler: Yeah.
Katie Wilson-Milne: —or do they? Just knowing the art world and how informal it is— I mean, I think maybe that’s changing in Europe and the UK in a way it’s not in the US just because of the money laundering rules, but it’s just so bizarre to imagine your regular art dealer, even at a very big gallery, knowing to ask these types of questions and actually asking them of their clients in a way that’s not off-putting.
Steve Schindler: Right. There have been some inroads, and I think now it’s maybe considered a little more normal to, say, ask for a passport or do the kind of normal KYC that we’ve become accustomed to, even though it historically would seem intrusive in this market. But the kinds of questions that you are suggesting, and as Katie said, it would be difficult to know how to ask them or even very awkward to ask them.
Katie Wilson-Milne: Do you get the sense that art dealers know that they need to do this? We always try to remember to ask this. We’re talking about whatever the legal issue is, but it doesn’t matter if no one in the industry knows about it or is doing it or can figure it out, and also if there’s no consequences to not doing it, which we can talk about.
Paula Trommel: I think that’s a very, very important question. And I keep asking myself the same question because I do believe the big galleries, the big auction houses, of course, they are aware. The first thing they did was canceling the Russian sales. But do small advisors really know what to do? I find that very hard to believe. I find it very difficult for them. In the EU they already struggled implementing the anti-money laundering requirements. So now going a step further with the sanctions requirements, it’s quite difficult. But at the same time— just from my own experience, I’m heading to Art Basel tomorrow— and simply because a lot of galleries that do not fall under the EU anti-money laundering regime have currently been reaching out for advice which shows me they must do that probably because of the new sanctions regime.
Katie Wilson-Milne: That’s interesting. I also find it hard to believe, and I could be wrong, that in New York City your medium to small size gallery that’s willing to send anybody an invoice if—I don’t mean to mean they’re being sloppy, but just the habit of if someone wants to buy a beautiful work of art, they sell it to them. You just send an invoice and an email, the money gets wired or charged on a credit card, and because there is not already an AML regime that galleries are following, I think the way they are now in the UK— which sort of sets up a system where questions can be asked— there’s no place in art transaction in the US necessarily— in a dealer or private sale dealer situation, we’ll exempt the auction houses for a moment— to engage in that questioning. And of course even though there’s no formal AML regime applicable to the art market right now in the United States, the sanctions rules do apply. It doesn’t matter how much money is involved or who you are.
Paula Trommel: The rule of thumb is anything over $300, but that basically is everything.
Steve Schindler: That’s pretty much everything.
Katie Wilson-Milne: That’s everything. I didn’t even know there was that limit but that, even for the smallest gallery in New York that would apply, so.
Paula Trommel: Yes. It’s a very tough situation, especially for jurisdictions that previously did not have to comply with anything similar to this. So maybe I can tell you more after my experience at Art Basel to see what the foreign galleries ask. But I guess if you’re big enough to attend a the big art fairs such as Art Basel, you’re probably aware, but for anyone smaller than that, I find it very hard to believe that they know what to do. And even if they’ve heard of it, there’s no proper guidance explaining you what are the steps you have to fulfill? Because it’s really a case to case question. You need to look at every single transaction and all the underlying information to determine whether you can go ahead.
Katie Wilson-Milne: The other thing is like who at the gallery is in charge of that? I know in Europe now there’s got to be a designated person no matter what—even if it’s a dealership of one dealer, there has to be a designated person who’s the compliance officer for the AML regime, but that’s not true here. And as Steve and I have often found when we’re advising a gallery, even a very big gallery, there’s often not someone carved out to deal with legal and administrative issues in a clean way. That is changing. Sometimes there is. Sometimes the registrar is empowered to be that person, but sometimes the registrar really doesn’t know what’s going on and can’t make decisions and isn’t interacting with clients. So I think one of the challenge is just that there’s not a person, even at the biggest galleries, who is responsible for keeping track of these rules, educating the rest of the staff and making sure it occurs.
Steve Schindler: Right. I think that’s true. And it’d be interesting, because we actually have a few clients at Art Basel now and we haven’t had any questions about it. So my strong suspicion is that the kinds of questions that you’re suggesting should be asked are likely not being asked, at least by non-European galleries at art fairs, but we’ll see.
Katie Wilson-Milne: And it may be that if there is— literally the collector comes to the booth and is speaking in Russian and has a Russian name, that there might be some awareness. Oh, I need—can I do this? I should check into it. But I think something subtler than that, which is almost always the case, given the number of intermediaries involved in any big transaction, especially for a Russian oligarch or anyone who’s collecting at Art Basel, could make it difficult for that very obvious red flag. You know, it’s not the ultimate beneficiary buying the work, right? It’s some other person or entity. So that entity, even if the gallery is checking the USO fact list, which is not common, I don’t think, I don’t know that they would even think to check other sanctions lists and if the buyer itself isn’t on any of those lists, because we don’t have this AML diligence requirement in the US, I don’t know that you would ever even find out who the ultimate buyer is. And of course that buyer would make it so.
Paula Trommel: Yeah, I think that really is the main issue from a US point of view. It really is, because it’s not that common to—ideally you should know who is the UBO. If you’re dealing with an entity, who is the UBO of their company? If you’re dealing with an art dealer, who’s the underlying client? You should know who the UBO is.
Katie Wilson-Milne: UBO, meaning ultimate beneficial owner. Right?
Paula Trommel: Yes, yes. That’s for an entity or the underlying client if you deal through an art advisor.
Steve Schindler: Great. And the auction houses here do that typically, but I suspect that most galleries are not doing that here. As Katie said, we don’t have an AML regime that gets them in the habit of doing this kind of work, so— and to state the obvious maybe, if a Russian oligarch was trying to buy an expensive work of art, they’re not going to show up themselves with a heavy Russian accent and say, “here’s my Russian passport.”
Katie Wilson-Milne: They’re not the buyer.
Steve Schindler: That’s not ever going to happen that way. So a little bit more diligence and sophistication on behalf of the seller is clearly required.
Katie Wilson-Milne: Paula, can I ask you? I mean, this is a slightly off topic but Steve’s question made me want to ask this again of you. We’ve asked, I think, prior guests, but so if a US gallery goes to Art Basel or any art fair in Europe, let’s say continental Europe or the UK, because the 5th anti-money laundering directive, which instructs that these formal AML regimes be implemented across Europe are in place, does a US gallery, if they’re making sales at a European art fair, do they have to comply with the AML regime?
Paula Trommel: Yes, they do.
Katie Wilson-Milne: I just can’t imagine. I mean, given that we haven’t received a gazillion questions about this from our clients I can’t imagine that that’s happening, but—
Paula Trommel: Obviously I keep bringing up Art Basel, which is a bit difficult because—
Katie Wilson-Milne: Frieze London, or whatever.
Paula Trommel: Exactly. Frieze. You would really—you need to oblige the same way a UK-based gallery has to comply. And that’s— I mean, last year I still understood it’s still fairly new, especially after the pandemic, it’s the first art fest happening.
Katie Wilson-Milne: Right.
Paula Trommel: This year, I think the regulator will be a bit stricter.
Katie Wilson-Milne: I’m really interested to see.
Paula Trommel: And I do think they will do some spot checks to see whether— especially foreign galleries actually comply with the local laws. But it is difficult, because the US basically the galleries have to set up the entire system from scratch because you don’t have to do it in your local jurisdiction.
Katie Wilson-Milne: I think we’ve been curious to see, as the UK regulator starts to punish, starts to write reports, starts to publicize who’s not complying, any penalties that are issued, how galleries in the UK react. Because, right, until something’s enforced it doesn’t really exist. We see that all the time.
Paula Trommel: Very true. But I can tell you that it’s definitely being enforced in the UK. We have this, how do we call it, the shame list of UK galleries that should have registered with the authorities but haven’t yet. So they are even on a public list and being— where there are some fines, et cetera. But I’ve heard from quite a few clients across the market that they’re being contacted by the regulators just to check.
Even if they have registered, you know this, they still need to have the entire AML program in place, which is a risk assessment, the policies, the training, and then as the very last step these checks we’ve been referring to right now. So it’s a bit of work and also education about what do you really need to ask for, et cetera. It’s not really just a box taking exercise. You really do need to comply with each of the steps.
Katie Wilson-Milne: So I guess that question on sanctions now, how are these sanctions— this luxury ban, which is the real change since Russia’s invasion of Ukraine, the real anti-Russian steps that have been taken across these different jurisdictions on a federal level, how are they being enforced?
Paula Trommel: Well, I haven’t seen any cases yet. But simply because it’s only been three months essentially. And what I can tell you is this is not over anytime soon. Basically every few weeks we see individuals or entities being added to the list. I think in the UK it’s roughly 1,600 individuals, Russian individuals, being sanctioned now, and it’s ever increasing. So I think it would take a little bit longer to see the real impact and how the market is complying with it, but as of right now, I haven’t seen a public case of what happens if you—
Katie Wilson-Milne: How would the UK—we can take any—we’re interested in the US, but we can ask about the UK first— how would the UK regulator even know, right? These are private sales that are happening either between two dealers or at a gallery with an intermediary. They’re not registering the sales on any kind of national database. Probably the buyer themselves is not the UBO. I’m sure that they’re doing the normal AML stuff, but in terms of this luxury ban, which is anyone connected with Russia, obviously that’s much broader and the normal AML steps wouldn’t cover that, how would a regulator even know if you’re complying or not?
Paula Trommel: So usually exactly how they do it with the AML checks. They would usually ask for specific client files just to spot check to see if everything is by the books. But again, this is just the UK side. What’s more difficult is the US side where it’s not so common that a regulator would just walk into an art institution to do any checks. But I mean, the Rotenberg’s, again, there was a big case that they got investigated and then further down the line, they realized they have been selling wired sanctions. They have been buying and selling for multi-million works of art. So it did come to light, although it was a little bit later compared to when it actually happened.
Katie Wilson-Milne: Yeah. It’s hard to know how that kind of ban, understand—the sanctions OFAC list, that’s been around for a long time. To the extent it’s enforced or not enforced, that’s a stable reality. And you know, it’s more enforced obviously in certain industries than others. But the luxury ban, this idea that you can’t do business with anyone in Russia, it’s just hard to imagine how that would come to the attention of a regulator, especially in the United States, and I’m curious if it did what would happen?
Paula Trommel: I guess we have to wait a little bit longer to see what will they be doing.
Steve Schindler: It’s also hard to—what Katie says makes total sense, that unless you were doing business with a name person who becomes known, but that seems very remote. I also think for any kind of real sanctions to have the ability to be enforced it can’t be as vague as anybody connected to, right?
Because it’s too vague to expect people to comply with. It’s also too vague to really have an enforcement mechanism that makes any sense because you could look down a list of individuals who a gallery has done business with and then somehow a regulator miraculously would have to—
Katie Wilson-Milne: Finds a connection.
Steve Schindler: —find a connection. And it just seems—that part seems so difficult to enforce. And of course as this list gets longer and longer— as you said, maybe it’s up to 1,600 individuals— it becomes clearly more difficult for a gallery to do AML even on the individuals, right? Because each of those individuals is potentially doing business as somebody else, right? And so the UBO is— the due diligence to try to track a UBO for 1600 individuals is pretty daunting, I would say.
Katie Wilson-Milne: Yeah. And I think even in the US where you don’t have this connected to language, where it’s just you can’t ship something to Russia, you can’t sell something to someone who resides in Russia. As Paula was saying, these people reside in a lot of places, right? And whoever their art advisor is, who is certainly not going to be located in Russia right now, maybe is buying in their own name or there’s a company that’s based in the Bahamas or BBI or wherever, Jersey. I mean, even in the stricter, narrower regimes, which is the US and Europe, I find it hard to know how that diligence would really succeed.
Steve Schindler: I think the only thing that maybe makes some sense, and I know we’ve talked to clients about it, we don’t have an AML regime, but I think even galleries here in the US are more sensitized to the need to just spot red flags, right? So some new client comes in with some kind of potential purchase that’s very large or very strange or with money coming from unexpected places. Those are the kinds of red flags I do think now galleries here are sensitive to. And so if something unusual comes up. And remembering again that a lot of clients for galleries are repeat customers, even at art fairs. So like when someone comes into your booth, probably 90% of the time you have some idea of who they are. So I guess maybe one way to look at it is if there’s a new client, a new transaction, something that jumps out as being out of the ordinary, those are the kinds of situations where you should be doing a little bit more due diligence.
Katie Wilson-Milne: Right.
Paula Trommel: I agree. It is a little bit easier now with all the tech solutions that are out there. You can do a quick name check and it should show you if a person is on a sanctions list anywhere in the world. So it does help, but it’s still— especially at art fairs where deals are being conducted on the spot— it’s quite difficult to do the checks to see whether there’s a connection to Russia or not. So it’s definitely not easy.
Katie Wilson-Milne: You can imagine a situation maybe where someone’s aware that a transaction would perhaps fall within the UK sanctions regimes— either the broad luxury ban or someone who’s on a sanctions list— and so decides to sell the work out of their New York branch or their Paris branch instead. I would say of course not, you should not do that, but I think it’s not a strange idea that you would shift certain business operations to a different hub where there’s tons of activity because it’s slightly more commercially feasible or there’s less regulation or less diligence, I don’t know.
Steve Schindler: Right. I think that that happens all the time, and probably in a sense, it’s hard to imagine that a legitimate gallery would be shifting business to avoid say selling to someone specific who’s on a sanctions list in one place or another. That’s unlikely to be the case. But it’s certainly possible to consider the possibility that if one regime is just highly regulated and requires a lot of additional personnel or diligence and another jurisdiction has just a less burdensome regulatory regime, the possibility of slanting your business to the place that’s easier to deal with.
Katie Wilson-Milne: Right. And that might just mean, knowingly or unintentionally or just as a byproduct, that you’ll likely have more transactions that would be questionable. Yeah, I guess a good clear example since we’re talking about the art fairs is a big global gallery has a booth at Frieze in London and they say, our New York gallery is handling these sales, we’ll take your name. You’ll have priority and the New York gallery will contact you in two weeks and the transaction will occur in New York with the New York based gallery staff. That wouldn’t be so—you can just imagine a world where that happens.
Paula Trommel: Yeah.
Steve Schindler: So Paula let’s—maybe we can switch gears a little bit and talk about what impact these sanctions are having, if any, on the art market generally. Obviously there are a number of Russian individuals who are on these lists who are very active in the art market and are collectors. Do you think that these sanctions lists as they begin to grow are having an impact on the art market generally?
Paula Trommel: I do think they have an impact. Again, it’s quite difficult to determine right now because everything is so recent, but first of all we would need to determine what is the amount of your Russian art collectors who are now subject to the sanctions for the luxury ban. And it’s still a little bit up in the air, but as I said, currently there’s roughly— it’s actually 1,267 individuals on the UK list. So it’s quite substantial.
And at the same time, in the short-term the big auction houses have all canceled their Russian sales. So there is a short term impact we can see already, but it’s more the long term impact I’m curious about, because we can see that the sanctions regime is just expanding, and not only by individuals being added to lists but also—for example, as of right now, all of the regimes have focused on the sale of luxury goods to Russia or individuals, regardless of the connection.But recently in May, for example, the UK made another announcement which now might impact indirectly consignments of arts of work. So as we said in the beginning, it is likely that consignments at some point will also fall under the scope of the luxury ban. So the whole regime is just getting bigger and bigger and more transactions might fall under it.
So it might have a long-term impact, because I don’t think the sanctions are going anywhere anytime soon. I don’t think this is something that in two months is over and everyone can transact freely again. And we do know a lot of prominent wealthy Russians who collect and sell art, which they can’t do at the moment. So there will definitely be an impact, which is here to stay for a little while, but I think we do need a little bit longer to actually see what will be happening.
Katie Wilson-Milne: I guess, too, the impact depends on how big a proportion of the high end art market was controlled by Russian stakeholders. And do you have a sense of that? Obviously we hear about wealthy Russian collectors, but do you have a sense of how much of the market? You said that all these Russian sales were canceled immediately by the auction houses. Was that significant for the auction houses? Was that like a big chunk of their fall or spring business?
Paula Trommel: It was a big chunk, but at the same time looking at the recent auction results they performed really well. So you would’ve thought there would be an impact. To be honest, I don’t know the percentage of Russians buying at the big evening sales, but I thought we could see an impact, which we didn’t, because they performed really well. So that’s really interesting, because I personally thought I would see something, which I didn’t.
Katie Wilson-Milne: Yeah. Maybe that business is more in the private sale sector where you’d have to really be inside of it to perceive it.
Paula Trommel: Yeah. I assume so. I do believe so.
Steve Schindler: Right. Or there are buyers in other countries and places that have stepped in to fill the void is another possibility. I think we see that in other sectors maybe buyers from the Gulf states stepping up—
Katie Wilson-Milne: Yeah. Have an opportunity.
Steve Schindler: —and having opportunities to bid unopposed by Russian counterparts.
Katie Wilson-Milne: I guess another question, too, is, so that’s the art market in general, but within the world of the Russian art world I imagine these sanctions are— are they debilitating? Dealers or galleries in Russia now lost their ability to do international business, Russian collectors, museums have lost their ability to collect. Within the world of the Russian art market, what impact are we seeing?
Steve Schindler: Right. And as we speak, during Art Basel there was an art fair that was set up seemingly by the Russian government and sponsored by Gazprom that’s going on in St. Petersburg right now, so—
Katie Wilson-Milne: For all these people to make their own market.
Steve Schindler: For all these people to try to make their own market. I have no idea whether that’s even remotely going to be successful, but it is one of the fallouts of some of these galleries not being able to exhibit in Basel, for example.
Paula Trommel: I do think the Russian art market is suffering because of these sanctions. I think because of the lack of clarity across the globe really of what is prohibited and what isn’t. So a lot of international clients of theirs are just taking a step back, because they don’t really know what is allowed and what isn’t allowed. So that’s one side.
And I think what we’ve always seen recently at art fairs, for example, big art fair in Italy that some of the Russian booths have been— no one wants to go there to make a point to not support Russia. So I do think they are suffering, even if they are not supporting Putin, even if they’ve always been attending art fairs. And people are just avoiding it, because of the clarity and because of making a point to not support a Russian-based institution.
Katie Wilson-Milne: Well, that would seem to fall also very clearly within the, at least the UK luxury ban, too. So kind of understandable that you’d want to stay away. Now, the other big picture question we have to ask is, and I know it’s early, but do these sanctions work? And I don’t mean— I mean work in terms of their politically-desired effect, right? All these governments have decided that the response to Russia’s behavior is to impose these types of sanctions, including the luxury ban— if you want we can focus on the luxury ban— and doing that because there’s some idea that it will discourage Russia from continuing its aggression in Ukraine or other places or behave different politically. And is there any basis to think that that’s true, that these sanctions especially in the luxury space are working or doing anything?
Paula Trommel: I wish I knew. It’s an interesting question, because obviously their idea is to put pressure on Russia, taking away, especially from the Russian elite that supposedly is supporting the war machine of Putin, to put pressure on them. But is it working? I don’t know. I wish I knew the answer and could tell you it’s working, but I simply don’t know.
Katie Wilson-Milne: Yeah. It’s just, as you said, the ripple effects in the art market and just the impact on individual dealers and what they have to do and the transactions they may lose, but also individual Russian dealers or smaller collectors who have no connection to Putin, who do not support the war. There’s a huge bubble impact of these new sanctions and it would be helpful to know if it’s worth it.
Paula Trommel: I agree, and especially looking it from a UK point of view which is the wider luxury ban with a connection to Russia. I see this on a daily basis, receiving the information from potential Russian clients but having to cancel a deal because the person is paying taxes in Russia. And quite often I do feel sorry for the individuals, because I do believe they are against the Putin regime but they pay taxes in Russia because the tax rates are lower, and yet they’re prohibited from doing any art deals anymore. So it is a difficult situation where not necessarily— it might affect the elite that is supposed to be affected by this, but I think it’s way broader and it’s also affecting a lot of people who shouldn’t be affected by this.
Katie Wilson-Milne: Yeah. And if the elite aren’t changing their behavior, let’s say not the elite, but the elite with political influence to Putin, which is what we care about, if it’s not changing their behavior or if Putin doesn’t care at all what they’re going through in terms of their luxury good purchasing, then it doesn’t matter.
I think this conversation about how sanctions work and how we target Russia is happening obviously very broadly way outside of the art world right now, but they are interesting questions.
Steve Schindler: So Paula, tell us a little bit about how your company works. If we’re a gallery and we want to have some help in complying with all these sanctions law and we come to you, what will you do for us? How does it work?
Paula Trommel: So just— let’s go with the easy example again, of you are a gallery at Art Basel and someone is interested in buying a piece of art and you fear they might be— they have a Russian accent, et cetera.
Steve Schindler: I hope that’s not the way here.
Katie Wilson-Milne: Which is literally not how it will ever happen, but okay.
Steve Schindler: Right. A very deep, movie-like Russian accent.
Katie Wilson-Milne: It’s definitely a British art advisor.
Steve Schindler: Which, of course we can’t distinguish between other kind of Eastern European accents. That is just a—
Katie Wilson-Milne: Maybe a less ludicrous example would be a big gallery comes to you and says we have all these art fairs planned for this year, we’ve heard about this sanction regime, can you help us navigate it? What would you do?
Paula Trommel: So that’s a different scenario, because there we’d take a step back and really start with the training to explain— because I think that’s where it lacks quite often in the first place—
Katie Wilson-Milne: Right.
Paula Trommel: —To really understand the legal environment, the sanctions regime or the AML regime, et cetera. So you start with the training, you have all the paperwork in place for them to have in writing all the things they need to be doing and what to look at, especially red flags, et cetera. So that’s the pre-work. And then during a deal, someone would call me and ask, can you please look at the underlying information?
Or even a step before that and say what do I need to ask for? What is the information I need to, by law, need to collect and then look at to then determine whether we can go through the deal? So that’s what’s happening at the moment quite a lot, that I really specialized in sanctions advice. And that really means looking at every single transaction or client that potentially is based in Russia or in the UK connected to Russia. And unfortunately there’s no golden rule and you can say, okay, if those three things are fine you can just go ahead. It really is. Quite often you need to sit down with a client to understand a little bit better what they’re doing, and it’s difficult.
Steve Schindler: Yeah, no. And I’m curious, again— putting it in the context of the art fair— how long would you need to do this assessment? So I am in a booth, somebody comes in and I have a list from you and I start taking down some information—
Katie Wilson-Milne: And I’m doing AML diligence anyway.
Steve Schindler: —and then I send this all to you or I call you on the phone and say, “Here’s the information I have,” and I have a limited amount of time to make this transaction happen. How much time on average would you need to do the kind of diligence on your end so that I could decide whether I could make the transaction?
Paula Trommel: It can be very quick, but it really all depends do you have all the relevant information at hand? That’s the key really. Let’s say you received a proof of address, the passport, a text residency, and the name, that’s broadly speaking all I need to do. And then I do my checks in the background. I scan the names, I do adverse media checks. I will look at sanctions list or politically exposed people list, et cetera. So that can be very quick.
But as you say, it’s a major difference if an individual’s already used to provide this information, or if this is complete news to them, because then they might not have it on their phone, they might need to head back, take a copy of some of the documents, et cetera. So it’s more that side that could take potentially a little bit longer rather than my side going through the information, determining whether everything is fine or not.
Katie Wilson-Milne: And isn’t there always this huge caveat that the name you’re being given if it’s not the UBO then it’s not that informative?
Paula Trommel: That’s a very tricky situation because to what extent should you be suspicious? Thinking, okay, no, this doesn’t sound— I always say if something doesn’t feel right, you should ask information. You should always ask, is there an underlying client— if it’s an art advisor, or who is the UBO of an entity, et cetera. But you can only ask to a certain extent, if that makes sense.
At some point, if really everything seems fine and you’ve asked all the relevant information, well, then you go ahead with the deal and if later on you find out they actually lied to you, you simply couldn’t know, because you did all you had to do. So it’s a tricky situation and you do need to ask certain questions, but you can only do that to a certain extent, can’t you?
Katie Wilson-Milne: Right.
Steve Schindler: Right. And you know, it’s interesting because I think it also depends a little bit on the gallery and whether they’re working in the primary or secondary markets. When galleries who are working in the primary market, particularly for high-end artists, are very concerned—
Katie Wilson-Milne: That’s a really good point.
Steve Schindler: —who the ultimate owner is, because that’s very much a part of the selling processes, is trying to make sure that these very special works, often by living artists, are going to places where they would like to see these works go.
Katie Wilson-Milne: And not being resold too quickly.
Steve Schindler: And not being resold.
Katie Wilson-Milne: So that would limit this issue.
Steve Schindler: Right. So I think galleries are very used to that. And so I think they would be asking the right questions, even if incidentally, to the way they do business. I think the secondary market is quite different and that’s where there’s less, I think, attention to where work is going often.
Katie Wilson-Milne: Right. So the primary challenge in the primary market may be you might have the information, but it’s knowing if it’s a problem and you need to not do the deal, right? They might not know that.
Steve Schindler: Right.
Katie Wilson-Milne: But in the secondary market it may be you neither have the information or the knowledge of the legal regimes to know that there’s a problem here.
Paula Trommel: Especially in the US, because as we say under the AML regime in the EU and UK, you already have to ask more questions, but in the US you technically don’t have to, so that’s just making it more difficult.
Katie Wilson-Milne: I imagine too, Paula, because most of your clients because of the AML regulations are going to be in Europe and the UK, that if you’re doing a general training policy writing for your clients, which I’m sure you do, you’re now just including sanctions in that AML process, right? It’s not like you’re like, “Do you want AML or do you want sanctions?”
You’re like, here’s the compliance regime, here’s what you should be aware of. So, there’s probably— just anyone who’s coming to you for that kind of AML compliance is going to be made aware, and you’re going to help them with these sanctions issues. Whereas as you said, art players in the US aren’t coming to you for anything, and so they’re not going to get that indirect knowledge.
Paula Trommel: Yes. Although I would always explain it to them. And what I’ve seen actually, which is quite interesting, is a trend in the US that even though by law art businesses are not required to comply with AML, a lot of them have voluntarily a toned down version of policies and a risk assessment, simply because they want to protect themself and their business.
They might not necessarily have to do it, but I do see an increase of individuals or companies reaching out, wanting to have just a simple policy and a training to train their team. And this was even before the sanctions regime was implemented. So it is quite interesting to see how the mindset slightly changes. I’m not saying everyone is doing it, but I did see a few people reaching out
Katie Wilson-Milne: That doesn’t surprise me, because that’s what we saw with the auction houses, right? The US branch of Sotheby’s and Christie’s has not historically been regulated in the same way as their European and UK operations, and yet they made a choice to implement global policies that were consistent across jurisdictions. And that really brought a level of, we’ll call it self-regulation or diligence into the US auction houses that wouldn’t have happened otherwise. You can imagine for the very top galleries that have branches all over the big European cities, right, and London, that it could be the same thing. They’re going to have a policy for London and Paris, and it’s the same people running the New York office and it’s going to be the same.
Paula Trommel: Yeah, it really is. So the auction houses and the major galleries, I do see it. I do see a more global approach complying basically with the strictest regime to make sure that everyone complies with the local ones. So that does make it a bit easier. And I do think now going ahead with this global approach, the sanctions regime is making it a little bit easier to get the point across to your US entities or foreign entities, because they do need to comply with sanctions, while before they didn’t necessarily understand why they have these AML rules, why technically they do need to comply with it, if that makes sense. And now it’s a bit easier to make your point why you need to comply with this.
Katie Wilson-Milne: Right. All right. Well thank you so much, Paula. And as you have said many times, this is a fast-expanding topic, so we may have cause to revisit it with you in the future.
Steve Schindler: Yeah. Thank you, Paula.
Paula Trommel: Thank you so much.
Katie Wilson-Milne: Take care.
Steve Schindler: Bye-bye. 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, a 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, 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.