Major Art Market Players Band Together to Shake Industry’s “Shady” Image
Just as U.S. President Donald Trump kicked off a sweeping rollback of post-crisis financial regulation, the art market took a small step in the other direction.
The Responsible Art Market Initiative (RAM), launched in late January in Geneva, is a set of guidelines and best practices designed to help art businesses comply with anti-money laundering and terrorism financing regulation. This self-regulation initiative, developed by an interdisciplinary group including experts from across the art world, academia and law enforcement, is voluntary and non-enforceable.
However, RAM includes prominent founding members such as the auction house Christie’s and Swiss dealer Seydoux & Associés Fine Art. And art market experts say it could pave the way for something more robust.
Some of the recommendations may sound obvious: Guideline No. 7 is “Keep Records.” But Simon Hornby, president and CEO of art storage and handling firm Crozier Fine Arts, said it was unusual and valuable to have these recommendations gathered under one umbrella and applied to the specifics of the art market.
The regulatory guidelines start with the premise that the art market, with its culture of secrecy and discretion, is vulnerable to abuse by criminals and terrorists. It poses a set of questions a business can use to audit itself, such as “What information about clients is gathered and recorded?” and then moves chronologically through the transaction process, with a checklist of steps to take at each stage.
Many of the steps have broad applicability to a variety of industries. However, the guidelines describe how to spot “red flags” specific to art dealing that could arise with respect to a client, an artwork, or the transaction itself.
Hornby, who previously advised insurance firms on risk management for art transactions, said the guidelines could evolve into something more substantial, such as an accrediting body that holds members to a set of standards and provides third-party auditing, not unlike, say, fair trade guidelines or an organic certification.
He further noted that the art market is already subject to a number of regulations, including tax law, anti-trafficking statutes, and criminal law. Indeed, major art-world players often have compliance teams in place who ensure all aspects of a transaction are above board, from provenance to “know your client” due diligence.
So, if the RAM guidelines were already in use, why start proselytizing about them now?
The art world has come under increasing public scrutiny in recent years as the dollar value of the art business has grown, said Wendy Cromwell, an art advisor and founder of Cromwell Art LLC, who has been outspoken on the need for greater transparency. In 2015, the global value of the art market stood at $63.8 billion, up from $35.9 billion in 2005, according to the 2016 TEFAF Art Market Report.
The Financial Action Task Force, an intergovernmental coordinating body, cites rough estimates from the International Monetary Fund (IMF) that show the scale of money laundering to amount between 2% and 5% of global gross domestic product, which would translate to a range of $1.48 trillion to $3.7 trillion. Due to the nature of the problem, there are no reliable estimates of the scale of money-laundering or terror financing flows that utilize the art market.
But even if a fourth of the entire $64 billion art market involved laundering, it would account for barely more than 1% of the global total of dirty money at the conservative end of the estimate. But heavy media coverage of art-market legal disputes and suspicions that ISIS is selling looted antiquities has brought renewed attention to the industry’s often opaque business practices.
That attention culminated in damaging allegations from high-profile economist (and art collector) Nouriel Roubini, who called the industry “full of shady stuff” during a panel at the 2015 World Economic Forum in Davos, Switzerland. The comments, reported in the Financial Times, coincided with the passage of a handful of new regulations impacting the art market, such as a Swiss law requiring extra due diligence on cash transactions in excess of 100,000 Swiss francs.
The consortium behind RAM decided then to collect and disseminate a set of industry best practices, most of which, the group stresses, are already being followed. By communicating them broadly, they hoped to both restore public confidence in the art market, and help professionals find country-specific information as new regulations and legislation are rolled out.
The initiative differs from earlier attempts at self-regulation, such as the Basel Institute on Governance 2012 art trade guidelines, in that it was developed by art market professionals who aimed to make it as easy to use and practical as possible. But the two initiatives appear to have converged on many of the same principles: know your client, scrutinize the work’s provenance as well as the provenance of the funds for the transaction, and alert authorities should any suspicions arise.
Since the RAM Initiative’s launch, the group has been contacted by individuals in France, Italy, Germany, Brazil, and Uruguay with offers to help draft country-specific guidelines. The Responsible Art Market initiative is itself producing regulatory guidelines for the U.S. and U.K., which in 2015 accounted for 43% and 21% of the global art market, respectively, according to the TEFAF report. Switzerland, where the initiative is based, accounts for only 2% of the art market as a whole, but has been in the news for a legal battle between the Russian collector Dmitry Rybolovlev and Swiss dealer Yves Bouvier, centered around Geneva’s large freeport.
Whether the initiative will actually change the behavior of art market participants remains to be seen. Self-regulation, which typically lacks any accountability or enforcement mechanism, is often of dubious effectiveness.
“All initiatives for self-regulation are worthy in concept but difficult to implement,” said Howard Spiegler, partner and co-chair of the Art Law Group, Herrick Feinstein LLP. Still, he said the guidelines could be followed without necessarily investing significant resources in new personnel. Instead, he said, it’s “a matter of asking more questions and being aware of problems that may arise unless more information is provided with respect to particular transactions.”
But if, as the RAM Initiative has said, these best practices already exist, it’s not clear that they’re always being followed.
For example, one of RAM’s founding members, Christie’s, sold works to the Malaysian collector Jho Low, a businessman who, as The Wall Street Journal reported, U.S. prosecutors have accused of using funds stolen from the country’s investment fund 1MDB to buy paintings worth more than $100 million, raising the question of how the auction house missed the “red flags” described in the guidelines.
A firm linked to Thomas Seydoux, the founder of Seydoux & Associés Fine Art, was also described as “lining up to sell him pieces.” And several Swiss financial institutions, as well as auction house Sotheby’s, were also said to have transacted with Low.
“There are going to be ethical people and unethical people in every business,” said Cromwell, the art advisor. She said auction houses were more concerned with the provenance and authenticity of art works, and less about the source of financing.
“Their interest is that what they’re selling is what they say it is,” she said, regardless of where the money comes from.
A Christie's spokesperson said it “stopped allowing [Low] and any individual or entity known to be associated with him to transact in any way and complied with the government’s request for information” as soon as it became aware he was the subject of a government investigation. While a spokesman for Sotheby’s described its compliance team as the “largest full-time” team in the industry, with nine staff members led by a former prosecutor.
Thomas Seydoux said neither he nor his company was involved with Mr. Low. He told Artsy the 1MDB case highlighted the “the need for international guidelines and greater scrutiny by art dealers, auctions, and banks in order to make sure we can be more efficient going forward.”
So what does happen going forward? In addition to launching more country-specific guidelines, the RAM Initiative said it had considered having a membership scheme, but that required a level of administrative resources it did not yet have.
Demand for more concrete steps towards self-regulation will likely grow. A 2016 survey from Deloitte found roughly two-thirds of collectors, art professionals, and wealth managers favored self-regulation over government intervention.
As in other industries, government regulation tends to be more onerous for smaller businesses. That could harm the smaller galleries and dealerships that form a key part of the art market ecosystem. It is in everyone’s interest, said Cromwell, to avoid government scrutiny that could drive out the galleries that incubate emerging artists.
Cromwell said she doesn’t believe in “complete regulation.”
“I don’t think the art world needs that,” she said. “I think what drives the art world is great art that people want to own.”
Anna Louie Sussman
An earlier version of this article listed Howard Spiegler as the head of the art law practice Herrick Feinstein LLP. Howard Spiegler’s correct title is partner and co-chair of the Art Law Group, Herrick Feinstein LLP.