Consistent with efforts in recent years at apply banking laws to the art market, the prospects of passing a bill in Congress that would apply these rules to a broad class of counselors and attorneys have recently increased. The ENABLERS Act, a nomenclature gimmick apparent from the moment it was proposed, was briefly appended to the annual National Defense Authorization Act, which, in keeping with longstanding tradition, was easily passed by the United States House of Representatives on July 14, 2022. This tactic, which has also been used extend the scope of the Bank Secrecy Act to antique dealers in 2021, greatly increases the odds that what initially seemed like a minor publicity stunt will become law. The readers of the Art Law Report will not be surprised by a critical view here of the effort to place a square peg – the art market – in a round hole – banking supervision. This bill, however, is much worse. The confusion is compounded by the fact that despite extended coverage about her attachment at the NDAAthe ENABLERS Act as originally proposed is not in the version of the NDAA that past the House of Representatives last week (it was added and then revised, notwithstanding at least one statement to the contrary). What has been approved so far omits the worst parts of the ENABLERS Act. But the perception that this is an ironically done deal can have the effect of reducing vigilance about its prospects. Even though this bill never becomes law, it came very close to what it should have been.
Empirical evidence is thin to suggest that the art and collectibles market is particularly prone to bad actors within the market itself. Are art galleries, consultants or lawyers more likely to engage in money laundering than other businesses? Absolutely not. It is not for lack of expressed calumnies. Yet, as a Treasury Department report this year confirmed, whatever the value of these financial crime regulations, they work best when applied to financial institutions, which are virtually unavoidable in the modern world in regarding payments and transfers. The intrusion of bad actors who victimize these same art market actors does not excuse an invasive surveillance state by imposing the creation of a network of informants. Introducing this substantive idea into a defense bill is deeply cynical and seems like the tactic of choice for a backdoor policy.
The bill (HR 5525) was introduced by Rep. Tom Malinowski of New Jersey on October 8, 2021 under the name “Establishing New Authorities for Business Laundering and Enabling Security Risks”, ENABLERS abbreviated. The existing Bank Secrecy Act, 31 USC § 5312(a), places various obligations on regulated entities, primarily banks, to file suspicious activity reports with the Financial Crimes Enforcement Network (FinCEN). The best known of these obligations is to report cash transactions over $10,000. This obligation was extended in 2021 to “antique dealers”, a more nearly two years later is not defined by law or regulation.
Notably, FinCEN released its report earlier this year at the request of Congress on the state of risk in the art market. The FinCEN report noted the risks of malicious actors using the art market to launder money, but effectively concluded that additional regulation was not warranted.
The ENABLERS Act would continue this trend and add to the entities covered by the Bank Secrecy Act: “a person engaged in the trade of works of art, antiques or collectibles, including a dealer, adviser , consultant, dealer, gallery, auction house, museum, or other person who engages as a business in the solicitation or sale of works of art, antiques, or collectibles”, as well as any attorney involved in financial or related administrative activity on behalf of another person”, a trust or corporate service provider, CPAs, “a person engaged in public relations, marketing, communications or other similar services so as to provide another person with anonymity or denial” and certain third-party payment services.
That’s quite a list. The addition of dealing in art or collectibles is similar to other proposals that never made it into law, most recently in 2018’s ‘Protection Against Illicit Trafficking of works of art and antiquities” which never became law. This is a broad definition that would almost literally include everyone involved in the art or antiques market in any way, and treat them like a bank.
This is, believe it or not, the narrowest part of the bill. And while I can recognize the eyes that will follow, perhaps the worst part of this very bad idea is the suggestion that any lawyer involved in a financial transaction also shares these obligations. Everyone hates avocados until they need them, as they say. But the suggestion that lawyers inform their clients not only violates centuries of established law, but is abhorrent to public order.
Here, therefore, we will take a brief detour through the solicitor-client privilege currently under attack. The privilege was recognized as early as 1577 by the English Court of Chancery as a legal right, in the case of Berd vs. Lovelace (1577), 21 English. Rep. 33 (Ch.). Professor Wigmore, the author of the treatise on definitive evidence, described it as “designed to ensure the client’s subjective freedom of mind in seeking legal advice”. John Henry Wigmore, Evidence § 2317 (1st eds., Little Brown & Co. 1904). As the Supreme Court later noted in endorsing this view, “If the privilege did not exist at all, each would be cast upon his own legal resources. Deprived of any professional assistance, a man would not venture to consult any able person, or would dare to tell his lawyer only half of his case. Blackburn v. Crawfords Tenant, 70 U.S. 175, 192-93 (1865). This concept also exists in some respects in the law of each state and was codified in the federal rules of evidence in 1974.
The revised wording that was passed in the House is narrower, but difficult to accept. It would now include in the regulated group “legal or accounting services” which involve “the services of arranging, associating or forming companies or other legal entities”. This is again a very broad category that could easily include lawyers consulted to create ownership structures to own works of art. “Shell Corporation” is a popular front man in this respect, but literally reading the bill as proposed would put an attorney between their client and the law in assessing what the client said confidentially. It’s totally untenable. When you threaten the very act of consultation, the unintended consequence is that more people won’t ask for advice on how to comply with the law.
It really comes down to this: do you think the government is justified in knowing what you tell your lawyer in confidence? Do you believe the government has the right to take your words to your lawyer, take them out of context, and fine or jail you? Maybe there is a government you trust with this power. I haven’t met any yet. In other words, pick the issue on which you disagree with either major political party. Would you be sure that a government under this party would act with discretion if it were in possession of your most intimate confidential information? Don’t count on me.
What is the case with this bill, then? What I’ve seen cited most often traces the impetus back to the so-called Pandora Papers, which followed the so-called Panama Papers. According to the International Consortium of Investigative Journalists, its Offshore Leaks Database “contains information on more than 810,000 offshore entities that are part of the Pandora Papers, Paradise Papers, Bahamas Leaks, Panama Papers and Offshore Leaks investigations.” These articles, it has been suggested, “strip dispel the secrecy that covers companies and trusts set up in tax havens and exposes the people behind them. This includes, when available, the names of the true owners of these opaque structures. In all, the interactive app reveals over 750,000 names of people and companies behind secret offshore structures. They come from leaked records and not from a standardized corporate registry. . . The successful NDAA calls the Pandora Papers “the largest expose of global financial data in history.” There is another way to describe these exposed people and data: the victims of a crime in which this data was stolen. As noted, none of these documents have been filed publicly, they have been “leaked”.
Two wrongs still don’t make a right. Gallery owners, lawyers and accountants are not bankers. It’s certainly welcome that someone noticed and crossed out the worst part of the bill, but the celebration of privacy breaches still flows from the current bill.