The conundrum of art market integrity

Erich Chlomovitch perished in the Holocaust in 1943, along with his younger brother Egon. He left behind his mother Rosa and his cousin Mara who survived the war in Bačina, Serbia. But what he also left behind, inside a hidden wall compartment of Rosa’s modest village house, was a hoard of metal boxes covered with dirty blankets. They contained more than 400 pieces of Impressionist and Post-Impressionist art – masterpieces by Degas, Pissarro, Renoir, Picasso and Cézanne – collected during Erich’s time working for legendary Parisian art dealer Ambroise Vollard. .

What happened next is more like the plot of a thriller than real life: a sequence of tragic events that took the life of Rosa, Erich’s mother, a network of spies and of art-loving Yugoslav communist apparatchiks who went in search of the treasure that was ‘the Chlomovitch collection’, a ballerina by Degas hanging on the wall of Mara’s new house in Kosovo which revealed the whereabouts of the precious collection. Today, the Chlomovitch collection is kept in the archives of the National Museum of Serbia, its property is still disputed by Vollard’s heirs and Erich’s distant cousins ​​of Israel.

Besides its Hollywood-esque backstory, the complex legal dispute over Chlomovitch’s near-priceless collection highlights several typical risks an art market player faces on a daily basis: questions about provenance and legal ownership of a work of art, the difficulties of authenticating and valuing art that has been out of circulation for decades, and integrity issues regarding counterparties in an art transaction. But in addition to these “traditional” risks, new integrity considerations have been introduced to the market through the proliferation of digital art and non-fungible tokens (NFTs); the popularization of art as an inflation-proof, less traceable and relatively liquid asset class; increased online sales/cryptocurrency payments; as well as the securitization and co-ownership of works of art.

Does it deserve increased attention?

The dynamism of the art market has long attracted connoisseurs but also delinquents, the latter seeking to distort and exploit the traditions and idiosyncrasies of the market. It is therefore not surprising that in the light of recent geopolitical developments, various observers of the art industry have already warned against the possible use of the art market to dodge the penalties Where object trafficking looted from Ukrainian museums.

Despite this, a recent report by the US Treasury concluded that, comparatively speaking, integrity risks are not as high as in some other industries, for example, the real estate sector. Scott Rembrandt, a senior US Treasury official make a deal for prioritizing the fight against illicit financing in other areas by emphasizing that “while certain aspects of the high-value art market are vulnerable to money laundering, it is often the case that There are bigger underlying issues at play, like shell company abuse or the involvement of conniving professionals, so we’re tackling those first.

Although the risks are acute and present, it may be that the inherent glamor of the art market and the sheer readability of stories about various art adventurers and their sometimes amoral enablers – stories like the one about Erich Chlomovitch – continue to place the art industry under constant scrutiny from the media, and by extension, regulators. Articles about dodgy real estate cash transactions in Canada may simply not have the same resonance.

Need for a proportionate approach to regulation and due diligence

“We have the art not to die of the truth”, said Nietzsche. So will the introduction of stricter regulation and compliance-focused oversight bring too much “truth” to the art market, destroy its mystique and challenge the redeeming quality of art? Is the tight management of integrity concerns worth the risk of transforming the art market into a mechanized trading floor devoid of the passions of collectors?

The European art market is subject to Anti-Money Laundering (AML) regulations as a result of the EU’s 5th Anti-Money Laundering Directive (5AMLD). These regulations were made into UK law in January 2020 via an amendment to the Money Laundering and Terrorist Financing Regulations. Although relatively lightweight, 5AMLD imposed additional costs and a bureaucratic burden on art market players, who dragged their feet in its implementation, mainly due to their concern to preserve the most precious value of the art market: confidentiality.

The commercial impact of increased regulation has not yet been assessed in the coming years, although it is expected that the London market – which is already suffering from some negative impacts (at least in the short term) ) of Brexit – could be disproportionately affected. This is all the more the case as London specializes in high-value art transactions, which often involve high-risk clients and as such require enhanced due diligence.

So what can we do to keep the art market thriving while making it less susceptible to exploitation by rogue actors?

The Geneva initiative Responsible Art Market (RAM) rightly recommends risk based approach to conducting due diligence in the context of art transactions, which is consistent with the requirements of 5AMLD.

This approach is no different from one already familiar to seasoned corporate intelligence officers who have been looking at various counterparties for decades. However, in the context of delicate artistic transactions, mastering the cultural codes of the art market distinguishes effective and proportionate due diligence from the usual exercise of “case-ticking”.

Such an approach is crucial to making integrity considerations conducive and non-disruptive to an artistic transaction. And even if folklore would have you believe otherwise, it is important to remember that the mechanisms that cause abuse in the art market, i.e. anonymous front companies, offshore bank accounts and bad actors, are a global problem that is neither endemic to the art market nor curable by its increased regulation.

Art market regulation requires art market culture

Finally, we must turn to the actors of the art market. What was their experience? Regulations have certainly added to the burden on them, and some governments – including the UK – are arguably not taking their concerns seriously enough, especially in the context of the current cost of living crisis. Demands on art market players are piling up while there is little reward offered in return. HMRC has (understandably) started to fine art market participants who fail to register for AML monitoring, while the government’s new economic crime (anti-money laundering) tax payable by regulated companies has dealt another financial blow.

In the UK, the long-promised opportunities of Brexit have yet to materialize, and calls from art market players to abolition of import VAT on art seem unlikely to be heard when there are other more pressing items on the agenda. Yet, although sometimes hailed as an elitist pastime, the art market is a powerful engine of economic growth and a source of prestige “soft power”. And with the UK’s share of the global art market now at a level historically lowthe UK government should realize that the public interest of art market regulation must go hand in hand with the public interest of art market culture.

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