TheArtLawReviewEdition1-1

Cultural Property Disputes

In 2017, the United States District Court for the District of Columbia (the DC Circuit) denied in part and granted in part Germany’s motion. The Court ruled that seizures from a country’s nationals are a violation of international law when the seizures are part of a policy of ‘genocide’. The Court reasoned that the sale bore a ‘sufficient connection to genocide such that the alleged coerced sale may amount to a taking in violation of international law’.28 The District Court also found support for the plaintiffs’ allegation that the Commission’s decision was politically motivated, concluding that foreign policy supported the just and fair resolution of claims for Nazi-confiscated art and that no binding precedent from the DC Circuit required the claims to be ‘exhausted’ in Germany. Finally, the Court found that the balance of interests weighed in favour of the plaintiffs’ choice of forum, particularly because three of the heirs are US citizens.

Germany filed an interlocutory appeal, arguing that the lower court incorrectly found that it had jurisdiction over the case. Germany restated the arguments that the lower court had rejected, including that allowing the claims to be heard would conflict with the US government’s stated policies regarding Holocaust restitution. In July 2018, the DC Circuit affirmed in part, ruling that the claims against Germany and the SPK fell within the expropriation exception. However, the Court noted that the exception requires a ‘commercial nexus’ between the sovereign and the United States When the defendant is a foreign state, the commercial requirement is only satisfied if the property at issue ‘is present in the United States’. Since the Guelph Treasure is in Germany, the Court was required to dismiss Germany from the lawsuit.

The DC Circuit rejected Germany’s and the SPK’s petition for a rehearing en banc, but the US Supreme Court granted Germany and the SPK’s writ of certiorari. Oral arguments were held on 7 December 2020, and they addressed two questions: (1) whether suits concerning property taken as part of the Holocaust are within the expropriation exception, and (2) whether a foreign state may assert a comity defence. The US Supreme Court will make its jurisdictional determination in 2021. This case demonstrates the complexities surrounding Holocaust-looted art claims, not least of which are the non-legal and moral considerations in addition to legal arguments.

ii International antiquities disputes

In a very different type of cultural heritage dispute involving the FSIA, a foreign government was sued for contacting an auction house about an object with questionable provenance consigned for sale.29 In Barnet et al. v. Ministry of Culture and Sports of the Hellenic Republic,30 the dispute arose from Sotheby’s planned auction of a Corinthian bronze horse. A few days prior to the sale, Greece sent Sotheby’s a letter challenging the consignors’ ownership, citing Greece’s patrimony law and alleging that the bronze had been illegally removed.31 Sotheby’s then withdrew the antiquity. A few weeks later, Sotheby’s and its consignors (the Barnets) filed a complaint in the United States District Court for the Southern District of New York, seeking a declaratory judgment that the Barnets were the lawful owners of the bronze and

28Philipp v. Federal Republic of Germany, 248 F.Supp.3d 59, 71 (D.D.C. 2017).

29By way of a disclaimer, the author of this chapter represented the Hellenic Republic in the litigation.

30Barnet et al. v. Ministry of Culture and Sports of the Hellenic Republic, 391 F.3d 291 (S.D.N.Y. 2019).

31Patrimony laws generally vest nations with ownership of antiquities discovered within their borders; if artefacts are discovered by illicit excavations or not properly reported to authorities, the objects become stolen property and are vulnerable to seizure or repatriation claims.

6

© 2021 Law Business Research Ltd

Cultural Property Disputes

that Sotheby’s was entitled to sell the item. Greece moved for dismissal under the FSIA, alleging that its actions qualified as sovereign, not commercial, activity. In June 2019, the District Court held that Greece lacked immunity, reasoning that the transmission of the letter to Sotheby’s that ultimately halted the sale of the auction lot fell within the FSIA’s commercial-activity exception. Greece appealed the decision in the Second Circuit.

In June 2020, the United States Court of Appeals for the Second Circuit reversed the District Court’s decision.32 It held that a foreign state’s immunity is not lost under the FSIA when the foreign sovereign makes a communication about its ownership under a patrimony law because the enforcement of that law is inherently sovereign, not commercial, activity. A private party cannot assert ownership of an antiquity under a national patrimony law. The Court found that Greece’s act of sending the letter was not in connection with a commercial activity outside the United States; thus, the direct-effect clause of the commercial-activity exception was not satisfied, and the District Court erred in concluding it had jurisdiction.

This litigation is a landmark case because it was the first time a foreign sovereign was sued for protecting its heritage via a patrimony law. Other foreign nations feared that the District Court’s problematic ruling would prevent them from communicating with sellers and institutions in the United States regarding property protected under their national patrimony laws. However, the Second Circuit’s unanimous decision supports foreign governments’ role in the art market regarding issues of patrimony and protects them from suits in which they seek to protect property and claim ownership under patrimony laws. This is particularly significant in the context of antiquities, which are often looted from source countries before being sold in market countries to cultural institutions and private collectors.

Another case involving national ownership of antiquities is Republic of Turkey v. Christie’s Inc.33 The 28 April 2017 Exceptional Sale at Christie’s featured the Guennol Stargazer, a 22.9cm tall Anatolian marble female idol of Kiliya type, carved during the third millennium BC. There are only 15 such figures in existence, but this one was particularly appealing because it was once part of the magnificent Guennol Collection, begun in 1947 by Alastair Bradley Martin and his wife Edith.34 Expected to sell for US$3 million, the artefact was bought by an anonymous bidder for US$14.4 million.

As in the Barnet matter, the Turkish government informed the selling auction house that the government disputed the title to the object and had a valid ownership claim under its national laws. Nine days before the sale, the Consul General of Turkey informed Christie’s that the idol originated from Turkey and was therefore considered ‘state property’. The following day, Christie’s challenged those assertions and declined to halt the sale. Representatives for the parties met to resolve the dispute, but were unsuccessful.

The day before the auction, the Turkish government filed an ownership claim in federal court and asked the court to stop the sale. The nation stated that the antiquity ‘is an extremely rare artefact that is an integral and invaluable part of the artistic and cultural patrimony of the Republic of Turkey’. Further, it asserted that it was ‘illicitly removed’ from the country in contravention of a Turkish patrimony law passed in 1906 because it was looted in the 1960s, not discovered during a government-approved excavation and not reported to authorities. Christie’s countered that Turkey did not provide factual evidence for its claims that the

32961 F.3d 193 (2d Cir. 2020).

33Republic of Turkey v. Christie’s Inc., 425 F.Supp.3d 204 (S.D.N.Y. 2019).

34In December 2007, Sotheby’s sold a Mesopotamian limestone carving from the collection; it went for US$57.1 million, setting a still-unbroken auction record for an antiquity.

7

© 2021 Law Business Research Ltd

Cultural Property Disputes

artefact was looted and that the 1906 patrimony law was irrelevant to the sale. Moreover, the auction house argued that Turkey inexcusably delayed its demand for the return of the antiquity because it was openly displayed at the Metropolitan Museum of Art (the Met) and also appeared in several publications. Christie’s asserted that Turkey should have known about the artefact’s location years before.

The court rejected Turkey’s request for a temporary restraining order to halt the sale, finding that any irreparable harm35 to Turkey was ‘substantially diminished’ due to Christie’s offer to delay receipt of funds and hold the work for 60 days following the auction to provide Turkey with an opportunity to provide evidence supporting its claim the piece was looted. However, the parties disputed whether the 1906 patrimony law was legally in effect at the time the artefact was removed. Turkey asserts that the law has been in effect since 1906. Christie’s argued that the Republic of Turkey was not even in existence in 1906, but was rather established in 1923, and did not adopt the 1906 law or enact similar patrimony laws until the 1980s.

The court also raised concerns about the delay in demanding the return of the piece, questioning why a restitution claim was not filed while the artefact was at the Met. Christie’s and the consignor, Michael Steinhardt, jointly filed a motion to dismiss, arguing that Turkey’s claim was not timely under laches because the nation unreasonably delayed in filing the case. Turkey countered that the lawsuit was not time-barred because the statute of limitations does not begin to run until a claimant is aware of an object’s location and knows it has an ownership interest. Turkey was unaware of its interest until the auction catalogue revealed that the artefact lacked provenance prior to the 1960s. Interestingly, in a rare move, the court ordered Christie’s to reveal the identity of the anonymous winning bidder.

The answer filed by Christie’s and Steinhardt’s answer contained counterclaims against Turkey asserting the following: (1) that the consignor be declared the rightful owner;

(2) that Turkey committed tortious interference with contract; or, in the alternative, Turkey committed tortious interference with prospective economic advantage. Both parties filed summary judgment motions. In September 2019, the district court denied Christie’s and Steinhardt’s motion for summary judgment and granted Turkey’s motion for summary judgment on the tortious interference counterclaims.

The case is ongoing. Trial was initially scheduled for April 2020 but has been delayed due to the pandemic. The bench trial is now scheduled for April 2021. Like Barnet, this decision will have a tangible impact on antiquities litigation and foreign sovereigns’ patrimony claims under their national laws in the United States.

iii Forfeiture claims

Cultural heritage disputes in 2020 also arose in the context of government seizures, including a number of high-profile matters. On 15 September 2020, the US government initiated a seizure against Erdal Dere and Faisal Khan.36 Dere owns and operates Fortuna Fine Arts, Ltd and Khan is his long-time associate and co-conspirator. The defendants were indicted for an audacious years-long conspiracy to defraud buyers and brokers in the antiquities market with the use of false provenance documentation. Dere was charged with aggravated identity theft after misappropriating the identities of deceased collectors and using their names to

35A legal standard for such requests.

36U.S. v. Dere and Khan, No. 1:20-cr-00501 (S.D.N.Y. 15 September 2020).

8

© 2021 Law Business Research Ltd

Cultural Property Disputes

fraudulently establish fabricated provenance for looted antiquities. Khan then assisted Dere in procuring buyers in the United States and abroad. The scheme was far-reaching, and included an unnamed New York auction house.

Yet this was not the defendants’ first problem with the law. Fortuna Fine Arts, Ltd had come under scrutiny on multiple prior occasions.37 In 1993, the FBI confiscated items smuggled from Aphrodisias in Turkey by the company, and in 2018, the Manhattan District Attorney issued a seizure warrant for an Etruscan terracotta vessel due to concerns that it was illegally exported. In fact, Dere’s father had purportedly been arrested and released by Turkish police for his connection to a smuggling ring before moving to the United States decades ago. He was implicated in the smuggling of a marble sarcophagus depicting the ‘twelve labours of Hercules’. The sarcophagus was intentionally and irreversibly damaged to smuggle it more easily; the smugglers sliced the large object into pieces. A part of the sarcophagus made its way to the Getty Museum, which repatriated it to Turkey in 1983. The United States government now demands that Dere and Khan forfeit the objects in their possession, in addition to the funds earned from the sale of antiquities that were accompanied with fabricated provenances.

Another dramatic seizure involved the illicit transportation of Egyptian artefacts into the United States. Ashraf Omar Eldarir was indicted on two counts of smuggling after he imported looted Egyptian antiquities into the United States.38 One count concerns approximately 590 artefacts, while the second involves a polychrome relief. The large cache was seized at New York’s JFK Airport in January 2020 after Eldarir, a US citizen, arrived from abroad with three suitcases filled with undeclared Egyptian antiquities. Among the items were gold amulets from a funerary set; a relief with the cartouche of a Ptolemaic king that was originally part of a royal building or temple; wooden tomb model figures with linen garments dating to approximately 1900 BCE; and two complete Roman period funerary stelae of the type found at Kom abu Bellou in Egypt.39 Eldarir falsely declared that he was carrying goods valued at US$300. In addition, he did not have legal documentation authorising the export of the artefacts from Egypt. The pieces had been recently removed from a dig site, as indicated by the presence of loose sand and dirt that fell out of the suitcases after officials opened them. Some of the items also smelled of wet earth, which was a further indicator that they had been recently excavated. If convicted, Eldarir faces a prison sentence of up to 20 years for each count. The indictment followed an investigation by US Immigration and Customs Enforcement and US Customs and Border Protection. Eastern District of New York US attorney Richard P Donohue stated: ‘These cultural treasures traveled across centuries and millennia, only to end up unceremoniously stuffed in a dirt-caked suitcase at JFK.’40

But perhaps the most interesting government seizure in 2020 involves the storied ‘Gilgamesh Dream Tablet’, a looted cuneiform tablet exhibited in the Museum of the Bible and acquired by Hobby Lobby in 2014.41 However, this was not Hobby Lobby’s first problematic acquisition. From 2009, representatives of Hobby Lobby had purchased thousands of Biblical-era artefacts from Iraq that were intended for the future Museum of the Bible. However, the artefacts were actually looted and then shipped to Hobby Lobby with

37www.theartnewspaper.com/news/two-manhattan-antiquities-dealers-arrested-on-charges-of-years-long- fraud-scheme.

38U.S. v. Ashraf Omar Eldarir, No. 1:20-cr-00243 (E.D.N.Y. 2 July 2020).

39www.justice.gov/usao-edny/pr/brooklyn-man-indicted-cultural-artifacts-smuggling-charges.

40id.

41The Museum of the Bible was founded by Steve Green, the president of Hobby Lobby, in 2017.

9

© 2021 Law Business Research Ltd

Cultural Property Disputes

false provenance information. The information falsely claimed the items came from Israel or Turkey to avoid mention of Iraq as the true country of origin, due to public knowledge about extensive looting from that nation. In 2017, in response to a civil forfeiture action filed by the Eastern District of New York,42 Hobby Lobby agreed to forfeit US$3 million to the US government and return over 5,500 artefacts to Iraq.

On 18 May 2020, the Museum of the Bible faced yet another front-page antiquities controversy when the United States filed an in rem proceeding against the Gilgamesh Dream Tablet. The small tablet was one of a dozen found in 1853 in modern-day Iraq and depicts what is believed to be the oldest work of literature, the epic of Gilgamesh. The tablet at issue was allegedly illegally imported into the United States. Artefacts found within Iraq’s borders are subject to patrimony laws. These laws vest ownership of objects found within its borders to the Iraqi state, and prohibit their export. In addition to those laws, the US has placed import restrictions on Iraqi cultural property since 1990, and then again through the 2010 Iraq Stabilization and Insurgency Sanctions Regulations.43 As such, the Gilgamesh Dream Tablet is considered stolen property under US law.

According to the government, the Tablet’s provenance was falsified to show that the work had been discovered decades ago and had been inside a box purchased at a California auction in 1981. In truth, it had been purchased by a US dealer in London in 2003 and then brought to the United States. At the time, Iraq was experiencing widespread looting after the US invasion earlier that year. In 2013, the prior possessor of the Tablet (a dealer) contacted Christie’s to consign the cuneiform piece for a private sale. The auction house contacted the dealer to confirm the provenance. Unusually, the dealer warned the auction house that the provenance would not withstand scrutiny and suggested that Christie’s not use it in connection with a public sale. In response, Christie’s offered the Tablet to Hobby Lobby via private sale. Hobby Lobby expressed concerns about the provenance but Christie’s failed to provide the false provenance letter or the identity of the antiquities dealer after inquiries were made. Ultimately, Hobby Lobby purchased the Tablet for US$1.6 million from Christie’s.

The day after the United States filed its civil forfeiture action, Hobby Lobby sued Christie’s for breach of contract and fraud, seeking compensation and alleging that the auction house misrepresented the item’s provenance. The case is ongoing and will doubtless prove interesting to the art community at large.

III CONCLUSION

A number of legal controversies in 2020 faced delays due to the coronavirus pandemic. As government offices, court houses, arts institutions, businesses and law firms reopen in 2021, the art market will be eagerly awaiting the outcomes of these matters.

42United States of America v. Approximately Four Hundred Fifty (450) Ancient Cuneiform Tablets; and Approximately Three Thousand (3,000) Ancient-Clay Bullae. The author of this chapter consulted with the Eastern District of New York on this matter.

4331 C.F.R. Part 576.

10

© 2021 Law Business Research Ltd

Chapter 2

RECENT DEVELOPMENTS IN THE ART MARKET

Tom Christopherson, Emelyne Peticca, Mona Yapova and Samuel Milucky1

The year 2020 has been one of uncertainty and challenge for the art market at least as much as for any other sector, with the market having to address the challenges of significantly increased levels of regulation while at the same time dealing with the real-time effects of the covid-19 pandemic and the uncertainties around the looming departure of the UK from the EU. With the UK accounting for the second largest share of the global art market,2 the fact that all these factors bear most directly on the market in the UK will have both positive and negative effects on its competitor markets, while they in turn face their own political and regulatory challenges and seek to respond to the exigencies of the post-covid-19 world.

Only time will tell how the art market responds to these pressures; at the time of writing, it remains uncertain whether there will be a trade deal between the UK and EU, what form such a deal might take and the impact on the art market this might have. Covid19 appears to be resurgent in many parts of the world, and plans to open markets and build a return to normality are subject to constant revision. Over and above these uncertainties, the introduction through 2020 for the EU art markets (including the UK) of anti-money laundering and counter-terrorism regulatory controls under the EU Fifth Anti-Money Laundering Directive requires art market participants to re-evaluate their way of doing business in a fundamental manner, going to the heart of the art market’s core values of informality, flexibility and discretion.

This chapter evaluates current progress and speculates about likely impacts of the triumvirate of trials of Brexit, covid-19 and greater regulation. The outcomes may be uncertain, but it is becoming clearer that the art market in five years’ time will look different in many respects from the one we thought we knew on 31 December 2019.

At the time of writing, the UK and EU negotiators remain locked in the second or third last chance saloon for negotiations around a trade deal and it is difficult to predict whether there will be a comprehensive deal, a limited deal, a limited deal with grounds for later expansion or no deal at all. As with all sectors, this makes planning for art market participants extremely difficult and the effects of increased restrictions on trade between the UK and the EU would be significant for the art markets on both sides of the English Channel.

Not all cultural goods have enjoyed the freedoms offered by the EU single market, with items deemed by individual Member States to be ‘national treasures’ reserved to Member States’ own policies by Article 36 in Chapter III of the Lisbon Treaty and its forebears. Nevertheless, the loss of the single market rights will impact on UK dealers’ and auctioneers’

1Tom Christopherson is a consultant, Emelyne Peticca and Samuel Milucky are trainee solicitors and Mona Yapova is a paralegal at Constantine Cannon LLP.

2The Art Market 2020, Clare McAndrew, Art Basel and UBS report, p. 17.

11

© 2021 Law Business Research Ltd

Recent Developments in the Art Market

ability to move art easily and quickly around the EU and even if a trade deal is reached, Brexit is likely to result in significant delays and additional bureaucracy for those UK art market participants who have relied upon trade around the EU without customs declarations and border checks. Customs checks, transport delays and inadequate port facilities on either side of the Channel are likely to impede the swift movement of goods; by way of example, the UK has issued a list of ‘designated ports’ through which items requiring CITES licences must be shipped.3 Reversing an earlier decision to exclude Dover and Eurotunnel from the list of CITES-designated ports was a welcome response to outcry from the art market, which relies heavily on these ports for art movements to and from the EU. However, the need for CITES licences for what had previously been intra-EU trade, and the requirement for licence verification at the port, will add to portside delay. This will be significant for an art market that has become accustomed to real-time transfers of works of art for auctions, art fairs, travelling exhibitions and private views between London and other art market centres around the EU.

Another Brexit-related challenge for the UK art market will be the likely restrictions on the movement of people to and from the EU. In maintaining its global entrepôt status for art transactions, and the key relationships that underpin such transactions, London has relied upon its ability to draw upon a reservoir of diverse and suitably educated personnel from across the EU, with wide-ranging linguistic and cultural skills to service an international clientele. While the ICM Unlimited and SQW report into the impact of Brexit on the arts and culture sector4 was prepared for the Arts Council and concerned with the art world beyond the art market, its findings have resonance for the trade as well. A key finding of the ICM Unlimited report was that ‘while only a minority of the organisations included in this survey employ EU nationals, this rises to a majority of the workforce among larger organisations and among organisations based in London’.5 A similar situation applies for the London art market catering for an international clientele, often with EU nationals playing important client-facing and relationship-building roles, in many cases having come to London through the wide-ranging arts-related education programmes run by the major institutions and auction houses.

While the UK government has taken steps under its EU Settlement Scheme to protect the status of EU citizens wishing to remain in the UK at the end of 2020, it remains to be seen whether the London art world will be able to maintain the flow from the EU of culturally well-informed talent coming to work in London in the years ahead. This challenge presents itself for the art market and also the body of educational establishments that up to now have fed it with culturally diverse talent.

A corresponding challenge for UK art businesses will be to maintain their EU connections, be they associates and partners or clients and potential clients, with the greater restrictions on travel in the EU for UK citizens that will involve visa waivers, permits and potentially, in some cases, specific licences. In an art world dominated by personal interaction

3Trading CITES-related specimens through UK ports and airports from 1 January 2021: Designated land, sea and air ports for trading or moving CITES-listed endangered animals, plants, or their parts and derivatives from 1 January 2021, Department of Environment, Food and Rural Affairs,

14 October 2020 (www.gov.uk/guidance/trading-cites-listed-specimens-through-uk-ports-and-airports- from-1-january-2021).

4Impact of Brexit on the arts and culture sector, ICM Unlimited report, 20 February 2018.

5ibid., p. 51.

12

© 2021 Law Business Research Ltd

Recent Developments in the Art Market

and relationships, underpinned by short-term, often immediate, travel and fast-moving deals, the bureaucracy and delay caused by these arrangements may prove to be a significant trading disadvantage, over and above the additional costs incurred.

It remains to be seen whether these changes in the trading landscape will lead to changes in the structure of the European art market. Paris would appear to be the most likely art market to gain from any increase in obstacles to communication and trade between the EU and the UK, particularly at the middle and lower price points in the market. Paris has a long-standing and well-developed infrastructure of auctioneers, dealers, agents and ancillary services and also an extensive collector base, making it an attractive environment within the EU single market for trade in mediumand lower-value items. Paris has long held a primary position within the EU (including the UK) in categories such as the decorative arts and ethnographic art, and some commentators predict that Brexit might provide an opportunity to extend this dominance across the spectrum, even to include contemporary art, which had been a particular strength for London.6

The same may or may not be the case at the top end of the international art market. For sales of works of art over US$5 million, the market is markedly global and London enjoys a dominant role in terms of the overall EU art market,7 competing directly with New York and China. With much of the art at these levels being owned and traded across the world, London’s ability to maintain its significant entrepôt role may be affected by Brexit less than sometimes feared; the 2020 Art Basel report estimated that EU sales only represented 20 per cent of total imports and exports from the UK,8 with the lion’s share of sales (by value) coming from and returning to the rest of the world and (presumably) without direct effect from Brexit.

One of London’s traditional advantages over Paris has been its relatively lighter regime in areas such as general business administration and taxes. It is possible that London’s ability to leverage its greater independence from EU-inspired regulation might allow it to maintain and develop these advantages.9 This approach does have historical precedent, with the international art market effectively moving from Paris to London in the 1950s and early 1960s, driven by regulatory and fiscal administrative burdens imposed on the Paris market. One area in which the UK might benefit from regulatory advantage post-Brexit is in relation to the introduction of the EU Cultural Goods Import Regulation10 discussed below. Equally, matters might go the other way as a result of separate developments, such as the announcement in October 2020 that the UK might reduce or withdraw the value added tax (VAT) Retail Export Scheme (VAT-free retail for tourists) from 1 January 2021. As the art trade pointed out, this would put the UK art market at a disadvantage compared to its EU counterparts.11 Similarly, the coming into force of the Ivory Act 2018 (following the Supreme Court’s decision denying a claim for judicial review) will introduce controls on ivory sales

6‘Paris, the new London?’ Louise Darblay, ArtReview, 11 October 2019.

7The Art Market 2020, Clare McAndrew, Art Basel and UBS report, p. 47. Clare McAndrew points that the EU’s 32 per cent share of the global art market in 2019 would have dropped to 12 per cent with the UK’s contribution removed for that year.

8ibid., p. 47.

9‘Why Brexit Is a Golden Opportunity for the U.K. Art Market’, Clare McAndrew, Artsy, 30 August 2018.

10‘Brexit: what’s next for the UK art market?’ Daniel Dalton, The Art Newspaper, 31 January 2020 (www.theartnewspaper.com/comment/brexit-challenges-and-opportunities-for-the-art-market).

11‘Trade fears axe of VAT-free shopping for tourists after Brexit’, Frances Allitt and Laura Chesters, Antiques Trade Gazette, 31 October 2020, p. 4.

13

© 2021 Law Business Research Ltd

Recent Developments in the Art Market

in the UK market that will be substantially more far reaching than in the EU or elsewhere, Furthermore, extra-EU regulatory advantage might also be partially offset for the London market by the effects of the new anti-money laundering regulations that are taking effect across the EU and the UK, as discussed below.

At this point several leading galleries, including David Zwirner and White Cube, have moved to open new premises in Paris and others are rumoured to be following them. Sotheby’s and Christie’s have maintained active salerooms in Paris since the French auction market was opened to foreign competition in 2001. Recent Paris sales at both auction houses have grown significantly, with Sotheby’s increasing its French sales by a surprising 41 per cent from 2018 to 2019.12 These developments indicate that major art market participants are hedging their bets between London and Paris; perhaps this might lead to the development of two leading European markets, with London continuing to offer a venue for art at higher price points for a global audience and Paris developing a leading role in the higher-volume middle and lower price ranges, catering for a strong domestic and intra-EU market.

Drawing the EU art market into the ambit of anti-money laundering and counter-terrorism regulated sector under the Fifth Anti-Money Laundering Directive will have an impact on both the EU and UK art markets, as the UK has made clear that Brexit will not interfere with its implementation of the Directive. Indeed, the regulations might have a disproportionate effect on the London market and its greater focus on international transactions, potentially reducing its historical regulatory advantage over its continental rivals.

The new anti-money laundering regulations apply to individual or linked transactions above a threshold of €10,000, where such transactions are for ‘works of art’, which (in the UK iteration) catches paintings, sculptures, limited edition ceramics, photographs and tapestries but does not include works of decorative art, furniture, jewellery and collectibles such as coins, stamps and cars.13 The regulations, which in the UK came into force for the art market in January 2020, will have three principal effects: additional administration and bureaucracy for regulated entities; two levels of customer diligence (depending on the nature of the transaction and the parties); and levels of disclosure and transparency not hitherto seen in the art market (and not seen in competitor art markets outside the EU).

The regulatory requirements for nominated money laundering reporting officers and staff training programmes, as well as for procedures to identify, record and track clients, will presumably be helpful in combating potential money laundering through the art market in the EU. To banks and other financial institutions, these may appear to be extensions of normal practice, but to the art market they constitute cultural change and not insignificant cost for a market largely consisting of small businesses often dealing in high volumes at relatively low values. The largest area of cultural change concerns the identification of clients behind the parties with whom the art market participant is transacting, be they the principal acting through an agent, the ultimate beneficial owner of a corporate entity or chain of entities, or the principal beneficiary of a trust. While this may appear entirely sensible when looking to identify malefactors operating through third parties and behind corporate veils, it causes considerable difficulties for a market that has always depended on individual relationships

12The Art Market 2020, Clare McAndrew, Art Basel and UBS report, p. 134.

13The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 [SI 2017/692], as amended by the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 [SI 2019/1511]. The definition of works of art derives from Section 21(6) of the Value Added Tax Act 1994, as amended.

14

© 2021 Law Business Research Ltd

Recent Developments in the Art Market

and where many participants’ assets are not the art being sold but their client lists and client contacts; disclosure of these to competitors represents a material business risk. Existing regulations were written for the financial sector and sit uncomfortably with the structure and business model of the art market, which is struggling to adapt to the regulations in an effective manner while preserving levels of business.14 It is particularly unfortunate that this process of reconstruction is required at the very time covid-19 is having such a widespread impact on the art market and its related businesses, with many having to fight to stay afloat.

It remains to be seen whether the EU art market will be able to adapt to operate effectively under the new regime, particularly in the absence of similar regimes in competing markets around the world. In the UK, there have been attempts to create an effective and balanced interpretation of the regulations for the art market, in the form of the British Art Market Federation’s Guidance on Anti Money Laundering for UK Art Market Participants15 (the Guidance) and through continuing discussions with HM Treasury and HM Revenue and Customs, which is the new anti-money laundering supervisory body for the UK art market. However, there remain several areas of uncertainty over important aspects of the regulations, in particular concerning the extent of disclosures required to ensure effective due diligence while preserving the exclusivity of relationships that underpins the art market. In the relationship chains that characterise many art transactions, a due diligence free-for- all would lead to significant duplication, while unnecessary disclosure of client identities to competitors would be a serious threat to many businesses. The existing ‘reliance’ provisions in the regulations (which seek to avoid duplication of effort by allowing one regulated party to rely upon the due diligence carried out by another) do not appear to assist in the art market context. The Guidance seeks to address the issue by identifying the ‘customer’ on whom due diligence is required and the party responsible for that due diligence, thereby avoiding the need for all participants in a transaction to conduct due diligence on all the other participants. The Guidance effectively seeks to identify the ‘hub’ in each transaction, at the point the participants acting on the buyer’s side meet the participants who in one way or another act for the seller. That hub – the clearest example being the auctioneer in an auction

– has responsibility for investigating both buyer and seller and their intermediaries, but the due diligence obligation of those on either side of the transaction is restricted to other parties on their side of the deal. However, the matter remains complex and to an extent uncertain in the context of the wide variety of art market transactions. It will be a challenge to achieve a successful balance between the apparently contradictory forces of effective due diligence and client confidentiality between competitors, but this will be fundamental to enable regulated art markets to operate effectively in the UK and in EU Member States.

The money laundering regulations might have a disproportionate effect on the London (as opposed to the wider UK) art market, which by its nature is likely to give rise to a higher proportion of circumstances requiring ‘enhanced’ due diligence. This possibility arises from the high-value and highly international nature of the London art market. The major auction houses have dedicated compliance teams and long experience of many of the obligations of

14‘UK Dealers Are Scrambling to Make Sense of “Burdensome” New Anti-Money Laundering Regulations Quietly Passed Over the Holidays’, Naomi Rea, Artnet (https://news.artnet.com/market/anti-money- laundering-regulations-uk-1749087).

15Guidance on Anti Money Laundering for UK Art Market Participants, British Art Market Federation approved by HM Treasury, 24 January 2020 (https://assets.publishing.service.gov.uk/government/uploads/ system/uploads/attachment_data/file/879925/BAMF-AML-Guidelines-approved-by-HMT-24-Jan-20.pdf).

15

© 2021 Law Business Research Ltd