Legal Winter 2017

1. NEW YORK - Has the Art Market Become an Unwitting Partner in Crime?

When you sell your home the paperwork details the sale, including your name, and the title search lists the names of the people who owned the property before you. But when someone sells an artwork at auction — even something worth $100 million, much more than your house — the identity is typically concealed.

Oh, the paperwork might identify the work as coming from “a European collection.” But the buyer usually has no clue with whom he or she is really dealing. Sometimes, surprisingly, even the auction house may not know who the seller is.

Secrecy has long been central to the art world. Anonymity protects privacy, adds mystique and cuts the taint of crass commerce from such transactions. But some experts are now saying this sort of discretion — one founded in a simpler time, when only a few wealthy collectors took part in the art market — is not only quaint but also reckless when art is traded like a commodity and increasingly suspected in money laundering.

“The art market is an ideal playing ground for money laundering,” said Thomas Christ, a board member of the Basel Institute on Governance, a Swiss nonprofit that has studied the issue. “We have to ask for clear transparency, where you got the money from and where it is going.”

The debate about anonymity in the art world has intensified over the past year, fed in part by the release of the so-called Panama Papers, which detailed the use of corporate veils to conceal ownership, dodge taxes and enable crime, its authors say. Now various expert groups, like the Basel Institute, are coming forward with ways for dealers and auction houses to curb secrecy and combat money laundering. In a significant change, Christie’s said last week it has strengthened its policy in recent months and now requires agents looking to sell a work through the auction house to tell it the name of the owner they represent.

“Where it has concerns, Christie’s declines the transaction,” the company said in a statement.

The stakes have risen alongside the soaring value of art, with an estimated $63.8 billion worth of sales in 2015.

In one current money-laundering case, United States authorities have accused Malaysian officials and associates in a civil complaint of converting billions of dollars of embezzled public funds into investments like real estate and art. Masterworks by Basquiat, Rothko, Van Gogh and others were purchased, many at Christie’s, according to a complaint filed by federal prosecutors. Later, a Cayman Island company owned by one of the accused launderers took out a $107 million loan from Sotheby’s in 2014 using some of those artworks as collateral, authorities say.

Another recent dispute seems to reveal that auction houses themselves do not always know whose art they are selling. In this instance a collector has accused Sotheby’s of selling his $16 million painting by Henri Toulouse-Lautrec without knowing who actually owned it.

The Toulouse-Lautrec work, “Au Lit: Le Baiser,” consigned for sale at Sotheby’s in London in 2015, depicts two women embracing on a bed. The Swiss dealer who brought the work to Sotheby’s, Yves Bouvier, signed the standard paperwork surrounding such a sale, which requires the consignor to indicate he or she either owns the painting or is authorized to sell it. After the sale, he was given the proceeds.

But the real owner was a trust controlled by Dmitry E. Rybolovlev, a Russian billionaire who had been using Mr. Bouvier as his art adviser. Mr. Rybolovlev agrees he had authorized the sale but says Sotheby’s should have checked who the real owner was before turning over the money.

“It is extraordinary that such a rare and high-value work could have been sold at auction without the auction house knowing the identity of the true owner,” Tetiana Bersheda, a lawyer for the Rybolovlev family office, said in a statement.

Actually, experts said, it’s not that rare. “Do auction houses know who the principal is?” asked Amelia K. Brankov, a lawyer who specializes in the art market. “I don’t think they always do.”

Mr. Rybolovlev, who himself has used offshore shell companies that obscured his ownership of art, is now engaged in a sprawling legal battle in several courts with Mr. Bouvier, over matters that include the money from the Sotheby’s sale.

(Mr. Bouvier, who is also a leader in the international art storage business, said he has not turned over the money because, he said, Mr. Rybolovlev had told him to keep it to partially settle a debt from another transaction.)

Sotheby’s declined to comment on whether it believed Mr. Bouvier to be the owner. But it says it knew him very well as a customer and that he had represented to them that he had the legal right to sell the property. As to its policy of learning the identity of ultimate owners, Sotheby’s said it takes a risk-based approach — sometimes requiring disclosure depending on the specific facts and circumstances of each situation.

Auction houses live off the fees they earn for brokering sales, so it makes sense that auction houses would both value and trust customers who bring in a lot of business like Mr. Bouvier, who bought hundreds of millions of dollars of art at sales.

Other valuable customers for the auction houses and dealers were Malaysian businessmen who, beginning in 2013, bought more than $200 million in art, usually operating as the Tanore Finance Corporation, including eight works at Christie’s. The United States government contends in a civil complaint that the art was purchased with money that had been embezzled from Malaysian government accounts and that the ultimate beneficiary was Jho Low, one of the businessmen. Mr. Low, who has denied any wrongdoing, has not been criminally charged.

Art was far from the only asset into which Mr. Low transferred funds, and the art world has pointed out that he passed muster with other entities such as banks and law firms before federal officials here last year identified him in its complaint.

Christie’s and Sotheby’s said they each have long had rigorous programs to curb money laundering and that until the investigation became public, there had been no reason to suspect anything was amiss with Mr. Low.

“Before extending a loan to Mr. Low, we conducted extensive due diligence in accordance with our Anti Money-Laundering and Know Your Client procedures,” Sotheby’s said in a statement.

Artworks are particularly suitable vehicles for money launderers, experts said, because they transfer easily and store quietly, perhaps in a basement or in an offshore tax haven. Unlike the real estate market, where lightning escalations in price are rare, values in art can be suddenly boosted by intangibles such as fads and personal taste.

Beyond the question of money laundering, some experts say the anonymity of buyers and sellers hinders their ability to track ownership, a key element in establishing a work’s authenticity.

Anonymity was certainly a factor in the success of the scam that took down the estimable Knoedler gallery in New York after 165 years in business. Some $80 million was turned over by collectors to purchase unknown, albeit fake, “masterpieces” that were brought to market by a Long Island art dealer and her boyfriend. They said all the work had come from a mystery collector who became known as Mr. X. In fact, they were being created by a forger in his Queens garage.

Jeanne Greenberg Rohatyn, a New York gallerist and art adviser, said there are situations, as when a scholar is putting together an academic inventory of an artist’s work, where collectors do acknowledge ownership. “We work with the collector,” she said, ‘Would you like to cooperate?’ If they say no, we respect that.”

But she said she would resist a more general turn away from secrecy. “The move toward transparency is always there, but a collector’s private collection is their private collection,” she said. “It is in their home. It is not in the public domain.”

Regulators in other financial sectors have been working to eliminate veils.

In finance, Treasury officials last year began asking banks to identify customers who set up accounts in names of shell companies. In real estate, they introduced a pilot program that requires the full identification of people who buy expensive properties in New York and Miami using cash and shell companies.

But efforts to reduce anonymity in art sales have gone nowhere. In 2012, a New York appeals court ruled that auction houses did have to let buyers know the identity of sellers. But the decision was overturned on appeal.

The auction houses and some experts say that money laundering is rare and the threat overstated.

Sometimes, they said, the names of prior owners are carried in auction catalogs and even in situations where owners sell through an agent, the houses often know their identity because of their broad knowledge of the market.

Many in the art world believe that eliminating anonymity would damage the market and invade privacy. Some sellers, they say, are families only looking to avoid the embarrassment of crushing debt. Others may be museums seeking to quietly deaccession works from their collection without causing a big fuss.

Imposing rules on auction houses, some experts argue, would only push the business toward less regulated markets abroad or into the hands of private dealers — who are not required to announce sales or publish prices.

“We have to tread lightly,” said Evan Beard, who advises clients on art and finance at U.S. Trust, “unless we start to see that art is being misused in various ways. You have got to do it without throwing too much sand in the gears.”

https://www.nytimes.com/2017/02/19/arts/design/has-the-art-market-become-an-unwitting-partner-in-crime.html?_r=0



2. GENEVA - Industry Behemoths Set Voluntary Rules for Art Business

February 7, 2017. The Swiss Art Law Foundation, together with contributors from auction houses, major art galleries, insurers, law enforcement, and University of Geneva academics, have launched the Responsible Art Market Initiative, or RAM, setting guidelines for business practices throughout the art industry. The guidelines are voluntary.

The RAM best practices for the entire range of art businesses are similar to a number of due diligence steps already recognized as a practical necessity in the antiquities market. The RAM acknowledges that application of the guidelines will depend on the size and resources of each art business and value of artworks. Following all of the RAM guidelines for each artwork sold would require an army of lawyers and researchers, and some of the recommended financial investigations are prohibitively complex for smaller businesses to undertake.

Art businesses and sales are generally divided in market reports into general categories: Post-War/Contemporary (46-48% by value), Modern (about 28-30%), Impressionist (11%), Old Masters (5%).*

The antiquities market is the most highly scrutinized category of artworks, although at less than 1% of the art market by value, according to TEFAF reports, it is the smallest of the global art market categories. In the antiquities category, well-provenanced art and artifacts are now much more highly valued than items with scanty ownership history, creating a two-tier market based upon provenance. With respect to allegation regarding funding terrorism, informed collectors have no interest in materials coming out of war zones.

A key issue for traders and collectors of ancient and ethnographic art is the fact that artworks very often came from countries that were colonized, and no restrictions were placed on export for many decades, or when they gained independence, the source countries never established any permitting systems for lawful export. Instead, most source nations simply imposed blanket export laws, most of which were not enforced domestically. Nonetheless, the existence on paper of such laws is viewed by anti-trade advocates as justification for treating virtually all artworks from these source countries as unlawfully obtained, or even “stolen,” even after many decades of circulation in the market.

Although the major auction houses have generally viewed artworks from source countries with blanket export laws as acceptable for consignment sale if the artworks have been outside of the source countries for at least 10 or 15 years, the RAM guidelines are silent on this and set no reasonable limits. Other AAMD and other museum-adopted guidelines in the US that set a pre-1970 date of initial export for acquisition or donation of artworks have left potentially hundreds of thousands of artworks imported post-1970 as “orphans,” unable to be purchased or even accepted as donations by many US museums.

The major auction houses are in the enviable position of commission sellers, who will thrive regardless of the imposition of general rules for due diligence or the acceptability for sale of artworks. They already have in-house compliance departments, and can gear their marketing to the artworks that are rated as acceptable. Art galleries and collectors who wish to sell objects without paperwork dating back 50 years (rarely retained, since documentation was not previously required for import, export, or lawful trade) will be left out in the cold.

The RAM directs art businesses to:
Know and understand the risks inherent in art transactions for money laundering and terrorist financing (note that for all the press reports on art financing terrorism, there is no data substantiating this and the RAM does not provide any actual examples of it). Nonetheless, it is true that many of the world’s wealthiest collectors prefer not to have their acquisitions public. This fact of the art world could serve as a cloak for illegitimate asset transfers. High value art purchases (common in modern and contemporary art, but rare in the antiquities world) can involve foreign or offshore accounts and purchases through intermediaries, making transactions susceptible to claims of money-laundering.
Do a risk assessment. Document any portion of the business if it is not already well-tracked.
Apply risk-based measures and be alert to red flags. Perform art purchase due diligence work including research and documentation, and substante client information.
Know your client and establish their “risk profiles.” Check for client red flags. What is the client’s source of wealth? The RAM suggests that businesses should request documents to verify the client’s identification information and “other reliable, independent source documents, data, or information as may be appropriate under the circumstances (Documenting a client’s income source might be acceptable for auction houses or credit transactions, but ordinary clients of galleries would not find this acceptable. A possible solution: accept credit cards (traceable) and checks only, and ask for ID on the check. Ask for an address to send copies of a receipt or background info on artwork.
Research the artwork, its ownership and provenance – Check for artwork red flags. Obtaining provenance history and proof of authenticity should be part of every transaction. Dealers and auction houses should publish all known provenance in catalogs, check stolen art databases, and obtain witness declarations and expert opinions, if needed.
Know the background and purpose of the transaction. Identify the source of funds, avoiding cash transactions and third party payers. Use caution in accepting payments from banks in unregulated countries.
Keep records. (Possibly the most important guideline.)
Train staff in money laundering and terrorist financing risks, and on reporting to authorities.
If suspicions exist, step back from the transaction.
Know your reporting requirements, which vary by country, and comply by reporting your suspicions to law enforcement.

Many art market participants already follow many of the practices listed in the guidelines, refraining from cash transactions, attempting to document prior ownership and requiring proof of identity of sellers and buyers. Yet recent media coverage of the art world focuses on scandal, with headlines about international fine art buyers associated with offshore tax havens and reports of large collections of fine art stored secretly at international free ports. Notorious cases of fraud and forgery and highly publicized raids on galleries and auction houses have created a public perception of the art market as full of unsavory characters, undocumented transactions, and dubious or stolen artworks.

In fact, criminal activity in the art world is not more or less extensive than in any other market, although a large portion of the trade still operates on handshakes and gentleman’s agreements – arguably an indicator of mutual trust in the integrity of most dealers and gallerists. Nonetheless, particularly in the Post-War/Contemporary art market, high prices and easy money have drawn a new kind of promoter to the business: people who care only about money, not art, and their negative influence is being felt.

The media has lately been dominated by highly exaggerated accusations of connections of antiquities dealers to ISIS and Islamic extremism. Industry experts are aware that fraud or misrepresentation are actually the most common crimes in the art world, and that due diligence practices and transparency regarding the identities of buyers and sellers is crucial to ending these blights on the trade. The art trade’s general acceptance of anonymous or third party transactions is thought to make it particularly vulnerable to illegalities such a money laundering or claims of funding terrorism. Secrecy is also common at the high end of the art market, where modern paintings sell in the multiple millions: sellers may not want their need for money revealed and buyers are worried about exposing collections to theft.

The Contemporary art world has largely avoided criticism as a vehicle for money laundering, although art crime is most often found there, where the money is. The lack of scrutiny of this market may be related to the celebrity, cachet and social standing of the financial, entertainment and other high-wealth high-rollers involved. This part of the market’s glitz and glamour can sometimes provide cover for aggressive hustlers with poor reputations or for lack of documentation of the movement of high-value art.

In contrast, antiquities account for such a small financial percentage of the global art trade, in that ancient art does not even have its own slice of art trade pie charts, being lumped in with silver and furniture and other less valuable art. Its population is also older and more staid, as well as focused of connoisseurship rather than fashion and style.

The RAM recommendations repeat prior best practice standards for the art industry, notably the Basel Institute on Governance 2012 art trade guidelines. These industry standards were set forth by the Basel Institute on Governance’s Art Trade Initiative at a global conference on ‘Governance of Cultural Property: Preservation and Recovery’, which took place in September 2009.

https://committeeforculturalpolicy.org/industry-behemoths-set-voluntary-rules-for-art-business/

3. JERUSALEM - Court Rules Israel Can Hide Archeological Activity in West Bank
January 18, 2017 – The Jerusalem District Court ruled today that Israeli excavations in the West Bank, and the lending of artifacts found in those excavations can be done anonymously. Citing the potential of “hurting foreign relations” in future negotiations with Palestinians, and hurting publishing, research grant, and international collaboration opportunities for archeologists working in the West Bank due to international boycotts against Israel, the court ruled in favor of anonymity.

Both Israeli and Palestinian archeologists have raised concerns regarding the potential abuses that could result from the lack of transparency and ignoring international law. “Trying to avoid boycotts does not justify flouting international heritage practices or secrecy that could lead to covert excavations.” Israeli archaeologist Yonathan Mizrachi of Emek Shaveh, reported to Lauren Gelfond Feldinger of the Art Newspaper. “Accepted practices include publishing all activities and making sure that excavations benefit the local population—in this case, Palestinians.”

Palestinian archaeologist Hamdan Taha told The Art Newspaper that anonymity ”…contradicts internationally accepted scientific norms. Transparency is exactly what differentiates scientific archaeological excavations from looting.” Taha added that protecting secret archaeological activity in Palestinian territory is a “violation of international humanitarian law, and will have adverse consequences on Palestinian cultural rights and the peace process between the two sides”.

Provisions had previously been set for the development of collaborative efforts between Palestinian and Israeli archeologists in the1995 Annex to the Oslo Accord, which stated that the powers and responsibilities for archaeological activity in the West Bank were to be transferred to Palestinian jurisdiction.

Sensitive issues of common interest were to be negotiated in permanent status negotiations, mediated by a joint Israeli-Palestinian archaeology committee. But more than 20 years later, with the lack of permanent status negotiations, the joint committee has not been formed.

The case was petitioned to the Jerusalem District Court by human rights and archaeology organizations after concern of lack of transparency on the part of Israeli archeological teams.

The Israeli petitioners are considering an appeal to Israel’s Supreme Court.

https://committeeforculturalpolicy.org/district-court-rules-israel-can-hide-archeological-activity-in-west-bank/