Quarterly insights and observations from the regulated Art Market
Despite the transparency regulation aims to bring to the art market, the market continues to struggle to get on the same page 3 years after the introduction of AML regulation to the UK and EU.
Differing opinions, interpretations and varying levels of understanding are all contributing factors leading to confusion and misconception.
Acting both as a resource by providing quarterly insights and observations, Arcarta Insights aims to provide an overview of the impact regulation is having on the art market to promote conversation and aid understanding.
Due to the recent introduction of AML regulations in the art market, there is a lack of information on whether the art market in the UK, EU, or elsewhere is facilitating the use of "dirty money". However, does this lack of evidence mean that it does not exist? This is open to debate.
Although it may be an unpopular parallel to draw, art - like luxury goods - could be considered a ‘retail’ sector, albeit one where the average transaction sizes would be considered extremely large in comparison to most any other customer-facing ‘retail’ business.
These characteristics - along with the transportability of art as a store of wealth and the subjective opinion that drives the value of a work of art - make art an unavoidable money-laundering risk when viewed through the lens of AML regulation.
An oversimplification perhaps, however these characteristics remain at odds with how relationships within the art market are formed and the responsibility imposed on the gallery team required to comply with such laws.
Unlike historically regulated sectors such as banking and finance, dealing in art - for many - is a highly personal affair that often - but not always - involves a face-to-face encounter. Moreover, unlike a bank - even at the very top end of the art market - no gallery or auction house will be dealing with many thousands of unknown customers in a month.
For a gallery at least, the cycle of enquiry to purchase would certainly not be considered rapid either with collectors - motivated as they may be - making allowances for the logistical gears involved in shipping a valuable artwork to turn - leaving ample ‘breathing space’ for trust and relationship building to take place.
Despite this, regulation for many - and the requirement to carry out customer due diligence as a result - could be viewed as turning ‘gut feel’ into something tangible and formal by using specialised - and sometimes not so specialised - information to clearly show: Our customer is not a money-laundering risk.
Arriving at this is no small feat however particularly given the gallery or auction teams - for the most part - are understandably lacking in infrastructure and extensive on-the-job compliance experience.
Consider the highly specialised nature of dealing in art and that gallery hires be made on the basis of an art history degree and not anti-fraud.
While the requirement for staff to be ‘trained sufficiently’ remains - regulation that asks a gallery to ‘think risk’ is inadvertently viewing the art market through the same regulatory lens as other regulated sectors such as finance and gambling.
This is not to say the art market is not a risk, it’s more to do with asking the question: Is asking a business - lacking in compliance ‘nouse’ and infrastructure - to ‘think risk’ - as would a bank - and assume the worst, helpful, easy to embrace and adopt?
If processes and systems, rules and regulation was designed to engender a system of ‘trust’ by asking we start by thinking about why is it safe for me to proceed - we reframe the task and instead ask the art market to defend its right to transact by assembling the evidence to support the decision.
We believe that in order to transpose the regulation effectively in the art market, there needs to be an infrastructure that is designed to give the business ‘green lights’ and the ‘answers’ it needs to move forward with the sale. We need to leverage technology and tools that provide greater degrees of confidence and transparency from the outset, not simply present known risks or ‘red flags’ alone.
While it is decidedly a ‘non-sexy’ subject, it’s now widely understood the UK - and EU - art market is legally required to collect personal information from their collectors before they complete a sale. Our most recent survey shows collectors are undergoing due diligence every 3 months.
However, when - and more importantly how - they do so has created incongruence in the market with businesses interpreting these requirements differently, shaping the collectors experience in the process.
While this may seem like growing pains, these differing approaches impact the collector the moment they are most invested, asking them to share personal information within a market vulnerable to cybercriminals.
At all levels, collectors are becoming increasingly more attuned to their rights and the vulnerability of outdated methods such as email which continue to dominate the way in which information is sent and received.
Such observations are supported by surveys such as The Art Basel x UBS Art Market Report 2022, which found that of the top ten concerns of high net worth collectors, increased regulation and identification requirements when transacting were number one.
As the market continues to embrace online methods of selling, so too are collectors expecting a certain level of assurance when sharing their information.
In an independent survey we found that when there is a secure option available, galleries will lean into technology as it allows them to reassure the buyer of the security of their information and protection of their privacy.
While the word ‘app’ springs to mind, downloading and installing anything for a mobile device is far too disruptive and unnecessary given the sophistication of platforms and services accessible instantly and directly through the browser with no need to install anything.
As we think about the role of the collector in this two-sided equation and the technological solution that connects the two parties we ought to consider:
In the art market it’s commonplace for people to buy - or sell - on behalf of someone else acting as an ‘middleman’ or ‘intermediary’.
Many members of the art market work in this way and yet when AML regulation is added to the equation things suddenly become difficult. At its most simplistic, AML regulation requires that a business ’Knows Its Customer’ and that ‘knowing’ one's customer be based on certain formal processes - referred to as due diligence - rather than personal, subjective experience alone.
A gallery ‘Knowing its Customer’ also means carrying out due diligence on the true source of funds e.g. If a gallery is approached by someone buying on behalf of someone else, where is the money coming from?
When intermediaries are involved, knowing where the money is coming from becomes tricky because it has required intermediaries having to disclose their customer which often holds little obvious appeal for the intermediary - or the ultimate customer - where both may have legitimate preferences for privacy.
For two and a half years, while many have wrestled with commercial tensions and their legal obligations, updates to UK guidance proposed conditions under which it may be possible for this aspect to be ‘relaxed’ and yet there’s still confusion.
Whether it could be argued that this confusion is tied to 2 and a half years of habits formed or a lack of education is open for debate, however absence of ‘black-and-white’ literal explicit instruction providing a step-by-step for the art market leaves the door ajar for interpretation.
A lack of explicit instruction doesn’t suggest there are parties at fault or that the regulations are a ’square peg in a round hole’ - it’s more that it’s not possible to provide exhaustive, explicit instruction because of something referred to as a ‘risk-based approach’. Best viewed as a ‘mindset’ galleries are required to adopt, the so-called risk-based approach takes ‘black and white’ and turns this into shades of grey leaving things wooly and soft around the edges rather than well-defined.
The emphasis on Sanctions as a result of the conflict between Russia and Ukraine is a classic example of this at work in an international art market.
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