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Tuesday
Jan302018

Dr. Thomas Christ: The Basel Art Trade Guidelines 10 years on 

This overview provides a perspective on an industry sector – the art market – that has increasingly come into the spotlight of law enforcement and business integrity circles in recent years. Dubious practices of some market players has led to demands for greater transparency in art market transactions in particular in relation to the secrecy surrounding the provenance of funds used to purchase art.

Collective Action for the Art Market? Over the last ten years or so the fact that the art trade offers a possible platform for money laundering and tax evasion has become an undisputed fact. But already in 2008, these concerns prompted several major international art market players to approach the Basel Institute on Governance, due to its track record in establishing industry based self-regulation and Collective Action Initiatives -- to help address these emerging reputation and legal risks in their market.

(Among others, the Basel Institute was a co-initiator and remains  a founding member of the Wolfsberg Group of private banks which continues to be regarded as one of the most effective Collective Action initiatives, focusing on developing guidance and industry standards to prevent money laundering in the financial industry.)

This group of heterogeneous industry leaders from the international art market were seeking ways to develop and implement good governance principles and due diligence best practices in order to level the playing field with a view to ensuring that individual players would not damage the reputation of the entire industry. It was hoped that by adopting self-regulatory standards, the need for specific, legislation or regulatory standards would be avoided, as these could be costly for the industry to implement. It was also felt that the industry itself would be best placed to address issues of confidentiality where it is reasonably justified, and to come up with practical solutions.

Institutions approached to join this endeavor included auction houses and gallery owners, highly reputable art experts, art insurers and Art Basel, the biggest contemporary art trade fair in the world. At the time, Art Basel was supportive of the effort but opted not to actively participate as it considered its role to be that of a ‘landlord’ for art dealers rather than an art dealer itself or the appropriate venue for actively influencing market practice.

Today, ten years later Art Basel has developed the Art Market Principles and Best Practices and will make them an integral part of the exhibitor regulations. They have stated that the Art Market Principles and Best Practices be ‘included in the applications for all three Art Basel shows going forward, coming into effect with the Miami Beach show in 2018’.  We very much welcome this development and are curious to understand what has led to this change of heart. This development has provided us with an opportunity to reflect on the role that should be ascribed to the Basel Art Trade Guidelines in view of the apparent evolution in thinking over the last decade.

The role of the Basel Institute on Governance. The Basel Institute is an independent non-profit institution devoted to interdisciplinary research and policy advice in the areas of public, corporate and global governance.  It also has a longstanding and strong track record in Collective Action to counter corruption, money laundering and promote good governance. The Basel Institute is not an advocacy organization nor does it engage in ‘finger-pointing’ campaigns, but is solution oriented and takes account of the various stakeholder perspectives of an industry sector or of a public administration environment. At the same time the Basel Institute does not claim to be an expert in relation to the industry sectors in which it works – and the same applies to the global art trade. The Institute’s contribution lies in its extensive experience working with a wide range of industry sectors to address financial crime related reputation and legal risks that can undermine customer trust and confidence.

The Collective Action model that developed the Wolfsberg AML Principles served as the basis for the international art market initiative, though the focus was not only on money laundering but on a broader range of questions often discussed at an inter-governmental level, e.g. export of cultural objects, return of cultural objects, Code of Ethics for Museums, Principles on Nazi-looted Art, Code of Ethics for Dealers in Cultural Property etc.

In 2009, the Basel Institute organized and hosted a conference titled ‘The Governance of Cultural Property: Preservation and Recovery’. One of the liveliest topics debated was the role of the art market as a safe haven that enables dubious players to operate as well as art objects of doubtful origin and value to circulate within the legitimate art market. During this event the Basel Institute was approached by an international auction house and The European Fine Art Fair (TEFAF) on these matters; these discussions lead to a series of round table meetings in Basel and New York.

These meetings carried on the discussions initiated at the 2009 conference with the aim of identifying best practices to mitigate the risks associated with the industry being a safe haven for illicit funds. The Basel Institute served as facilitator to the deliberations that involved representatives of auction houses, various international art dealers’ associations as well as American and European lawyers. The outcome was a draft of the Basel Art Trade Guidelines.

The Resonance of the Basel Art Trade Guidelines. To put it in a nutshell, the major achievement of the Guidelines was the clear consensus that for all major transactions, not only the provenance of the object is important, but equally the provenance of the purchaser’s funds, including the ultimate beneficial owner. The "know your client" rule, which is well established in the financial sector, and the need for transparency in relation to financial transactions relating to the trade in art have therefore become relevant to the global art market. On the other hand, the Guidelines take into account the art market’s need for discretion when it is justified, and to find a well balanced ruling in a possible claim for disclosure of a client’s or beneficial owner’s identity. The Guidelines sought to address all fundamental integrity issues of the industry. Rather than going beyond existing legislative requirements they attempt to harmonize and group various applicable international recommendations and national legislations.

The Guidelines were met with positive feedback from many art dealer associations and art lawyers, in strong contrast to the auction houses that all of sudden appeared to get cold feet and decided not to pursue the further adoption and ratification of the draft Guidelines. Because of that lack of uptake, the Guidelines were largely dormant and further efforts that could have been taken by the industry to protect it from being misused for undue purposes and from consequent reputational damage were not pursued. On the other hand, there was no lack of media interest in the Guidelines, and the most frequent question asked was about the reasons for the drop in commitment by the industry. This media interest has possibly contributed to a growing awareness of the art industry’s increased susceptibility to exploitation by criminals.

Other endeavors since then, including a shortened version of the Basel Art Trade Guidelines focusing on money laundering aspects, were met with a lukewarm response at best. This included, or was especially so in Switzerland, despite the fact that the freeports and free economic zones in various Swiss cities have given rise to discussion on the risks they may present in relation to money laundering.

When comparing these limited successes in the art market with the success of the Wolfsberg AML Principles among private banks, one could perhaps come to the conclusion that the banks’ fear of losing their reputation was rated more highly than the fear of losing certain customers. In the art market it seems to be the other way round: the fear of losing net sales as a result of adopting tighter controls on money laundering and related risks is apparently greater than any concerns about the risk of losing reputation, or legal risks for that matter.

Nevertheless, the dynamic of addressing risks in the international art market has not, and will not stop. Since January 2016 for example, the Swiss regulator treats every art dealer as a financial intermediary with the respective transparency duties. And while we are still missing traction for common guidelines and a leveled playing field, individual actors have taken action. These days all major auction houses have an in-house compliance function and Art Basel is adopting its in-house Art Market Principles in 2018. While these developments must be viewed as positive, they do not address the reputational risk for the sector as a whole. When only the major players adopt such standards and others continue to play by the old “rules,” the whole industry can be pulled down by one incident of misuse. In addition, it is likely that regulatory action will be further strengthened, as the art market is recognized as a high-risk in several recent country reports issued by the world’s leading AML watchdog, the Financial Action Task Force (FATF).

The Basel Art Trade Guidelines have been a source of inspiration for academics, lawyers and others, as well as a focal point for the media and commentators interested in the issue of preventing illegal activity in the art industry through soft law. The publication of the Guidelines as a final document and the Basel Art Trade AML Principles will continue to prompt and inform public discussion and may even encourage further discussion of integrity in the global art trade. We hope this will lead, sooner rather than later, to more and indeed more concerted action in the art market, involving key players at all levels, thereby ensuring that the art market can continue to prosper without taking unnecessary legal and reputational risks.

____

Dr. Thomas Christ, pictured above, is a member of the Foundation Board of the Basel Institute on Governance. He recently retired as Managing Director DHL, Global Forwarding Switzerland. He studied History of Art and Law at the University of Basel and concluded his academic education with a PhD in fundamental copyright questions in the film industry. He's a member of the Board of the Foundation for the Museum of History of Basel.

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