The Art Market Regulation Report

How 105 Art Businesses in the UK reacted to market regulation (and a Pandemic) for the first time in history.
The year 2020 saw the UK Art Market contending with two novel problems: a pandemic and regulation. One of the last remaining unregulated markets, from the 10th of January last year, the transposition of the 5th Anti-Money Laundering Directive into national law required all Art Market Participants - Galleries, Dealers, Advisors & Auctioneers - to train staff, define Policies, Controls and Procedures and carry out Customer Due Diligence prior to concluding a sale.

Similar to the measures used by banks, the 5th Directive places an unavoidable and urgent requirement on Art Market Participants who are considered vulnerable to the threat of Money-Laundering, Financial Crime and Sanctions evasion.

Dealing in Art, it should come as no surprise that most Galleries and Dealers are lacking both resource and experience, as there is little to no competency within the business relating to compliance or anti-fraud. Not unsurprisingly the initial reaction was one of confusion and frustration, quickly overshadowed by the prospect that the inevitable friction regulation introduces could see non-essential ‘emotional’ art purchases suffer at a time when they are more important than ever.

While there are broad similarities between regulation as it pertains to historically regulated markets like banking and finance, the operational impact on a gallery is markedly different owing to a lack of infrastructure, time, money and man-power. Consider that banks will employ Compliance Officers to analyse information and make decisions thereafter, or have large, mature infrastructure to process, manage and maintain the range, depth and breadth of information with which a gallery must now deal amidst a remote setting.

Consider that galleries receiving and storing ID documents to email inboxes opens the door to identity theft in an industry already routinely targeted by Cybercriminals, where these risks and attacks will increase further in lieu of remoteness. While the Money-Laundering Regulations require requests for ID be made, a GDPR and Data Protection issue has been created in its wake for the Art Businesses lacking in systems and infrastructure. Email is no longer a safe channel of communication. Indeed, Business Email Compromise - referring to a range of attacks involving email hacking - saw invoice fraud increase by 155% in June, not long after Dickinson lost £2.4million in January to the very same threat.

The differences between historically regulated sectors are compounded further owing to the unique way in which galleries, dealers and auctioneers have come to operate with one another over time. Consider many Art Businesses purchase works from one another, consign works to one another, or may purchase on behalf of their clients. This type of activity when viewed through the lens of the 5th Anti-Money Laundering Directive is viewed as acting in agency and subsequently requires parties involved having to disclose on whose behalf they may be acting. 

While the heart of the regulation concerns itself with a call for transparency to reduce illegitimate activity, it is seemingly at odds with two fundamentally important characteristics which define the business of dealing in art: Discretion and privacy, two characteristics no less that are oft sought by legitimate buyers and collectors.

With the UK, the EU and Switzerland having adopted the directive, the road to a regulated Art Market is both unavoidable and an eventuality. While the UK accounted for 21% of all sales of works of art, the US is twice that at 44%. Not unsurprisingly, the 1st of January brought antiquities dealers in the US under regulation, while the US Treasury placed Galleries and Museums on notice in November. 

February 2021 will mark the start of a phased registration as the UK Art Market Supervisor HMRC requires all Art Market Participants to Register their business for Money Laundering Supervision for a firm deadline in June.
Tom Noon
Co founder & CEO

Who is in the Report?

This report shines a spotlight on the UK Art Market’s response to its first year getting to grips with regulation.

The report draws on activity and input from 105 different Art Market Participants. This group consists of Galleries, Dealers, Auctioneers and Art Advisors and focuses on those based in the UK, that may have a presence in Europe or internationally.

1 in 24 (4%) of art buyers were either Politically Exposed or Sanctioned*.

Of the 2,596 Customer Due Diligence Reports created for Art Buyers, 104 reports included a Politically Exposed Person or Sanction profile.
*A Politically Exposed Person refers to anyone deemed susceptible to bribery and corruption owing to their prominent public function.

Just how risky is the Art Market?

As part of their Customer Due Diligence reporting, Art Market Participants are required to adopt a risk-based approach that sees a decision to proceed with a transaction broadly reflective of risk relating to three elements: Country, Transaction and Customer.

Learning that 96% of transactions - albeit for a comparatively small sample size - are not conducted with Politically Exposed or Sanctioned individuals suggests that these Art Businesses are perhaps not exposed to a level of risk we would ascribe to a bank, dealing with far greater volumes of customers over the course of a year. 
That said, while the comparatively smaller numbers of clients a gallery will deal with will contribute to a reduced risk on this basis of a reduced exposure, are we to infer that the remaining 96% of customers with whom these Art Businesses were dealing presented no risk if we are to apply to the thinking which saw regulation take effect?

Unfortunately, the gallery must contend with the very real and practical issue that by and large, no Money-Launderer can be identified on the basis they come with ‘tags attached’ making the prospect of navigating these murky waters somewhat difficult. Indeed, while databases allowing one to search to see if a client is a Politically Exposed Person or Sanctioned are not without their distinct advantages, they are of course predicated on detection - dealing with known threats - not on prevention alone. 

Consider for a moment, the second element which will contribute to the ‘riskiness’ of a possible sale of a work of art: The size of the transaction. Put simply, the size of the transaction is directly proportional to risk and it is this aspect in particular that could be considered the ‘Achilles heel’ for any gallery, dealer, art advisor or auctioneer attempting to navigate risks. 

Indeed, since 2017 the international Art World has had to contend with the very real and growing threat of Cybercrime owing to the high-value transactions that are commonplace. With an apparent lack of infrastructure and experience, Galleries are an attractive and lucrative target for Invoice Fraud which sees a Gallery’s email account hacked and invoices intercepted.

July saw 348 new Customer Due Diligence reports created, reflecting a more active, online art-market calendar.

An industry moves online.

Prior to the pandemic the art world had long remained somewhat reluctant to embrace online as a primary sales channel. While Instagram was considered useful for raising awareness and platforms like Artnet and Artsy provided an ongoing source on online enquiry, the physical fair remained the preferred route.

Following the first lockdown in March and with the confidence of a fair-going public at an all time low, the art world was left with no alternative other than to move online with Sotheby’s one of the first to react with its Contemporary Art Day Sale. Marking a paradigm shift, the increasing transparency brought about by regulation was echoed by price transparency at online fairs, with many galleries taking advantage of viewing rooms provided by ArtLogic.

With Customer Due Diligence reporting and record-keeping required prior to the completion of a sale, the volumes of Customer Due Diligence reports tends to suggest a stream of activity that is seemingly in lockstep with an online art fair calendar. 
January

177 new Customer Reports created

February

258 new Customer Reports created

March

194 new Customer Reports created

TEFAF Maastrich

7th - 14th March

Art Basel Hong Kong

18th - 25th March

April

180 new Customer Reports created

May

121 new Customer Reports created

Frieze New York

5th - 9th May

Sotheby's Contemporary Art Day

14th May

June

234 new Customer Reports created

Bonhams Prints and Multiples Sale

18th - 19th June

Art Basel

17th - 26th June

Phillips Design Sale

19th June

Masterpiece

22nd -28th June

July

348 new Customer Reports created

Bonhams Modern British and Irish Art Sale

1st July

Phillips 20th Century & Contemporary Sale

2nd July

Christie's ONE

10th July

Christie’s Modern and Contemporary Art Evening Sale

11th July

Phillips New Now Sale

15th July

Sotheby's Rembrandt to Richter

28th July

August

61 new Customer Reports created

September

218 new Customer Reports created

October

284 new Customer Reports created

Christie’s 20th Century Evening Sale

6th October

Frieze London & Masters

13th - 17th October

Phillips’ 20th Century & Contemporary Art Day Sale

21st October

November

255 new Customer Reports created

TEFAF New York

1st - 4th November

Sotheby’s Impressionist & Modern Art Day Sale

19th November

London Art Week

27th November - 11th December

December

266 new Customer Reports created

Art Basel Miami Beach

2nd - 6th December

Indeed, the two most active months July and October saw major art events underway including Art Basel, Phillips Design Sale, Masterpiece, Christie’s ONE, Sotheby’s Rembrandt to Richter, Frieze London and Frieze Masters.

Conversely, with TEFAF Maastricht cut short due to the pandemic - and TEFAF New York replaced by TEFAF Online - the final quarter shows a return to activity in November and December which more closely mirrors the start of the year in February as the art world was emerging from winter and looking forward to spring.

Keeping buyer participation to a minimum is key.

It took an average of 59.7 seconds for art buyers to provide information to an Art Market Participant so they could carry out Customer Due Diligence.
Customer Due Diligence is a two sided affair requiring participation from both the Gallery and its clients. It should come as no surprise however that the simple act of asking clients for information was and remains one of the biggest concerns an Art Business must reconcile as it contends with client exception, privacy and service all now conducted under the shadow of regulation.

Indeed, unlike many other goods and services, a work of art is an entirely non-essential, emotional purchase and subsequently - there was - and remains a degree of reluctance on both sides to entertain regulation. While the gallery wants to avoid offending a client with whom it has dealt with many years for fear of losing a sale, the client is often concerned about what is happening to their highly personal information and the reasoning behind the request.

With anything that is seen to reduce friction for both gallery staff and their clients top of mind, many continue to email all their clients informing them of the regulation, independently of whether or not the client was looking to buy now or in the future.

Owing to the pandemic, Customer Due Diligence was and remains a remote affair which sees the gallery having to ‘Verify Identity’ before it carries out any subsequent Due Diligence. Referring to an aspect of the regulations that enables the gallery to demonstrate the person on the document is the person that has supplied them, this becomes doubly difficult remotely.

In the first instance the gallery must request a range of information, which will see requests made for Utility Bills - and other forms of Proof of Address - which in a paperless world aren’t always immediately at hand. Moreover, the Art Business will require reliable means to prove and satisfy itself that any information and documents are supplied by the person on them. Remoteness and lack of face-to-face relationship, opens up vulnerabilities that any fraud ring will look to abuse. Consider that before the pandemic, 63% of all fraud took place remotely.

That aside, once all this information is received, the gallery without suitable systems realises it now has highly-sensitive client Passports and ID documents stored on gallery computers and in staff inboxes and contained with email threads and client correspondence.

What started out as a regulatory issue in January, fast becomes a GDPR nightmare in an industry already besieged by hackers and cybercriminals adept at manipulating information, taking over email accounts and stealing or manipulating any information deemed valuable or exploitable.

Lack of regulatory harmonisation creates an uneven playing field.

49.9% of art buyers providing documents for Customer Due Diligence were UK citizens, while 24.8% were from the US.
While the UK, the EU and Switzerland are transposing the directive into national law, the 5th Anti-Money Laundering Directive - or an equivalent regulatory reform - isn’t an international initiative.

While many consider the UK a ‘front runner’ in response to its swift transposition that will see UK art activity supervised by HMRC, the US has been slower to respond. Indeed, it was January 1st 2021 that saw the US bring Antiquities dealers into the scope of regulation while Art Dealers were placed on notice in October 2020.

This lack of consistency and increased transparency brought numerous challenges concerning client privacy and more notably issues where US-based Art Advisors and Consultants were looking to purchase works on behalf of their clients.

With UK Art Market Participants required to carry out Customer Due Diligence on the ‘Ultimate Beneficial Owner’ of the work of art, there was considerable pushback from Art Advisory firms who were met with ‘new rules of engagement’ that saw galleries, dealers and auctioneers - without a suitable alternative - having to contend with the painful and frustrating issue of getting Advisors to disclose the identity of their clients.

Although this report focuses on UK Art Market Participants only, Art is and remains an international market. That said, while there remains a lack of regulatory consistency across the pond, there is an equivalent problem in its wake.

Offshore companies contribute to workload.

Companies, Trusts and other ‘entities’ involved 3 times as much admin and equivalent analysis by Gallery Deputies and Nominated Officers.
When purchases are made on behalf of a company, trust or other ‘entity’, the analysis and administrative effort involved is appreciably greater.

Unlike a Private client - where the source of funds is to be paid from a personal account - dealing with entities sees the Art Market Participant carrying out Customer Due Diligence on directors with significant control i.e. 25% or more of the company, in addition to receiving and analysing a range of Company Verification documentation.

In cases where the entity is outside the jurisdiction of the UK, a lack of international standardisation and transparency concerning company information introduces a very real problem in that there may be little to no information available on the company and its directors.

Moreover, as it is not uncommon for company structures to have directorships held by other companies: The process becomes not unlike peeling away layers of an onion sometimes without end. 

That said, while there are an increasing number of jurisdictions that provide Beneficial Ownership Registers to help illuminate who has a controlling interest in a structure, there remain countries that decline to offer such databases, leaving the gallery to rely on information supplied by their point of contact at the company.

When viewed through the lens of the 5th Anti-Money Laundering Directive, these jurisdictions can be fast considered to act as a smokescreen, presenting issues for both buyers and sellers.

Art Business Insight.

When approached for comment, a small sample of those featured in this report responded.
On facing regulation
Gathering information from agents for ultimate buyer where one or more party is involved, because of their worries about disclosing identity.
Sladmore Gallery, London
Concerns for 2021
Aspects relating to reliance and confidentiality remain an issue, I think there is still work to be done here on clarification and understanding the need for dealers to be discreet with their clients information. I also think further attention needs to be paid to standardising our approach within the art industry as every gallery seems to approach the regulations slightly differently.
Stair Sainty, London
Responses from clients
Truthfully most of them have been very good because we are incredibly blunt from the get go when making our sales. We have a small customer base which is also helpful and know the majority of our clients well. For the most we outline the requirements of what they need to supply straight away and break this down for them if there is any confusion and try to make this easy for them. But again this process is dependent on us managing our clients whimsical ways…
Luxembourg & Co. , London
On facing regulation
The most difficult aspect has been confirming exactly who you have to conduct the due diligence on and establishing exactly what documentation needs to be provided. Often deals have a number of people in the chain in both directions and it's not always possible to access everyone. Even though guidance has been published these nuances in deals do not always fit the standard procedure. Navigating this with sensitivity has been a challenge. It is made more difficult when a company or organisation makes a purchase because the obligations to ascertain company directors and beneficial owners is more sensitive than just an individual.
Stair Sainty, London
Concerns for 2021
I believe a fee for registered AMPs is to be introduced to help pay for the regulation of the scheme. Which would seem like adding insult to injury right now.
Sladmore Gallery, London
On facing regulation
I think the most challenging aspect has been adjusting to the new protocol of asking for clients identification and proof of address immediately after verbally confirming a sale. It was strange in the beginning as it can make a sale feel a little bit more severe than a smile, a handshake and 'a thank you very much, we will send you your invoice shortly'. It was a bit of a challenge, but after a while you do adjust and it has very much become the norm.
Bowman Sculpture, London
Responses from clients
Overall very well, we have not had many issues with people providing the documentation, the key has been clearly explaining the reasons why we are asking for it and providing them with mechanisms to transmit the information as conveniently as possible.
Stair Sainty, London
Responses from clients
In the main, and once clearly explained, most understand.
Beaumont Nathan, London
Concerns for 2021
There is always a fear that things will become too complicated in terms of regulation, but at the end of the day, it is important to keep our business and our clients safe, and so we learn to adjust to the new regulations as they come into affect. Arcarta has been very helpful in providing an easy-to-use platform, and a great help in providing us with explanations and extra support when needed. 

Bowman Sculpture, London
Regulatory challenges
Collection of paperwork form clients in the US !
Beaumont Nathan, London
Responses from clients
Most of our clients do not find it strange as they are used to this protocol when banking, or purchasing goods over a certain amount. Many of our clients have been purchasing art works throughout the year, not just with our gallery, and so are used to being asked to provide their information at this point. However, some clients do take offence, as they feel they are being challenged.
Bowman Sculpture, London
On facing regulation
We understand the need for compliance however it's another time and energy consuming process for an already busy, small team.
Alon Zakaim, London
Responses from clients
So far everyone understood and complied without problems. We are all used to handing over our passports at hotels...
Ben Brown Fine Arts, London
Responses from clients
Most of them have been quickly compliant and understood very well. In a way, because of the pandemic this year, we did not not make the same number of sales that we normally do.
The Mayor Gallery, London
Responses from clients
Positively; our clients seem to understand the process and are willing to comply.

Alon Zakaim, London
On facing regulation
After the initial introduction and implementation into our daily practice (which was a huge shock) I find the daily administration the most challenging aspect of regulating KYC/CDD. Often it can be straight forward with clients but there is frequently times when documents need to be chased or are incomplete etc. As this is an add-on to my role it can often be a juggling act.
Luxembourg & Co. , London
Concerns for 2021
Enforcement – the lines between principle activity and agency activity is still a problem for the Art world.Additionally it would be VERY useful for the industry to get a clear guide to AML reliance between AMP regulated counter-parties. Standard wording for example...?
Beaumont Nathan, London
On facing regulation
To explain this new regulation to our existing clients and introduce them in confidence and trust to the [arcarta] platform.
The Mayor Gallery, London
On facing regulation
Too much paperwork, drafting of risk assessments, drafting of policies.
Ben Brown Fine Arts, London
Responses from clients
Most have been very compliant. The problems lie with the less straightforward transactions.
Sladmore Gallery, London
Concerns for 2021
That the procedures will become even more complicated and more administration will be required.
Luxembourg & Co. , London
Concerns for 2021
Any upheavals or major changes to the system and having to retrain staff.
Alon Zakaim, London
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