By Cates Saleeby.

In late 2018 and the first half of 2019, there have been two major developments in the European Union’s regulation of movement of artworks and cultural goods from country to country or from seller to buyer. The Fifth Anti-Money Laundering Directive (“the Fifth Directive”) and the EU Regulation on the Introduction and the Import of Cultural Goods (“the Regulation”), which were adopted in 2018 and 2019, respectively, intend to increase transparency of art purchase and sale transactions, disrupt criminal activity and cut off a source of terrorist financing through the use of the art market. The Regulation also aims to help protect cultural goods from loss and destruction through the same processes it uses to stamp out smuggling. Despite these laudable objectives, art market professionals raised concerns that both the Fifth Directive and the Regulation will have a negative impact on the art and cultural goods and even hinder return of cultural objects to their country of origin when the art has seemingly little to no involvement in financing terrorism or money laundering.. This article will address the validity of these as they are weighed against the intended objectives of the two legislative acts to decrease criminal activity and foster transparency in the art market.

The European Commission explained the need to update the Anti-Money Laundering Directive in its 2017 and 2019 Supranational Risk Assessment Reports (SNRAs). Specifically, the 2019 SNRA identified nearly fifty products and services vulnerable to money laundering, including free ports, often used to store art. The European Commission also decided to introduce Regulation in response to the 2017 calls to action from the G20 and the G7 summits about the necessity of preventing the criminal activity that antiquity trafficking can be used to finance.

As a reminder, EU regulations are directly binding on all member states without the need to be transposed into national law. By contrast, directives set forth thresholds and goals that must be reached along with deadlines for member states to implement the directives into their own national laws. Both of these kinds of legislative acts are adopted through the ordinary legislative process: first, the European Commission proposes legislation; the European Parliament hears the draft and may either adopt the proposal or amend it; then the European Council hears the Parliament’s position and votes to either accept it, which leads to the adoption of the legislative act, or to amend the Parliament’s position and return the proposal to Parliament for a second reading. If the legislative proposal is returned for further readings, the Parliament examines and approves, or rejects, the Parliament’s position. A Conciliation procedure is available if needed to reach an agreement on a joint text. Legislative acts are adopted once the European Parliament and the European Council both approve the legislative proposal and the final text is signed by the Presidents and Secretaries General of both institutions.

Jean-Michel Basquiat, Hannibal (1981), used in a money laundering scheme in 2007, when it was brought into the U.S. with a declared value of $100. (source: ArtNet).

The Fifth Anti-Money Laundering Directive

The Fifth Directive is meant to prevent money laundering and terrorist financing in the European Union. It entered into force on July 9, 2018; all member states must implement it into national law by January 10, 2020. The Fifth Directive has a wide scope, targeting money laundering in a variety of different sectors. It replaced the Fourth EU Anti-Money Laundering Directive (“the Fourth Directive”), which has been in effect since 2015. The Fourth Directive, which expanded “Know Your Customer” requirements for many industries, like real estate sales and banking, did not target the art industry. The Fifth Directive extended the “Know Your Customer” expectations and other requirements to art dealers and other service providers and introduced enhanced due diligence measures to monitor suspicious transactions involving “high risk” countries.

Specifically, the Fifth Directive requires that art dealers adhere to the following:

  1. “Know Your Customer”: The Fifth Directive now requires art dealers to verify the identity of anyone purchasing a work of art worth €10,000 or more, no matter the payment method. The Fourth Directive only applied to cash payments and did not specify art dealers. This process of identification prevents anonymous buyers from hiding behind personal agents, as the regulation demands the identity of the beneficial owner. Many market professionals say that the €10,000 amount is too low and that it will hurt small businesses that may have trouble handling the extra steps required to complete a purchase. The €10,000 rule also can apply to “a series of linked transactions,” making it easy for a series of smaller sales to reach the threshold. The International Confederation of Art and Antique Dealer Associations (“CINOA”) and the British Art Market Federation (“BAMF”) both oppose this rule, saying that the increased administrative burden is too much for art dealers to bear.
  2. Enhanced Due Diligence: sellers are obligated to identify the source of their client’s wealth as part of the higher standard of due diligence required by the Fifth Directive. While this investigation is meant to prevent money laundering, commentators point out that carrying out these enhanced due diligence requirements may cause further implications for data protection compliance. “High risk” transactions, such as those involving cultural artifacts or other items of cultural, historical or other significance, also require extra steps in due diligence, as do sales involving high-risk countries.

Much of the Fifth Directive encourages a risk-based approach to transactions to minimize the risk of money laundering, which is a growing concern of many national governments. The risk-based approach asks service providers to take on the responsibility of gathering enough information about the customer and the sale to understand the risks involved and mitigate these potential risks. The Responsible Art Market (“RAM”) initiative based in Switzerland created a toolkit with checklists to assist art market professionals in conducting client due diligence and collecting other information required under the Fifth Directive. The toolkit notes potential “red flags” for a transaction, like incomplete provenance, the seller changing their story as to how they acquired the work, or the presence of offshore companies or trusts to hold assets only. RAM also offers other materials for those in the art market as they transition to adherence to the new expectations.

EU Regulation on the Introduction and the Import of Cultural Goods

The main objective of the Regulation is to prevent the loss of cultural goods, preserve cultural heritage, and block terrorist financing though sales of looted cultural heritage. Before this rule, while some individual member nations like Germany and Malta addressed the movement of cultural goods across their national borders, the EU as a body did not have laws that addressed the import of cultural heritage objects. The European Commission, the executive body of the EU, argued that because there were inconsistencies in laws from country to country, criminals were encouraged to import illicit objects through “the more vulnerable routes.” Importers were able to choose to introduce illegal goods from Iraq, Syria, and other countries into EU states with less stringent laws and then could move the goods more easily to nations with stricter regulations. The Regulation is meant to make the exploitation of such vulnerabilities difficult by establishing uniformity in the law directly applicable in all EU member states. The Regulation was formally adopted on April 17, 2019, and entered into force on June 27, 2019. The prohibition that forbids import of cultural goods unlawfully removed from non-EU country of origin will take effect in late 2020.

The Regulation applies to cultural goods such as art, collectibles, and antiquities being imported into countries in the European Union from outside countries. Cultural goods over 250 years old, of any value, that are products of archaeological excavations or elements of artistic or historical monuments will require an import license (Regulation, Article 4, Annex Part B). A number of scheduled cultural goods over 200 years old and worth €18,000 or more per item will require an importer statement (Regulation, Article 5, Annex Part C). Import licenses, importer statements, and/or customs declarations are also required for the entrance of objects into free ports. Import licenses must be obtained from the “competent authority of the Member State in which the cultural goods are placed under one of the customs procedures” of the Regulation for the first time (Regulation, Article 4.4). The process of submitting and processing the necessary documents will vary from country to country. This practice shifts the burden of proof to the importer to provide all of the correct documentation for an object and removes the burden from the customs authorities of the receiving country, who may have had to confirm the legitimacy of an imported object in the past. Protecting the recipient country is not necessarily a bad practice, but it may place a disproportionate burden on the importer that may be even impossible to uphold. If, for example, verifying the origin place of a rare book creates a cost for a seller, that seller may or may not be able to pass that cost on to a buyer. Such an expense may defeat the purpose of the import, depending on the value of the object.

The import information will be stored in an EU-wide electronic database maintained by the EU Commission that is set to go live on or before June 28, 2025. The EU present a broad “new common EU definition” of what constitutes a cultural good, which, according to the European Commission’s Taxation and Customs Union, should cover a broad range of “items of which countries consider that they have great artistic, historical or archaeological value and which belong to the country’s cultural heritage.” The lack of specificity means that a wide variety of objects could be considered cultural goods and the vagueness also may lead to disputes over whether an object is subject to the Regulation.

There is also a belief among some of those involved in the art trade that the legislators drafting the bill misunderstand the issues at hand and that the mandated solutions were not well-considered. Representatives from CINOA, BAMF, the International Association of Dealers in Ancient Art (“IADAA”), and the International League of Antiquarian Booksellers (“ILAB”) have all issued statements expressing concern over the Regulation. In 2017, the European Commission ordered a study to be done on the state of trafficking in the EU: “Improving Knowledge on Illicit Trade in Cultural Goods in the EU,” led by academics Donna Yates and Neil Brodie. Both with much experience in research of illicit trafficking, archaeology, and cultural property law, Dr. Yates and Dr. Brodie are currently affiliated with the School of Social and Political Sciences at the University of Glasgow and the University of Oxford, respectively. The results of the study were not published until July 12, 2019, after the implementation of the Regulation, leading critics to believe that the European Commission acted without full knowledge of the extent of illicit trade on the art market, despite having the best intentions to resolve antiquities trafficking.

According to the Yates/Brodie report, the difficulties of providing an accurate picture of the size of the illicit cultural goods trade because of insufficient data supply and inconsistencies in that data (p. 196). It is also impossible to create a valid map of common illegal trade routes because these pathways change so frequently (p. 197) and because shipping by regular mail is now commonplace with the shift to online sales (p. 106). Yates and Brodie recommend greater transparency in the art market, specialized units within law enforcement agencies for cultural heritage, improving access to evidence, and raising awareness of the illicit trade in cultural goods, among other actions, to reduce the number of illegally imported cultural objects (pp. 197-213). The report also acknowledges the challenges of accurately measuring the volumes of annual illegal antiquities trade (p. 78), noting the low “€200 million” estimate from IADAA (p. 79) and the unconfirmed “billions of dollars” estimate of obscure origin, formerly traced to Interpol and from which Interpol has distanced itself (p. 78).

Impact on the Art Market

The directors of art world organizations like BAMF, IADAA, and CINOA have expressed criticisms of both the Fifth Directive and the new Regulation. Their concerns primarily focus on the cost and administrative burden to small and middle-market dealers and lack of clarity in the implementation, both of which are expected to have a negative economic effect on the art and antiques trade.

Before its adoption, international trade dealers fiercely opposed the Regulation. One of these critics, Vincent Geerling, Chairman of the IADAA, says the Regulation includes “a number of highly controversial points that will have serious implications for the trade, as well as collectors, if enforced.” For example, determining the country of origin of many antique books created in Europe can be difficult, as they often do not have signatures or other identifying information. Although the European Commission contended that the costs to the art market would not be excessive, dealers were concerned and disagreed, saying that the amount of effort required to import items would make it uneconomical to sell lower-valued items. With only more expensive items worth the investment of time and expense necessary to sell them, the market for less expensive would likely diminish, although the opacity of the art market makes it difficult to estimate how much. In 2016, the estimated value of the “legitimate arts and antiquities market” in the EU was €17.5 billion, a number that could fall after the Fifth Directive and the Regulation take effect.

Impact on art fairs may also be negative, as they will probably experience a loss of sales due to the difficulty of timely receiving licenses for cultural artifacts. Pursuant to the Regulation, some allowances would be made for temporary imports for art fairs to make it easier to bring objects into the EU, but if someone from an EU member country buys an artwork and intends to keep it in the EU, he or she would require a license in order to bring the artwork home.

Ultimately, the combination of both new pieces of legislation increases the “costs and paperwork” to the art business, a world known for its handshake deals. Those disadvantages, though, pale in the face of vast estimates for the amount of money laundered globally per year, which is estimated from $800 billion to $2 trillion. Unfortunately, it is unclear to what degree the art market contributes to that figure. The uncertainty surrounding that value underlies the dispute about whether or not the additional regulation to the art market is worth it. The Know Your Customer policy imposes an extra burden on the part of art dealers, but that effort seems negligible in the face of this volume of criminal activity. It seems that the benefits of reducing illicit trade, money laundering, and terrorist funding outweigh the increased cost of doing business in the art market.

Reviewed by Jana Farmer, Partner at Wilson Elser.


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About the Author: Cates Saleeby is a Summer 2019 Intern at the Center for Art Law. She is a rising senior at Vanderbilt University and will graduate with a double major in Classics and Medicine, Health, & Society in 2020. Cates can be reached at cates.saleeby@vanderbilt.edu.