Art Market Compliance As Seen From Switzerland

April 5, 2022

By Anna Brouver

No News – Good news?

There is nothing surprising about the fact that the art market gets more and more regulated. The call for “art market transparency” after decades (if not centuries) of handshake deals and painting examinations in bank vaults suggests regulations designed specifically for the arts sector that would require due diligence of the participants and help combat money-laundering and terrorism financing. While the EU and the US have already introduced specific rules and duties for art market participants with the publication of its 5^th Anti-Money Laundering (“AML”) Directive and the 2020 revision to the Bank Secrecy Act, the art market in Switzerland is still unregulated. This article examines the art market compliance in the EU and Switzerland.

Directives, directives, directives

In the European Union, art market participants, such as dealers, galleries and auction houses, are obliged to comply with the 5^th AML Directive, if the value of the transaction equals EUR 10’000 or more. What does this mean in practice?

The 5^th AML Directive^[1] obliged all art market participants to duly register by 10 January 2020 (However, in some places, like the UK the deadline was extended until 10 June 2021 due to the Covid pandemic^[2]). Thus all affected art dealers should assess their original business practices regarding keeping client records and performing background checks, as well as always follow a risk-based approach. In practice, this would mean that a dealer should be ready to cancel a transaction if the client is unwilling to provide any AML relevant requested information. In order to prevent any breach of the 5^th AML Directive, all clients, including potential clients, should undergo an internal due diligence process. This due diligence process is one that is already an established reality in the finance sector. The starting point for the AML rules are focused on the KYC, which means Know-Your-Client principle, also called CDD (Customer Due Diligence). This KYC principle is a core principle in the finance sector and has been for the last 1-2 decades, due to the scrutiny that the finance sector often undergoes. In the scope of that, one should identify whether a potential client is to be classified as a HRC (high-risk) client or PEP (politically exposed person). This would be based on certain business or VIP positions, residency in a high risk country or high risk activity, among other factors. Further, as part of the AML process, art market participants should be ready to file SARs (Suspicious Activity Reports) and should continuously provide compliance tutorials and AML training opportunities for their employees. Each art market participant should, at the end of the day, have a dedicated person who closely monitors all AML relevant processes. This role, the Money Laundering Officer, should be in charge of transforming the rules of the AML Directive into the internal company rules, and or policies.

Swiss Regulations

Coming back to Switzerland, and observing the current regulatory landscape here, where the 5^th AML Directive is not yet a reality, there are portions of the Directive that the market can focus on. In fact, many initiatives by conscious art market participants have been launched in the last few years in line with the Directive.

For Example, looking at the biggest art fair worldwide, which has its roots and headquarters in Switzerland – Art Basel- we can see that in 2017 their management introduced Art Market Principles and Best Practices^[3], which recommends all art fair participants duly comply with the rules and asks them to confirm it by signing the document. These rules ask the following of its exhibitors: that they comply with all applicable laws in the country or countries where they do business, including statutes governing the forgery of artworks and provenance, the governance of potentially stolen and looted artwork, and, most notably, the laws regarding money laundering. Although these rules do not fully bring the 5th AML Directive into the Swiss landscape, the organization itself has shown its dedication to the initiative by including anti-money laundering considerations into its policies.

In addition, an important initiative to be mentioned is the Responsible Art Market Initiative (RAM) founded in Geneva in 2015. The goal of RAM is to increase the transparency of the Swiss art market. The relevant guideline here are the Guidelines on Combatting Money Laundering and Terrorist Financing^[4]. These guidelines in general contain more practical advice for the Swiss art market, more exact than the directives of Art Basel.

Other regulations are also in place to deal with the risks associated with cash transactions. For example, natural persons and legal entities dealing with transactions involving more than CHF 100’000 in cash, even if they are made in several installments, but the grand total of the transaction is over CHF 100’000, are regulated by the Swiss Federal Act on Combatting Money Laundering and Terrorist Financing (AMLA) Art. 2 para 1 lit. b and Art. 8a.^[5]

Under these guidelines, dealers working with cash are obliged to verify the identity of the customer, establish the beneficial ownership and duly keep those records. Furthermore, they must clarify the economic background and purpose of the transaction if it appears unusual or if there are indications that assets are proceeds of a felony, an aggravated tax misdemeanor, or coming from a terrorist organization. The duty to report the suspicious transactions (SAR) is elaborated in Art. 9 of AMLA in detail. See for example, here.

So, if some people think that Switzerland is a paradise for art transactions, it is only partially true.

Outlook for the more regulated Swiss art market

What possible scenarios are to be expected of Switzerland in the coming 5-10 years? There is no doubt that the Swiss market will also need to adjust to the worldwide trends toward more regulations and transparency in the art market. Whereas Swiss law already imposes requirements on banks to conduct due diligence on their clients and transactions in excess of CHF 100’000, art market participants might wish to be ahead of the trend and adopt the EU best practices. Therefore, it is highly recommended to follow a reasonable approach while transacting in the art market: trust your gut feeling, perform basic customer due diligence and avoid being involved in non-transparent art transactions.

About the Author:

Anna Brouver is holder of the Master in Law and the Executive Master in Art Market Studies. She lives and works in Zurich / Moscow.

Suggested Reading:

Art Market Principles and Best Practices, ART BASEL, https://d2u3kfwd92fzu7.cloudfront.net/AB_Art_Market_Principles_and_Best_Practices.pdf.

Art Market Guidelines, RESPONSIBLE ART MARKET, http://responsibleartmarket.org/art-market-guidelines/.

Anti-Money Laundering and Countering the Financing of Terrorism, EUROPEAN COMMISSION, https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/anti-money-laundering-and-countering-financing-terrorism_en

Anti-Money Laundering for the art and finance market: How to mitigate money-laundering risks in the art and finance industry?, DELOITTE SOLUTIONS, https://www2.deloitte.com/lu/en/pages/art-finance/solutions/dkyc-aml-art-and-finance-industry.html

Footnotes

1. See 2018, O.J. (L156) 43, https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32018L0843. ↑
2. Rena Neville, The art market is ‘high risk’ for money laundering, so ignore new regulations at your peril, THE ART NEWSPAPER (Mar. 26, 2021),https://www.theartnewspaper.com/2021/03/26/the-art-market-is-high-risk-for-money-laundering-so-ignore-new-regulations-at-your-peril. ↑
3. Art Market Principles and Best Practices, ART BASEL, https://d2u3kfwd92fzu7.cloudfront.net/AB_Art_Market_Principles_and_Best_Practices.pdf. ↑
4. Guidelines on Combatting Money Laundering and Terrorist Financing, RESPONSIBLE ART MARKET, http://responsibleartmarket.org/guidelines/guidelines-on-combatting-money-laundering-and-terrorist-financing/ ↑
5. Federal Act on Combating Money Laundering and Terrorist Financing (Anti-Money Laundering Act, AMLA), March 31, 1998, SR 955.0, AS 892 (Switz.), https://www.fedlex.admin.ch/eli/cc/1998/892_892_892/en ↑