With the global economy reeling from the direct effects of the COVID-19 pandemic, no sector is spared from its impact, including the art market. As auction houses seek to find ways to sustain business during this time of uncertainty, beginning or in other cases expanding the use of online auctions has emerged as a potentially viable approach to resuming some semblance of normalcy.
This shift to, or increased use of, online auctions and transactions could lead to a much larger pool of bidders and thus raises important questions around the effectiveness and scalability of existing financial crimes compliance controls related to customer identity, due diligence, and related anti-money laundering (AML) controls. As auction houses seek to protect their business and the integrity of their sales, it is crucial they adhere to existing regulation in the EU and are mindful of proposed legislation in the United States intended to keep nefarious actors and money laundering efforts at bay. Consequences of even unwittingly accepting and selling items with illicit provenance or accepting laundered funds even if the items and sellers are clean can be swift—including criminal or regulatory investigations and having bank accounts closed, which could then make it harder to establish a new banking relationship.
It is important for art market businesses to take stock of their current policies and procedures and understand that there is no one-size-fits-all approach to developing a compliance program.
- Due Diligence/Know Your Customer: Understanding the provenance of the items being sold is crucial. Knowing whether the item was properly obtained in a legal manner is important both reputationally and legally. On the other end of the transaction, knowing who is behind a bid or purchase and the source of those funds is a critical step for auction houses, who as previously noted may now see an entirely new and expansive community of bidders enter the fray. While some patrons may have legitimate reasons for preferring to remain anonymous, particularly in high-value transactions, this lack of transparency can also have a dark side: it facilitates the concealment of criminals’ identities and makes it more difficult to understand the source of funds. Auction houses must balance the desire for anonymity with the need to understand a buyer’s intentions.
- AML Program Scalability: Financial crime in general and money laundering in particular represent an existential threat to art dealers, galleries, and auction houses, particularly as the market increasingly turns to online sales. In addition to building programs that are effective and that match the needs of their institution, organizations should ensure that their compliance programs are able to scale to meet the needs of the environment, both in this time of current uncertainty and beyond.
- Expert Resources: The laws and regulations surrounding financial crimes compliance are complex and require careful analysis to determine how they apply to a given transaction and what steps art market businesses need to take in order to mitigate risk. Much like financial institutions have leaned on expert resources, the art market can, too. Those in the art world can obtain help with mitigating risk before issues arise. Partnering with those who have expertise in both regulatory compliance and the art world will accelerate compliance.