Lessons in Regulation for the Art Industry


On July 29, Sotheby’s held the first-ever global art auction livestreamed on the internet. It was a resounding success, highlighted by the sale of a Francis Bacon triptych for $84.6 million.1 Given the massive scale of online commerce, as well as the shutdowns precipitated by the COVID-19 pandemic, that might not seem extraordinary to people unfamiliar with the art and antiquities market. But the Sotheby’s auction factors into a larger debate on how to regulate the $64.1 billion global art market, including the $28.3 billion U.S. market.2

The Looming Challenge

The art and antiquities market was originally built by status-conscious aristocrats; today’s industry inherited from them a culture of discretion that shades into outright secrecy. That opacity has always allowed room for misconduct of various kinds; at issue now, however, is incursion into the game by more nefarious operators. Given the increasing ingenuity with which criminal actors of all stripes—individuals, organized criminal groups, terrorist organizations and even state-sponsored entities—diversify their income streams and launder their illicit proceeds, the art market cannot pretend to be resistant to their encroachment. As anti-money laundering (AML) regulation has tightened across much of the world, some of those seeking to circumvent it have gravitated toward the art market. And when an industry that relies on anonymous transactions operates online, the risks only heighten.

Regulation is surely coming. The recent U.S. Senate report on money laundering in the art market, agreeing in substance with the House of Representatives, explicitly recommends amending the Bank Secrecy Act (BSA) to treat art and antiquities establishments as financial institutions—meaning that dealers in art and antiquities would incur the same AML responsibilities and liabilities as banks (as well as both gem and jewelry dealers).3 The House would also mandate a 180-day interagency study of “the facilitation of money laundering and terror finance through the trade of works of art or antiquities.”4 This comes two years after the European Union, with its most recent AML Directive (the Fifth AML Directive), began mandating AML procedures for sellers involved in any art transaction of 10,000 euros ($11,964) or more.5

Thus, the question for the industry’s major players is not how to resist regulation, but how to turn it into value added. And a sense of how that might work can be found in an arena that, in all other respects, could scarcely be more different: the private security industry.

Lessons From an Unlikely Source

Privatized security has existed for thousands of years, but the modern concept of corporate entities providing armed security services traces its roots to the 1960s. The industry boomed in the early days of the wars in Iraq and Afghanistan and armed contractors became a significant portion of the U.S-led coalition’s “total force.” Following several high-profile incidents involving alleged human rights violations and serious crimes, the largely unknown and almost completely unregulated private security industry came under intense scrutiny. In 2008, 17 countries—those most connected to the industry—produced what is known as the Montreux Document, a restatement of laws and a set of “good practices” for engaging with private security.6 Taking this as a signal that serious regulation was on the horizon, the industry began to organize itself and to engage with states, civil society organizations, private clients, governments and international organizations. Through a multistakeholder initiative, an international code of conduct was drafted and adopted in 2010, outlining the industry principles, by which the industry agreed to operate and a subsequent International Code of Conduct Association was established to oversee the code.7 Furthermore, a series of formal, measurable, auditable standards (eventually ISO 18788:2015) that, for the first time, included human rights obligations, were produced and adopted, leading to a significant professionalization of the land-based security industry.8

As this multistakeholder and standards-based approach to regulating private security on land continued to develop, the private maritime security industry expanded almost exponentially between 2008 and 2012. Piracy off the coast of Somalia had sparked an unprecedented need for security assistance and privately contracted armed security personnel onboard ships became the favored approach to protecting vessels from attack. This offshore offshoot of the private security industry operated in the even more complex legal environment of the maritime domain. Much as the land-focused companies faced public scrutiny, private maritime security companies needed to demonstrate legitimacy in the face of growing international concern about weapons proliferation and questions about dubious operational practices that could endanger lives—in some cases, leading to accusations of innocent fishermen being killed. The larger, better established companies realized that they had to develop industry-specific regulation to ensure that good practices—within applicable laws—were documented and demonstrably followed.

Self-regulation by a trade association is not effective and opens the art industry to criticism of unfair and opaque oversight

Initial attempts at self-regulation failed. Those first efforts involved certification by a trade association—which was too conflicted to be effective. In other words, the same association could not engage in trade promotion and meaningful regulation at the same time. Furthermore, some companies saw a competitive edge in resisting or skirting any attempts at regulation, and without marketplace buy-in, the association-based certification was of little value. Eventually, the International Organization for Standardization (ISO) produced a standard for private maritime security in support of counterpiracy off Somalia. This was accomplished with the support of the International Maritime Organization and the shipping trade associations as they worked together with private security companies and private security industry associations that were set up not for trade promotion but to assist regulation. In 2012, an initial Publicly Available Specification (PAS) was produced and in 2015, ISO 28007:2015 was accepted as the way to verify standards across the private maritime security industry.9 Though it has held up well over the past five years, the lack of multistakeholder input should be a lesson for any other industry attempting to lead its own regulatory process. Excluding issues like human rights standards led to fierce criticism of the initial ISO 28007 PAS that was eventually addressed in 2015. Furthermore, the scope of the standard, even today, is limited to one issue: protection of ships transiting the formally declared “high-risk area” off Somalia, leaving the rest of the industry, operating elsewhere, without standards or oversight.10

The lessons from the private security industry’s regulatory experience are instructive for the art market as it faces similar challenges.11 First, self-regulation by a trade association is not effective and opens the art industry to criticism of unfair and opaque oversight. Second, a trade association that engages with other stakeholders for the express purpose of assisting the regulatory process can help protect the interests and discretion of industry actors who do not wish to be publicly visible through the regulatory development process. But that trade association cannot also be involved in trade promotion. Third, multistakeholder initiatives can be helpful in bringing about a sensible articulation of the key principles that are important to everyone—buyers, sellers, dealers, museums, governments, etc. If everyone has a voice in the process, it gives the process legitimacy and it makes it more likely that all the key issues—like AML—are considered and addressed. Fourth, with the involvement of key actors, the main principles that are vital to the legitimate function of the industry can be preserved rather than jeopardized by ill-conceived regulation. Finally, the community of stakeholders built through the process can be vital to both ensuring an inhospitable marketplace for bad actors and working together to address new developments as they arise—perhaps the skill that has proved most vital to success in 2020.

When an industry is free to establish its own ethical boundaries, different entities demonstrate commitment to different standards

Applying the Lessons

The art market is now in a similar position to where the private security industry found itself a little more than 10 years ago. Since the turn of the century, its reputation has been harmed by a number of high-profile scandals—among them the case of Italian dealers funneling looted antiquities to dealers and institutions willing to launder them,12 a major auction house’s attempt to auction a looted Cambodian statue,13 the prosecution of prominent dealers for defrauding customers14 and for trafficking in stolen goods,15 and a massive Malaysian corruption scandal that included laundering money through purchases of contemporary art.16 Those episodes of malfeasance, alongside others, have demonstrated that the art market is not up to the task of regulating itself.

Though an international legal framework for regulation exists in principle through such mechanisms as the 1970 UNESCO Convention and the 1995 Unidroit Convention, these are geared toward cultural heritage (antiquities, for the most part) rather than more recent art, and in any case are not in themselves meaningfully enforceable. When an industry is free to establish its own ethical boundaries, different entities demonstrate commitment to different standards. Furthermore, there are limits, at least for now, to some art market actors’ legal responsibilities. For example, while the code of ethics adopted by the International Council of Museums sets fairly explicit standards for due diligence in acquisitions, any due diligence-related to money laundering or tax fraud is, at this point, outside the remit of such institutions.17 The major auction houses have their own internal AML policies, but their legal and compliance departments must still function in a highly competitive environment in which sales are critical, information is very closely guarded and transactions are often opaque. Museums need to keep visitors and revenue coming in with notable acquisitions. Meanwhile, actors aiming to do the right thing must compete with the unscrupulous dealers, advisors, sellers and buyers who knowingly perpetrate or facilitate theft, fraud and money laundering.

Now, caught between the seeming inevitability of at least some external regulation on one hand and the heightened risks of the post-COVID online marketplace on the other, the art industry needs to draw a line in the sand—and be seen drawing that line. Taking an open, collaborative, good faith approach to external regulation through a multistakeholder initiative would not only mean countering crime and reversing the slow corrosion of reputational damage; it would also give first-mover advantage to those industry players who buy into the development of a new, more regulated, more transparent art market.

As complex as the issues involved may be, the art industry could soon be facing a stark and simple choice: Risk a whole new range of consequences by expanding the market while resisting regulation, or risk only the temporary discomfort of accepting and facilitating a reasonable degree of transparency. If the industry can regard the latter choice as an opportunity rather than a threat, it can ensure a resolution in which everyone wins but the criminals. 

David Soud, head of research & analysis, I.R. Consilium, Owings Mills, MD, USA, dsoud@irconsilium.com

Ian Ralby, Esq., CEO, I.R. Consilium, Owings Mills, MD, USA, imralby@irconsilium.com

Russ Armstrong, London, U.K. armstrongr@hotmail.co.uk

  1. Scott Reyburn, “Francis Bacon Triptych Sells for $84.6 Million,” The New York Times, June 29, 2020, https://www.nytimes.com/2020/06/29/arts/design/sothebys-online-auction-francis-bacon.html
  2. Dr. Clare McAndrew, “The Art Market 2020,” Art Basel and UBS, 2020, https://theartmarket.foleon.com/2020/ubs/index/
  3. “THE ART INDUSTRY AND U.S. POLICES THAT UNDERMINE SANCTIONS, Staff Report,” United States Senate, Permanent Subcommittee on Investigations, Committee on Homeland Security and Governmental Affairs, July 27, 2020, https://www.hsgac.senate.gov/imo/media/doc/2020-07-29%20PSI%20Staff%20Report%20-%20The%20Art%20Industry%20and%20U.S.%20Policies%20that%20Undermine%20Sanctions.pdf
  4. “AMENDMENT TO THE RULES COMMITTEE PRINT 116–57,” United States House of Representatives, Committee on Rules, July 17, 2020, https://amendments-rules.house.gov/amendments/CTA_COUNTER_02_xml717201713181318.pdf, 81.
  5. “Anti-money laundering (AMLD-V)—Directive (EU) 2018/843,” European Commission, 2018, https://ec.europa.eu/info/law/anti-money-laundering- amld-v-directive-eu-2018-843_en
  6. “The Montreux Document on Private Military and Security Companies,” International Committee of the Red Cross, June 11, 2020, https://www.icrc.org/en/publication/0996-montreux-document-private-military-and- security-companies
  7. “The International Code of Conduct for Private Security Providers,” International Code of Conduct Association, 2010, https://www.icoca.ch/en/the_icoc
  8. “ISO 18788:2015 Management system for private security operations — Requirements with guidance for use,” International Organization for Standardization, 2015, https://www.iso.org/standard/63380.html
  9. “ISO 28007-1:2015 Ships and marine technology — Guidelines for Private Maritime Security Companies (PMSC) providing privately contracted armed security personnel (PCASP) on board ships (and pro forma contract) — Part 1: General,” International Organization for Standardization, 2015, https://www.iso.org/standard/63166.html
  10. Ian M. Ralby, “What Went Wrong When Regulating Private Maritime Security Companies,” Operational Law in International Straits and Current Maritime Security Challenges, (Berlin, Germany: Springer, 2018) https://link.springer.com/chapter/10.1007/978-3-319-72718-9_9, 161-180.
  11. Ian M. Ralby, “Accountability for Armed Contractors,” Fletcher Security Review, 2, no. 1 (Winter 2015), 15-19, https://059927f5-49c6-47fa-92e9-3d499a0e6da2.filesusr.com/ugd/c28a64_82a6a04a9f314a67bd434ad7b3dc5490.pdf
  12. Peter Huck, “How the Getty Scandal is changing the art world,” Financial Review, December 3, 2005, https://www.afr.com/life-and-luxury/arts-and-culture/how-the-getty-scandal-is-changing-the-art-world-20051203-jkewb
  13. “Blood Antiquities: After Lengthy Fight, Sotheby’s Agrees to Return Looted Khmer Statue,” Chasing Aphrodite: The Hunt for Looted Antiquities in the World’s Museums, December 16, 2013, https://chasingaphrodite.com/2013/12/16/blood-antiquities-after-lengthy-fight-sothebys-agrees-to-return-looted-khmer-statue/
  14. Randy Kennedy, “Two Dealers in Pre-Columbian Art Are Indicted,” The New York Times, March 3, 2005, https://www.nytimes.com/2005/03/03/nyregion/two-dealers-in-precolumbian-art-are-indicted.html
  15. Justin Rohrlich, “International art expert charged with selling looted Cambodian antiquities for the past 50 years,” Quartz, November 28, 2019, https://qz.com/1758283/international-art-expert-charged-with-selling-looted-cambodian-antiquities/
  16. Graham Bowley and William K. Rashbaum, “Has the Art Market Become an Unwitting Partner in Crime?” The New York Times, February 19, 2017, https://www.nytimes.com/2017/02/19/arts/design/has-the-art-market-become-an-unwitting-partner-in-crime.html
  17. “ICOM Code of Ethics for Museums,” International Council of Museums, 2017, https://icom.museum/wp-content/uploads/2018/07/ICOM-code-En-web.pdf

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