The US Art Market

Date: 08 Jun 2022

Silvia Ricciardi

Citywealth looks at the US art market with a feature article focusing on the evolution of art galleries and styles of art popular among investors, going through the problem of art fraud, with a mention to money laundering, not forgetting about NFTs.

Citywealth digs into the art world looking closely at the US market, engaging in a detailed discussion on US art, taking into consideration the most popular styles of art among investors, going through the evolution of art galleries and the problem of art fraud, with a special mention to NFTs.

Citywealth wants to thank the experts who contributed to the article: Judith Wallace, Partner, Co-Chair, Art Law Practice Group at Carter Ledyard & Milburn LLP, Alexandria Swette, Principal at Kobre & Kim LLP and Lara Levinson, Counsel at Kobre & Kim LLP.

Different art styles for an ever-changing art environment

Despite an overall dropping in sales due to in-person auctions, exhibitions and fairs being cancelled or postponed due to the pandemic and consequent global lockdowns, the US art market can still count on the strong impact of its art dealers and galleries, auction houses and museums. With new and innovative styles of art always around the corner, art collectors are constantly on the lookout for investment opportunities. Asking what styles of art are popular among investors, Judith Wallace says that “it runs the gamut from well-established artists to digital-born art. There is still strong interest in collecting well-established, acknowledged artists’ works, especially for investments.” Lara Levinson looks at art from a different angle. “Our practice focuses on representing ultra-high-net-worth individuals and families in disputes,” she says that there has been “a steady increase in disputes involving all styles of art, ranging from contemporary works to Old Master paintings to, more recently, NFTs.”

The problem of art fraud

In an article published in The New York Times in February 2022 there was a mention to a Treasury Department report which said that, while the art market could be vulnerable to money laundering, it did not recommend immediate government intervention to install further regulations.

Alexandria Swette’s team anticipated and reviewed the report stating that “even without further regulations in the near term, we are still likely to see increased regulatory scrutiny in the future. Earlier this year,there was a report on money laundering and terror financing in the art market, the US Congress extended federal anti-money laundering regulations, which are designed to govern the banking industry, through to antiquities dealers. Although the Treasury Department has thus far said further regulation is not necessary, this is likely to be a developing issue, particularly if we see a considerable uptick in cases of significant money laundering through art. Indeed, the study did contemplate certain information-sharing systems and other programs that may be appropriate down the line. Simply put, it’s unlikely this is the end of the regulatory story.”

“The Treasury Department did recommend targeted regulation of the art market, although it recommended that the Treasury department complete its work to close gaps in other areas of greater concern before doing so, as the pressing needs are in closing gaps in beneficial ownership and LLC transparency, real estate, and investment advisors,” outlines Judith, who adds that “the report correctly concluded that while the art market has some vulnerabilities, problematic transactions are a tiny fraction of all transactions, even at the higher price points; the vast majority of art market transactions do not involve violations of U.S. sanctions regimes or money laundering, and that broad-brush regulation of the entire art market at relatively low levels (e.g., transactions of $5,000) is not a sensible response.”

Looking at specifics, Judith states that “the report acknowledged that harmonizing requirements with the EU market would help to prevent transactions from being driven to the US for the purpose of avoiding regulation, but recommended higher thresholds than the $5,000 threshold used for suspicious financial transactions at banks. The $10,000 suspicious transaction reporting threshold in Europe did not reflect risks in the US, which is home to the world’s largest art market, so the report suggested scrutiny of transactions above $50,000 and entities in the range of $500,000 – $1 million in annual sales for imposition of a requirement for a compliance program. That said, any Treasury focus on transparency in beneficial ownership will have an impact on art market transactions, as purchases through and by entities such as Limited Liability Companies are common, and the inability to independently verify beneficial ownership is a challenge in transactional due diligence as to title and provenance, and makes compliance with voluntary AML programs challenging.”

If we take into account art transactions across borders, local regulations cannot be ignored. “For example, the current scheme in the UK now applies anti-money laundering rules to art market participants trading works of art valued at €10,000 or higher, – specifies Lara – and the US efforts discussed by the Times follow on the heels of laws recently adopted in Europe, where dealers and auction houses must now determine the identity of their clients and check the source of their wealth.”

In the present scenario what should art collectors be aware of? Alexandria suggests that “given the current landscape, from my US-law perspective, I believe art market participants should (and will) continue to be vigilant even without further regulations to ensure they are conducting due diligence both on provenance and title, and with respect to clients and their source of funds. In the current climate, buyers and sellers should also be mindful and seek advice, if necessary, regarding any sanctions regimes that may be in play. Our firm provides exactly this kind of advice on this range of issues. We routinely analyse source of funds to demonstrate their proper origin in situations involving a variety of assets (including art) that may be subject to freezes, sanctions, or other issues.”

Art galleries and NFTs

With the rise of digital offers available to art investors, art galleries are adopting improved solutions to cope with the ever-changing art environment, including NFTs. Judith confirms: “Art galleries are exploring ways to help their artists create editioned work, including though digital editions, but most art galleries are not necessarily well-equipped to provide in-house support to help artists create, promote and sell digital art, and especially NFTs. However, there’s more to creating an interesting NFT than using blockchain technology. The most interesting NFT transactions I have worked on have come through businesses that have established relationships with artists, and understand the artists’ creative processes and interests, but can marry that with new media to create a genuinely new art form that is more than an image of an existing physical work. Those types of projects seem to be the ones that will have staying power if interest in NFTs as a novelty fades.”

Alexandria comments: “We are definitely seeing a ‘vibe shift’, as the cool kids say. When Emily Ratajkowski sells an NFT (‘Buying Myself Back: A Model for Redistribution’) for $140,000 at Christie’s, you know something is up. There will always be shifts in trends and generational disagreements in taste making, but the bottom line is we are seeing a change.

Still, art market participants, including those investing in digital art, are educating themselves about ownership rights and how to protect those rights. We have also observed auction houses, art loan businesses, art investment funds, and other market participants exploring avenues to invest in traditional and digital artworks and offer those investments to their clients.”

Main issues (and related solutions) with NFTs in the art market? Our experts think that…

… NFTs raise unique concerns about ownership rights, hacking, and money laundering, especially when the purchase is made with digital currency. The Treasury Department report places its own focus on NFTs. Although the report notes that the amount of funds laundered through NFTs is comparatively low, we anticipate an increase in such schemes involving NFTs or similar digital vehicles for money laundering in the future. – Lara Levinson

… it is our artist clients who are most interested in the potential for NFTs. Even if they are not yet ready to jump in, they are interested in preserving their exclusive rights to create digital-born art or NFTs, and in ensuring that purchasers and licensors cannot do so without the artist’s involvement and consent. The perceived financial potential is driving people to explicitly provide for intellectual property ownership in estate planning, sales and licensing agreements, and even divorces, whereas they previously may have seen IP control as principally a means to ensure control of their legacy and to prevent merchandising of a more prosaic nature, such as the use of their artwork on apparel. – Judith Wallace

… there is a need for solutions to assist investors in protecting traditional and digital art assets, as well as their reputations, in the face of private ownership disputes or government attention and this is what we offer.  These solutions can include a proactive analysis of source of funds to resist money laundering accusations, along with related strategies to preserve reputation. – Alexandra Swette

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