As if ensuring compliance with money laundering regulations, though essential, was not a sufficiently complex logistical burden on the art market (see our blog on combining both tech and human AML skills to achieve compliance), the lack of consistency around the most basic question: “what is a work of art?” leaves the art market experiencing its own form of “Tower of Babel”.
Since January 2020, each EU country has been obligated to implement the 5th EU Anti Money Laundering Directive which expands AML and counter terrorist financing regulations to include certain art market participants trading in selected “works of art”.[1] Instead of having one consistent definition of art across the entire EU and UK, each of the 27 EU countries define “work of art” differently, and the implementation of the Directive reminds one of the Babylonian tower-building exercise. To add to the problem of 27 different European definitions, the US is about to enter the fray and add art market participants trading in antiquities to its soon-to-be regulated AML sector.
One might well argue that global governments’ ambition to combat risks of money laundering and terrorist financing in the art market is important (if earthlier than the Babylonian’s aspiration) despite the lack of reliable data establishing the size and nature of the risk. However, the discrepancies across definitions internationally create a situation ripe for confusion as art market participants frequently buy and sell works of art internationally.
Starting with the EU, most countries, including the UK post-Brexit, have implemented the 5th Directive into national law. The Member States’ disparities in pre-existing national legislation imply there are vastly different approaches to the 5th AML Directive across the EU. Unlike EU Regulations that are self-implementing, EU Directives are not, but must be implemented consistent with the laws of the 27 Member States. This more flexible approach for Directives may work well for other markets and industries where the core “product” is consistently defined, but since the definition of the central “product” of the art market, works of art, is wide ranging, the ultimate effect is confusion and uncertainty. To highlight the varying definitions, consider just three European countries: the UK, Germany and Italy; and the USA.
The UK’s art market anti-money laundering and counter-terrorist financing laws came into force on 10 January 2020 making art market participants “regulated persons”. The UK definition of “work of art” includes part of a pre-existing definition, which is found in the UK Value Added Tax Act of 1994.[2] Here, the definition of art, broadly speaking, includes: a painting, drawing, collage, decorative plaque or similar picture; an original engraving, lithograph or other print; an original sculpture or statuary; a sculpture cast; a tapestry or other hanging; a signed ceramic; an enamel on copper, or an original/signed photograph, subject to limitations.[3] The definition clearly includes fine art, from old masters to contemporary. The UK definition does not however include decorative arts, antiquities, coins, ethnographic items, stamps, antique cars or the booming digital art market or non-fungible tokens.
A similar approach exists in Germany where the updated legislation also came into force in early 2020. As in the UK, the German implementation is built on pre-existing VAT legislation[4] for its definition of “work of art”. Using pre-existing definitions is highly convenient for the domestic art market participants in both countries. The German anti-money laundering legislation includes fine art as well as antiquities as objects within the scope of the AML regime.[5] However, German regulations leave room for interpretation as to the applicability of the regulations to items such as tapestry, ceramics, enamels on copper and photographs, all of which are included in the UK.
A dramatically different application of the Directive by Italy went into effect in October 2019 through Legislative Decree 125/2019. Unlike its UK and German counter parts, Italy uses not a single source to define work of art, but a combination of different laws. These laws include the Italian Constitution, the Code of Cultural Heritage and Landscape as well as some tax laws. Given the lack of clear guidance from the Italian legal system, navigating the various definitions and how they relate to one another presents its own challenges.
Another striking difference between the Italian and British application of the Directive is that Italian law[6] explicitly includes in its regulatory scheme those “who carry out trading activities in ancient things and works of art …”. [emphasis added] However, the ambiguity as to what is meant by ancient or antique things or the lack of specificity in defining works of art calls for speculation. The Code of Cultural Heritage and Landscape also includes “cultural goods”, or objects with an artistic, historical, archaeological, ethno-anthropological, archival and bibliographic interest and antiques and collectibles. The Italian Constitution as well as the Code of Cultural Heritage and Landscape are silent as to what extent modern and contemporary art are included, leaving open the possibility that it is excluded.
In a nutshell, the definitions of work of art within Europe include:
- In Italy: antiquities and antiques [which usually means items more than 100 years old], but by implication seems to ignore modern and contemporary art;
- In Germany: both antiquities and modern and contemporary art, and
- In the UK: antiquities are excluded, but modern and contemporary art are included.
Well outside the jurisdiction of Europe, the US has also begun the process of adding the art market to its AML regulated sectors. Like the Italians, the US includes antiquities. Although as of 1st of March 2022, the US definition of antiquities and the related regulations are yet to be finalised, they are expected to go into effect before the end of 2022. In February 2022, the US Treasury recommended against immediate ML regulation of the US fine art market, in favour of completing other priorities such as their work on beneficial ownership and real estate.
Simultaneously, the British regulators are actively considering whether to add antiquities and digital art to their regulated sector. The boom of digital art, including non-fungible tokens, has brought to light new questions surrounding how to define “art” and how to determine the appropriate scope of art market AML legislation. The question not yet being addressed by the various international regulators is whether art market participants trading in luxury items like jewellery, wine and watches should be part of the ML regulated sector.
The intention to regulate the art market to avoid its abuse by money launderers and terrorists is laudable. However, the inconsistency and uncertainty present in the international art market around the most basic of questions, “what is art?”, is particularly challenging for the international trade. If COVID has taught us anything about the art market, it is that the art market is incredibly resilient and flexible. In a utopic world, the discrepancies will eventually be harmonised hopefully in a way that reduces the risks while supporting a healthy, vibrant art market.
Rena Neville & Paula Trommel
Corinth Consulting
[1] Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (Text with EEA relevance) https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:32018L0843
[2] See https://www.legislation.gov.uk/ukpga/1994/23/section/21.
[3] See https://www.legislation.gov.uk/ukpga/1994/23/section/21 for the complete definition, including qualifications and exclusions.
[4] Nr. 53 der Anlage 2 des Umsatzsteuergesetzes
[6] Legislative Decree 125/2019