DEALING WITH LAUNDERING IN THE SWISS ART MARKET: NEW LEGISLATION AND ITS THREATS TO HONEST TRADERS.

• Author: Steiner, Katie L.

On January 1, 2016, new regulations took effect in Switzerland that impact the country's art market. The laws aim to close channels for laundering money and illicit antiquities within the art trade. Because the art market's opacity provides attractive conditions for launderers, Switzerland's new regulations introduce greater transparency in transactions for high-value works of art and in duty-free art-storage facilities, such as the Geneva freeport. The Geneva warehouse serves an international clientele of art collectors, who have traditionally stored works of art in the facility anonymously and indefinitely, without adverse tax consequences. The freeport provides essential services for honest collectors who wish to protect their holdings secretly and securely. In addition, the freeports offer an ideal climate for an emerging class of art investors, who buy and store works until they appreciate in value. By requiring greater transparency within the Swiss art market in an effort to curb illicit activity, the new regulations threaten to undermine the conditions that support the interests of legitimate art traders. Because Switzerland introduced its regulations unilaterally, Swiss art traders should advocate for self-regulation within the international art market in order to level the competitive playing field and preserve the conditions of confidentiality that honest traders depend on.

CONTENTS I. INTRODUCTION II. THE VALUE OF THE SWISS ART MARKET: TWO KEY FEATURES A. Contemporary Art Sales B. Art Storage 1. Freeport Mechanics 2. Benefits of the Freeports for Legitimate Art-Market Actors III. LAUNDERING OPPORTUNITIES MADE POSSIBLE BY SWISS ART Market Opacity A. Laundering Illicit Antiquities B. Money Laundering IV. SWITZERLAND'S NEW ART MARKET REGULATIONS AND POSSIBLE CONSEQUENCES FOR HONEST TRADERS A. Reporting Requirements on Art Purchases Could Chill Legitimate Sales B. Customs Requirements and Time Limits Also Inhibit the Legitimate Art Market While Failing to Eliminate Laundering Opportunities 1. Background 2. The Rule C. Two Additional Problems: Punishing the Innocent and Racing to the Bottom V. POTENTIAL SOLUTION: ART MARKET SELF-REGULATION VI. CONCLUSION I. INTRODUCTION

Switzerland is home to one of the world's most robust art markets. (2) It serves an international clientele of collectors and collecting institutions by offering a broad range of amenities, including auction houses, important sale venues, and secure art storage. The Swiss art market, like the art market as a whole, has traditionally enjoyed little governmental regulation. (3) Recently, however, Switzerland has introduced new measures to combat laundering opportunities in the art trade. These efforts reflect broader international attempts to close avenues for terrorist financing, as well as the trade in illicit cultural property. (4) Yet Switzerland's new regulations, in effect as of January 1, (2016), may give rise to a number of unintended consequences. (5) Specifically, the measures threaten to undermine the valuable services and favorable legal and economic conditions that allow the country's legitimate art market to thrive. In addition, Switzerland's regulations could drive art collectors--including innocent ones--to similar but less controlled markets in other countries, thereby driving valuable business away, while doing little to stem laundering practices in the art market globally. (6)

This paper analyzes the delicate balance between curbing criminal activity and protecting the interests of honest buyers, sellers, and dealers in one of the world's most important art markets. It examines key aspects of the Swiss art trade, especially the role that secure, confidential, and duty-free storage facilities play in maintaining the market's vibrancy. It argues that Switzerland's new regulations, which aim to combat laundering by requiring greater transparency in cash transactions and storage warehouses, threaten to eliminate the conditions of secrecy and confidentiality that are vital to legitimate art- market actors. Finally, the paper proposes a way forward for the honest traders in the Swiss art market who face competitive disadvantages and diminished services in light of the legislation. By promoting self-regulation within the international art trade, Swiss art dealers stand the best chance of leveling the commercial playing field while curtailing illegal activity and preserving the confidentiality on which many collectors depend.

2. THE VALUE OF THE SWISS ART MARKET: TWO KEY FEATURES

   1. Contemporary Art Sales

      A brief survey of the Swiss art market's distinguishing characteristics, and its economic value in general, demonstrates the high stakes involved in the country's new anti-laundering legislation. Switzerland plays a key role in the $75 billion global art market, ranking among the world's top five trading centers, along with France, England, Germany, and the United States. (7) Major auction houses, including Christie's and Sotheby's, (8) as well as numerous private dealers, operate in Switzerland. (9) The country plays its most publicized role in the art market during Art Basel, the contemporary art fair staged in Basel each June. (10) The event has emerged as the world's most important venue for buyers and sellers of twentieth and twenty-first century art, attracting 284 galleries from 33 countries in 2015. (11)

   2. Art Storage

      Switzerland attracts foreign collectors not only because of major events such as Art Basel, but also because of its political and financial stability, which produce favorable conditions for buying and storing valuable works of art. (12) In fact, one commentator has posited that "Switzerland's most important role on the international art market is probably as an interim depository for art objects." (13) Among the storage options available to collectors are the so-called freeports, or duty-free warehouses located in Geneva, Basel, Zurich, and Chiasso. (14) Freeports emerged in Switzerland in the mid-nineteenth century to provide temporary storage for grain and other commodities in transit to a final destination. (15) Over time, the Geneva freeport has evolved to specialize in storing art and other valuables, often for extended durations. (16)

      1. Freeport Mechanics

         The canton of Geneva is the majority shareholder in the Geneva freeport. (17) Rather than managing it directly, the canton leases the facility to a private firm that operates it. (18) The cost of rental space in the facility varies, but estimates range from approximately $1,000 for a medium-sized painting to $5,000--$12,000 for a small room that can accommodate multiple objects. (19)

         The search for safe investments following the global financial crisis and the subsequent surge in art collecting means that demand for freeport space is high. (20) Business is strong in Geneva, where the freeport generates approximately CHF 10 million annually for the canton. (21) In 2014, the freeport expanded to a new building, which provides an additional "10,400 [square meters of] high security rental space" for clients. (22) The precise contents and value of the goods stored in the Geneva warehouse are unknown, but reports estimate that Switzerland's freeports together house CHF 100 billion in property, approximately 40% of which is art and antiques. (23) New regulations targeting the warehouses therefore have significant business interests at stake.

         Freeports are designed to reduce barriers to trade by decreasing "the number of transactional events at which some customs or tax might be collectable." (24) Because goods stored in freeports are understood to be "in transit," an owner defers all customs duties and tax liabilities until the goods leave the warehouse. (25) The freeports are therefore "free" not only because of this deferral, but also because owners pay no value-added taxes on goods sold within the warehouses. (26) The tax advantages permitted by the freeports have "tend[ed] to transform [them] into long-term holding zones," where owners store property indefinitely, and where it may change hands several times without attracting a levy. (27)

         Although numerous freeports exist globally, only the Geneva freeport and five others--located in Singapore, Monaco, Beijing, Luxemburg, and Delaware--specialize in storing works of art. (28) These facilities cater to collectors not only because they offer tax advantages and deferred customs duties, but also because they provide tight security and other art-related services. (29) High-tech security measures are a hallmark of these facilities, whose clientele include museums, dealers, collectors, and art investors. (30) The Geneva freeport reportedly houses not only works of art, but also fine wine, precious metals, and automobiles. (31) Some dealers also operate galleries and showrooms in the freeport to facilitate the financially advantageous intra-warehouse sales, transforming the "temporary" storage site into a fixed retail space. (32)

         Traditionally, the freeports have further catered to collectors by offering discrete and confidential storage. (33) The precise contents of the warehouses are unknown, due in part to the limited reporting requirements imposed on the warehouse managers. (34) Since 2009, Swiss law has required freeport mangers to maintain inventories of the warehouse contents and the names of the individuals entitled to dispose of the property. (35) Customs officials also have the power to conduct inspections. (36) Yet neither measure facilitates meaningful disclosure: warehouse officials only share records with customs officials upon request, and customs officials have no obligation to share inventory information with foreign authorities. (37) As such, the freeports have traditionally afforded collectors with a high degree of confidentiality, requiring neither public disclosure of their identity nor the precise details of their holdings.

      2. Benefits of the Freeports for Legitimate...