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Art & Finance Report 2019

Art & Finance Report 2019

Art & Finance Report 2019 6th edition

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© 2019 dlaw Art & Finance Report 2019 | Table of contents

Table of contents

Foreword 14

Introduction 16

Methodology and limitations 17

External contributions 18

Deloitte CIS 21

Key report findings 2019 27

Priorities 31

The big picture: Art & Finance is an emerging industry 36

The role of Art & Finance within the cultural and creative sectors 40

Section 1. Wealth and the Global 45

Highlights 46

Art and collectible wealth 48

Global art market review 50

Auction guarantees 56

Regional trends 60

Regional profiles 62

Section 2. Art & Wealth Management 73

Highlights 74

Collectors & Art Professionals – Survey findings 2019 78

Wealth Managers – Survey findings 2019 84

Art & Estate Planning – Survey findings 2019 98

12 Art & Finance Report 2019 | Table of contents

Section 3. Art-Secured Lending 107

Highlights 108

Survey findings 2019 110

Size and structure of the art lending market 114

Art-secured lending trends 2019 116

Section 4. Art & Investment 125

Highlights 126

Performance: Art as an asset class 129

Fractional ownership – The new age of art investment? 146

Social investment models in art and culture 154

Section 5. Art & Technology 167

Highlights 168

Survey findings 2019 170

ArtTech trends and case studies 176

Blockchain versus user experience: Deloitte 190

Snapshot from the Hiscox Online Art Trade Report 2019 194

Digital Art and its market 196

Section 6. Risk Management & Regulation 201

Highlights 202

Survey findings 2019 206

Regulation: A focus on anti-money laundering efforts 212

13 Art & Finance Report 2019 | Foreword

Foreword

Since launching the initiative in 2011, we We are have seen the global art market ebb and flow: from the aftermath of the financial crisis to the peak of the market in 2016. delighted to In parallel, we have also monitored how the wealth management sector is present the increasingly responding to competitive pressures in its own industry, and the role art and collectible wealth are playing sixth edition in the transition to a more holistic wealth of the Deloitte management . Since our last report in 2017, external factors such as increasing political and Art & Finance economic uncertainty, rapid technological progress, climate change, and social Report. inequality have dominated the headlines on a daily basis. We live in a changing world, fraught with uncertainty. This is the context in which we should view the global art and Adriano Picinati di Torcello finance industry—the crucial intersection Director - Global Art & Finance between culture and wealth. Coordinator Deloitte Luxembourg With the advent of the millennial collector and an immense transfer of wealth on the Anders Petterson horizon, new ideas and models in the art Managing Director and finance industry are required. This ArtTactic year we have covered trends in social impact investing, and taken a closer look at how these models are currently working within the art and cultural sectors. We have focused on the opportunities these models offer and how they could be adapted to a broader wealth management strategy. We have also explored the strong interdependencies that exist between the art and finance ecosystem and the cultural and creative industries. Finally, we have examined the fifth EU anti-money

14 laundering directive and its implications for asset class. We are honoured to feature the the art market. We are proud to see that This suggests that the art and finance dazzling works of visual the art and finance topic is slowly but surely industry needs to do more to raise Lina Sinisterra in this edition gaining traction within the broader Deloitte awareness and educate its stakeholders of The Art & Finance Report. network and we welcome contributions to about key developments and broader An award-winning artist from the report from more and more Deloitte issues in relation to art-related wealth and , she has enchanted offices. We thank Deloitte , , how they will shape the future trajectory of fellow , collectors, and Netherlands, , Monaco, , the sector. gallery from all over the , , , of America, , , , We hope that this report will help to raise world. and for their input in this awareness of the developments and edition. initiatives that have emerged within the The vibrancy and colour of her art and finance industry over the past pieces mirror the dedication This report identifies the need for more couple of years. Transparency, regulation, and passion for what we at education and stresses that more and technology trends will play an Deloitte create on the canvas information and research are required if important role in the future of the art and of our industry. In light of this we are to make the case for change. This finance industry. However, a collaborative collaboration, we would like to year’s findings show that fewer collectors approach between all stakeholders (art thank Sinisterra for providing the and art professionals they are aware professionals, collectors (young and old), ideal palette to our survey. of developments in relation to art as an and wealth managers) is essential if we asset class this year compared with 2017. are to address the pressing issues and The wealth managers surveyed said the challenges we face, particularly as regards same, with just under half (54 percent) increasing trust in the art market and describing themselves as “aware” or “very in the years to come. aware” of what is happening compared with 57 percent who said the same in 2017. This could reflect that there have been fewer developments in the areas of art Above:  Big Bang - Excéntrica © Lina Sinisterra (2014) investment (such as art investment funds) Below: and art-secured lending (fewer operators Comer del Quiero © Lina Sinisterra (2010) and more consolidation). Conversely, however, we have seen rapid progress in technology ( and AI) and art- related regulations (such as anti-money laundering legislation).

These new trends are fundamental to the future well-being of the art and finance industry and the evolution of art as an

15 Art & Finance Report 2019 | Introduction

Introduction

The recent results from the major change in the art market and how many of Since the last houses show that auction sales slowed by the new ArtTech start ups aim to enhance 20 percent in the first six months of 2019 transparency and trust, whether through edition of the (based on results from Sotheby’s, Christie’s the use of blockchain technology or by and Phillips). This could signal that the art looking at ways to improve transparency market is heading for a period of weaker through more data, better data analytics, Deloitte Art & growth, as both the uncertainty surrounding and artificial intelligence. The other major Brexit and the US trade war with China take development that will compel the Report their toll on the global art market. market to become more transparent is regulation, which we cover extensively in Growth trends in the art market in recent section 6. The main focus of this section is in 2017, the years are also a cause for concern because the implications of the fifth EU anti-money they have failed to keep pace with the laundering directive, which will enter art market has growth in global wealth (see p.48 for into force in January 2020 and is likely analysis). Why are we not seeing a higher to have a significant impact on the art experienced correlation between wealth generation market and how it does business. Despite and the size and growth of the art market?1 the challenges that this regulation will What is holding wealthy individuals back present, findings from other sectors and 18 months of from investing more of their wealth in art as industries that have gone through similar an asset class? transition periods (the diamond industry positive growth. is discussed on p.241) suggest that the We will attempt to explore and answer reputational benefits of a more transparent these questions in this report, but and professionally compliant environment critical challenge when it comes to ultimately create more trust and favor the broadening the appeal of the art market is expansion of the market beyond its current a lack of transparency. In this year’s report, boundaries. 75 percent of collectors said that a lack of transparency was the biggest threat to the So maybe regulations and the rapid pace reputation of the art market, up from 62 of technological changes are exactly the percent in 2017. This is the highest reading ingredients the art market needs to grow we have observed since we first asked and expand beyond its existing client base. this question in 2016. If seasoned and Maybe a more regulated, professional, and established collectors say this is their main transparent art industry will generate more concern, one can clearly see why potential trust and interest among wealth managers new art buyers and collectors might shy who, in turn, will develop new art and away from the art market and thereby fail wealth management services and become to take advantage of the rapid growth in stronger advocates for art as a viable wealth. asset class. There is strong evidence of this in the US where, for example, the legal This report covers two main trends that framework (e.g., the Uniform Commercial could drive the art market towards greater Code (UCC)) has supported the growth and transparency. In section 5, we look at how development of the world’s largest art- technology has the potential to effect secured lending market.

1 W e have defined growth in the art market by using figures published by Art Basel and UBS in their Global Art Market Report 2019. The report publishes sales figures based on auction results as well as estimated dealer and gallery sales. 16 Art & Finance Report 2019 | Introduction

We would also like to highlight the growing interest and opportunities associated with social impact investment in the cultural and creative sectors. As we show in this report, these are likely to play a more important role in the development of the art and finance industry in the future.

We hope that this year’s edition of the Deloitte Art & Finance Report follows in the footsteps of its predecessors by providing a forum in which art and finance industry professionals can express their concerns and needs, in addition to suggesting ideas and possible solutions as to how these rit n i ffic roion octor issues are best approached. As ever, the main aim is to forge and foster long-lasting relationships within the Art & Finance world. ort ric uro ui i idd t tin ric o Methodology and limitations Deloitte Luxembourg and ArtTactic Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 conducted the research for this report between April 2019 and June 2019. We surveyed 54 private banks (down from 69 Sample 2011 2012 2014 2016 2017 2019 in 2017), and 25 family offices (down from Private banks 19 30 35 53 69 54 27 in 2017). Family offices 0 0 14 14 27 25

As in previous years, we conducted Art collectors 48 81 90 94 107 105 research among other important Art professionals 140 112 122 126 155 138 stakeholders in the Art & Finance market, such as art collectors and art professionals (galleries, auction houses, art advisors, art lawyers, art insurers, art SAMPLE DIFFERENCES: We are aware banks predominantly from , the logistics specialists, etc.). A total of 138 art that each year’s results may be affected US, and Asia (with no participation from professionals (down from 155 in 2017) and by variations in the sample size and ), and an additional 14 family offices 105 major art collectors participated in the geographical location of the wealth from Europe and the US. In 2016, the the survey (down from 107 in 2017). These managers responding to the survey. The survey included 53 private banks (38 from stakeholders from Europe, the US, the first art and wealth management survey Europe, nine from the US, and six new Middle East, Latin America, and Asia were was conducted in 2011 and included 17 banks from Dubai) and 14 family offices surveyed on a variety of topics relating to private banks from Luxembourg. In 2012, (with eight new family offices from the US). art as an asset class, their motivations, the sample was increased to 30 private In 2017, Deloitte Luxembourg and ArtTactic current and future involvement, challenges, banks, including banks from Poland and surveyed 69 private banks (of which five and opportunities. . In 2014, the survey included 35 were art-secured lenders) and 27

17 Art & Finance Report 2019 | Introduction

family offices. In this year’s survey, our We have expanded the regulatory section we believe that the results broadly reflect sample included 54 private banks (69 (section 6) this year to shine a spotlight the perceptions and attitudes that exist percent from Europe, 24 percent from the on the new EU anti-money laundering in the global wealth management and art US, 6 percent from Asia, and 2 percent regulation entering into force in January professional and collector communities. from Russia). We also included 25 family 2020. offices (40 percent based in the US, 56 External contributions percent in Europe, and 4 percent in Russia). Deloitte Luxembourg and ArtTactic We are delighted to be able to present recognize that the findings are indicative contributions from leading experts in this We would like to take this opportunity and understand their limitations. However, field in this report. to express our heartfelt thanks to all the survey participants: without their enthusiasm and support, this report would not have been possible. Like its predecessors, this report Section 1 of the report sets out our findings in relation to the outlook for the features a wide array of interviews and various art markets. These were based on qualitative Art Market Confidence Surveys contributions from leading figures in that ArtTactic sent out to 365 international art collectors, art advisors, galleries, and the art and finance industry. We are auction houses in May 2019. This section also includes auction data analysis of extremely grateful to them for the various modern and markets. It is predominantly based on following 48 contributions: data from Sotheby’s and Christie’s but also includes other auction houses when they represent a major share of the market. Introduction P68 T he art ecosystem for future generations | An interview with In order to present the survey findings P21 D eloitte CIS launches Art & Finance Hayashi Yasuta, Deputy Director, within the wider market context, we have service | Svetlana Meyer, Managing Cultural Economy and International given a broad, international overview Partner, Tax & Legal, Deloitte CIS Affairs Division, Agency for Cultural of recent developments across various Affairs. By Daisuke Kuwabara, Partner, regional modern and contemporary art P41 P erception versus reality: the Country Lead of Art & Finance Japan, categories. Most of the data was underrated potential of the Risk Advisory division, Deloitte Touche collected from Sotheby’s and Christie’s, cultural and creative sectors Tohmatsu LLC as they cover the majority of the modern Pascal Martino, Partner, Deloitte and contemporary art collecting categories Digital Leader & Banking Leader; P70 A rt & Finance highlights from the discussed in this section, although auction Andreas Steinbach, Manager, Strategy Low Countries | Rudolf Janssen, data from other leading auction houses is Regulatory & (EU Director, Cross-Border Tax; included for certain regional markets such Policy team); Miranta Evangelia Boura, Duco Wildeboer, Senior Manager, as those in China, , Russia, and Africa. Senior , Strategy Regulatory Financial Advisory, IPO & Governance & Corporate Finance (EU Policy team), Services, Deloitte Netherlands In the art investment section of the report Deloitte Luxembourg (section 4), we present analysis from Section 2 and Sotheby’s; for more information on the Section 1 P82 A paradigm shift in collecting art methodology used, please refer to p.140. P66 1 0 things you need to know to An interview with Christian Kaspar understand the next five years in Schwarm, founder of Independent the art market | Marion Maneker, Collectors. By Markus Seiz, Director, President and Editorial Director of Deloitte Germany ArtNews Media

18 Art & Finance Report 2019 | Introduction

P92 T he holistic wealth manager as Freya Stewart, CEO of Art Lending & Sustainability Services; Roberta art adviser | Frédéric de Senarclens, General Counsel, The Group Ghilardi, Sustainability Services, Art Consultant and Entrepreneur, Deloitte Italy founder of ArtMarketGuru P122 It is still possible to innovate in the art lending industry | An P158 T he long boom: investment in P94 M atchmaking for the future— interview with Aymeric Thuault, cultural infrastructure | Adrian wealth management and art Co-founder and Managing Director; Ellis, Director, AEA Consulting advisory | Harvey Mendelson, Aude Lemogne, Co-founder Managing Director, 1858 Ltd. Art and Managing Director, LINK P161 R eimagine: supporting the Advisory Management; Xavier Ledru, Deputy Fran Sanderson, Director, Arts & Head of Corporate Advisory Culture Investments and Programs, P96 T he evolution of art advisory & Structuring, Reyl & Cie Nesta services | Melanie Damani, Co- founder and Managing Director, P164 S upporting Culture | An interview Hottinger Art Limited Section 4 with Manoelle Lepoutre, Senior Vice President Civil and Society P129 Pe rformance: art as an asset P100 D o the new transparency Engagement at Total and Managing class | Ning Lu, Vice President of requirements for entities affect Director of the Fondation Total. Operations; Michaela Ben Yehuda, you? Pascal Noel, Director, Deloitte By Amandine Roggeman, Project Junior Art Market Analyst; and Monaco Manager Cultural Dialogue and Robert Cacharani, Senior Data Heritage, Civil and Society Analyst, artnet P102 A rt & taxation in Germany Engagement, Total Markus Seiz, Director, and Maida P141 T he Holding Period Effect: Mulic, Senior Manager, Deloitte benefits for holding art long- Germany Section 5 term | Michael L. Klein, Sotheby’s, Head of Sotheby’s Mei Moses P177 T he future of the P104 A rt on yachts: when one luxury ecosystem: a study of technology asset houses another | Janet P145 G rowing demand and and growth | Denis Belkevich, Xanthopoulos, Legal Adviser, sophistication in Asia Co-founder of Fuelarts and Roxanna Yacht Ownership & Administration Peter Lee, Leader, Family Office Zarnegar, Co-founder of Fuelarts, Department Manager, Rosemont and Family Enterprise Consulting Director of Operations, Training and Yacht Services; and Karolina Blasiak, Services Partner, Deloitte China Development, ARCIS Art Storage Art Advisor, Rosemont International Section 3 P150 T okenizing art & fractional P180 4 ARTechnologies ownership | Dr. Shermin Voshmgir, Niko Kipouros, Founder and CEO P118 A rt & Finance outlook Director of the Institute for A conversation with Evan Beard, Cryptoeconomics at the Vienna P181 A rteïa S.A. National Art Services Executive; University of Economics, and Philippe Gellman, Co-founder Ramsay Slugg, National Wealth founder of BlockchainHub.net, and CEO Planning Strategies Advisor; Dana Author of “Token Economy” Prussian, Vice President of Art P182 A rtory Services, Bank of America Private P152 A Note Music: cutting-edge Nanne Dekking, Founder and CEO Bank technology to invest in music copyrights | Matteo Cernuschi, P183 Verisart P120 T he current state of the asset- COO & Founding Director Robert Norton, CEO based art-secured lending market, and the challenges and P154 T he relationship between arts, opportunities over the next five culture, and sustainability years will bring Monica Palumbo, Partner

19 Art & Finance Report 2019 | Introduction

P184 W ondeur P221 U ltimate beneficial owners P236 Money Laundering in Arts, Olivier Berger and Sophie Perceval, and why you need to know a Swiss Perspective | Ralph Wyss, Co-founders about them | Pascal Eber, Attorney at Law, Partner, Audit Partner, Operations Excellence & & Assurance; Nadine Esposito, P186 Unlocking blockchain’s potential Human Capital; and Hajar Ouardi, Assistant Manager, Risk Advisory; for creators and rightsholders Consultant, Operations Excellence & Jasmina Iljazovic, Assistant Manager, Michael Rose, Partner, Blockchain; Human Capital, Deloitte Luxembourg Audit & Assurance, Deloitte AG Vikas Singla, Senior Manager, Switzerland Blockchain, Deloitte Canada P225 Safeguarding Philippe Heerren, Lawyer, Customs P238 AML and the art market in Russia P188 A rt & Tech Association & Trade, LAGA Belgium, a Deloitte Alina Davletshina, Senior lawyer, Kate Vasilieva, Co-founder/president, Legal member firm; Adrien Chiariello, Deloitte Legal CIS F.A.R.E Consulting GmbH; Kate Vass Former Manager, Operations Galerie GmbH (Founder, Creative Excellence & Human Capital, Deloitte P241 Experiences from the diamond Director); Tom Rieder, Co-founder Luxembourg industry | An interview with and Vice President, CEO dloop, Trisevgeni Stavropoulos, Head of Founder NOOW.ART P228 The fifth anti-money laundering Compliance at the Antwerp World directive: A European evolution, Diamond Center (AWDC). By Sarah P191 New prototypes to all not revolution, for art market Philips, Director, Risk Advisory; and aspects of the art ecosystem professionals in France | Sean Inneke Geyskens-Borgions, Senior Nadia Andersen, Manager, Dunphy, Director; and Olivier Thierry, Manager, Risk Advisory, Financial Innovation; Daniel Brunner, Head of Senior Manager, Deloitte Forensic, crime, Deloitte Belgium D.Lab, Deloitte Luxembourg France P244 Promoting responsible practices: P196 D igital art and its market P229 H ow Deloitte Netherlands Lessons learnt from the Elena Zavelev, Founder, New Art interacts with the art community Responsible Art Market Initiative Academy and Contemporary And to comply with the fifth AML Justine Ferland, Researcher at the Fair (CADAF) directive | Duco Wildeboer, Senior University of ’s Art-Law Manager, Financial Advisory, IPO Centre, attorney-at-law (Quebec, & Governance Services, Deloitte Canada), member of RAM’s Task Section 6 Netherlands Force; and Sandrine Giroud, Partner of LALIVE, Switzerland, Board P213 Interview with Michael Shepard, P230 Transposition of the fifth anti- member of the Art Law Foundation, Global Leader, money laundering directive into and member of RAM’s Task Force Risk and Financial Advisory, UK law: Legislative and practical Deloitte Transactions & Business challenges | Tamsin Baumann, P246 Know your patron: The Analytics LLP Partner; Francesco Trifilo, Manager; implications of the 5AMLD for Georgia Tongue, Manager, Deloitte museums in the EU and beyond P216 Anti-money laundering Forensic, UK Bernadine Bröcker Wieder, CEO/Co- obligations and solutions founder, Vastari Group Maxime Heckel, Director, Advisory P234 A nalysis of anti-money & Consulting, Financial Crime; laundering for art trade in China P249 The role of free zones in the Astrid Brandy, Manager, Operations Chris Cheng, Partner, Beijing AML compliance chain Excellence & Human Capital; and Center, Deloitte China Claude Herrmann, Executive Adrien Chiariello, Former Manager, Manager at Fine Art Logistics, Operations Excellence & Human Le Coultre S.A.; and Carole Schmitz, Capital, Deloitte Luxembourg Commercial & Events Director at Luxembourg

20 Art & Finance Report 2019 | Introduction

DELOITTE CIS

In November 2018, Deloitte CIS announced the launch of the Deloitte Art & Finance service line, which would provide Russian art-market players—collectors, museums, art galleries, art dealers, and artists, as well as our existing clients from family offices and private banks— with professional legal, tax, customs, and other services. This service line would operate under the umbrella of Deloitte Private, CIS, and be run Svetlana Meyer by Svetlana Meyer, managing partner of Tax & Managing Partner, Tax & Legal Legal, CIS. Deloitte CIS

Drawing on Deloitte’s vast experience Our forensic services include business in legal, tax, and customs services, the partner due diligence (reputation, team offers end-to-end services for the assets, beneficiaries, relevant expertise, Russian art market, such as blockchain- relationships, and contacts), affiliation based solutions, market research, fine checks for transaction parties, and art logistics (in partnership), forensic due diligence on previous owners of services, etc. artworks. Our specialists review art transactions for AML purposes as well Among the tax and legal services that as sanction and corruption risks and Deloitte CIS offers to art market players offer recommendations on effective are general business and labor law anti-corruption and bribery controls, advisory services, legal due diligence, professional accountancy support, and drafting of sale and purchase contracts other related services. and agreements with artists, restorers, and art dealers (agency and licensing agreements, etc.), comprehensive tax Part 1 assistance for businesses supporting Deloitte CIS Russian Art market the art market, and the preparation analysis of individual statements reflecting income from the sale or use of artworks. The Deloitte CIS research approach is to We also provide legal and tax advice provide extensive support to businesses on , donation, grant and in sectors that lack transparency, investment raising; assist with dispute including the art industry in Russia. We resolution and help to develop special use unique data collection and analysis loyalty programs. techniques

21 Art & Finance Report 2019 | Introduction

that guarantee high data quality and help selling indefinitely due to the emotional to identify trends and profile diverse nature of the initial purchase. target audiences and business sectors. •• Lax legal protections undermine trust The data we gather is guaranteed to among stakeholders on the art market: remain relevant for at least two years. galleries are sometimes reluctant to On top of that, we provide updates and invest in artists as, unlike the situation supplement the findings, if necessary. in the West, contractual violations are rarely punished in Russia (e.g., for The Russian art market has its own selling artworks without a gallery’s peculiarities. Before the official launch consent). of Art & Finance in Russia, our specialists did some fieldwork and interviewed •• A home-grown network of professional market players. Here are some of our key art critics is still maturing. findings: Encouraging trends on the Russian art Yuliya Bolshakova •• Confidence in how prices are set on market: Senior Consultant the Russian art market is dampened Global Employer Services/PCS by limited market analytics and low •• Transparent communication is opening Department/Art & Finance transparency (especially for non- up among market players, which Coordinator auction transactions). increases efficiency and trust. Deloitte CIS •• Low-priced and fast-selling works •• Professional is continuing dominate in the Russian contemporary to develop and mature, driving up art segment. Local market players tend quality and interest. to have a more short-term outlook, •• Local galleries are making positive The rise of online looking to make quick returns in a fast- strides towards boosting their appeal moving market. represents with up-and-coming young artists, •• Market growth is held back by muted recognizing the need to compete with an outstanding middle-class activity. The art market the opportunities and support offered opportunity to drive is very sensitive to macroeconomic by their European rivals. shocks, which are a key concern •• After years of mistrust, all players are for Russia’s emerging middle class. up turnover in the coming to a consensus that market The average art spend in Russia, at relations need tighter regulation and low-cost segment approximately ₽100,000 (roughly are taking tentative steps towards €1,340), is currently insufficient to tackling key issues. (up to ₽100,000 support a large, professional, and per artwork). investment-oriented market. •• The rise of online auctions represents an outstanding opportunity to drive up •• Russian buyers are generally more turnover in the low-cost segment (up emotional than rational, with to ₽100,000 per artwork); this sector contemporary art purchases often has huge potential in Russia’s current guided by personal taste. However, economic climate. there are tentative signs that they are moving towards a “collector” mentality, •• Artists are becoming increasingly aware i.e., buying art based on its historical of the commercial aspects of the art value or the reputation of the artist (big world. names, exhibitors at international art fairs, etc.).

•• Sellers sometimes overestimate the resale value of their works or hold off

22 Art & Finance Report 2019 | Introduction

The official launch of the Art & Finance Inna Bazhenova service line in March 2019 and the public Publisher of The Art Newspaper discussion that Deloitte CIS organized international network, founder of the brought together many Russian art- IN ARTIBUS cultural foundation, market players and clients of Deloitte CIS. co-publisher of The Russian Art Focus, To name just a few, our guests included art collector representatives of The Art Newspaper Russia, Gazprombank, Mercury Group, VAC Foundation, Russian State Tretyakov Gallery, MMOMA, PHILLIPS, Cosmoscow, InArt, top Russian galleries such as pop/off/art, Osnova, and Fragment Art Club. The discussion we had at the event and later findings confirmed that providing quantitative estimates of the contemporary Russian art market is no easy task due to the lack of transparency China, Russia, the USA, and France (the Russian , and regional museums and the reticence of most stakeholders. newspaper is distributed in over 60 of the Russian Federation). Among other The market capacity is estimated to fall countries in total). The Art Newspaper major shows organized by the foundation within the range from €5.9 million in 2018 Russia is the only international art are “Mikhail Roginsky. Farewell to the (based solely on the public reports of periodical in the country. The purpose ‘Pink fence’”; “ Palmin. Winterreise”; Russian auction sales at of the publication is to spark Russian- “Inspired by Rome. For the 400th www.artinvestment.ru—this figure speaking readers’ interest in the anniversary of Salvator Rosa and Gaspard has met with some criticism, as it only international art world and to carve Dughet” (in cooperation with The State covers about 10 percent of the market) to a niche for Russian art in the broader Hermitage Museum, Pushkin State €22.4 million (based on the InArt report global context. Museum of Fine Arts, and The Russian mentioned below). State Library); “Enlightenment Gothic. The IN ARTIBUS foundation is a non-profit Vasily Bazhenov—Anniversary Year” (in For the time being, Deloitte CIS will organization whose mission is to research cooperation with the Shchusev State not attempt to estimate the size of the and promote classic and . Museum of Architecture); “Khardzhiev’s market; instead, the team is focusing The foundation organizes art Archive. Unique archive materials on on getting to know art-market players in collaboration with museums, cultural Russian avant-garde and works from better, understanding their needs, and foundations, and private collections in private collections”; “Sculptors’ . determining how Deloitte can draw on Russia and abroad. It also publishes art Rodin. Maillol. Despiau”; and a few its expertise to . The foundation’s space others. In January 2019, IN ARTIBUS reinforce our position in the market. was opened in 2014 at Prechistenskaya foundation and The Pushkin State embankment in . Museum of Fine Arts brought together their large collections of one of the most Part 2 The exhibitions organized by the IN prominent Russian painters of the 20th Russian art-market players on their ARTIBUS foundation include “Mikhail century (Vladimir Weisberg) to present initiatives Roginsky. Beyond the ‘Red door’”, held his monographic exhibition “Nothing but Inna Bazhenova grew up in Nizhny as part of the 14th Venice architecture harmony” to the public. Novgorod, where she graduated from the ’s main program in 2014; “I Lobachevsky State University of Nizhny wished to work in the manner of Callot”; Inna Bazhenova says: “IN ARTIBUS Novgorod (UNN). “Vladimir Weisberg”; “Boris Kasatkin” and foundation is constantly engaged in In 2014, she acquired the English version “Late Mashkov”. All of these formed part the research and popularization of of The Art Newspaper, as well as the of a project dedicated to the Moscow the world’s classical art. We consider entire international licensed network school of (in collaboration with Russian art to be global art. We organize of its editions in the UK, , Italy, The State Tretyakov Gallery, The State exhibitions of European and Russian

23 Art & Finance Report 2019 | Introduction

art and publish research and catalogues in cooperation with the major Russian state museums (the State Hermitage Museum, The Pushkin State Museum of Fine Arts, The State Tretyakov Gallery, etc.), as well as private collectors.

Together with respected institutions like Ca’Foscari University of Venice, the Department at the University Denis Belkevich of Cambridge, and the Cambridge Co-founder at FUELARTS, art analyst Courtauld Russian Art Centre (CCRAC), and economist, professional manager we hold scientific conferences and invite of cultural projects, art investment & world-famous art experts. As a collector, collection management consultant I am pleased to provide items from my own collection to museum exhibitions anywhere in the world.” Previously, Denis served as managing It was designed as a response to the director of the Contemporary Asian international art market’s need for new Art Fair at GAAB (Warsaw) and project sales channels. As the traditional gallery manager of the Peter Konchalovsky format gradually becomes obsolete, the Foundation (Moscow). attention of galleries is switching to sales He currently serves as the international at art fairs and online commerce. development advisor to Cube.Moscow, “Cube.Moscow is a special space, which is a non-commercial platform where galleries function like a year- under the patronage of Dr. Uli Sigg round art fair. It is also an exhibition (Switzerland). He is a regular participant area and a place where educational at international conferences and programs are held. This platform type forums on marketing, economics, and is attractive for emerging markets, technology in art. Denis is also the author where gallery businesses need open and of educational programs and articles on daily communication. Besides, a new museum marketing, art banking, ArtTech, generation of collectors is being brought career management for artists, and asset up and educated thanks to various management. educational projects.

As a program director, Denis has The Cube.Collectors summit—the supervised several international art platform’s anchor event held in April conferences, such as Art & Reality 2019—confirmed that the project was (2010-2012, St. Petersburg and Moscow), moving in the right direction. It gathered GAAB Collectors Summit (2017, Warsaw), world-renowned international art and Cube.Collectors Summit (2019, functionaries and market strategists, who Moscow). He founded the art and were among the speakers. finance blog ARTFINEX and sits on the Board of the International Association Today, the fastest and most effective way of Asian Art Collectors. In 2017, he to attract international attention to local co-founded the Artherium startup: a art is participating in international fairs. collection management system based Cube.Moscow does this by gathering on blockchain technology. In 2019, Denis a pool of artists from the platform’s joined FUELARTS, the first ArtTech resident galleries several times a year accelerator based in New York, as a co- and exhibiting at fairs under a common founder along with Roxanna Zarnegar. brand. The next step for Cube.Moscow is launching educational programs and Cube.Moscow is a newly launched our own art market index,” says Denis platform in Moscow, Russia (in 2019). Belkevich.

24 Art & Finance Report 2019 | Introduction

Ksenia Podoynitsyna Russian contemporary art-market expert and founder of InArt—a project that provides Russian contemporary art analytics

Ksenia founded Gallery 21 in Moscow in 2010. Since its inception, the gallery “The current crisis has shown that has collaborated with established and emerging Russian artists, such as contemporary art is not a key priority Vladimir Dubossarsky, Sergey Shutov, Vladimir Arkhipov, Natasha Dahnberg, for investors who are diversifying and Sergey Katran. their assets or pursuing alternative In 2015, Ksenia launched an educational course on how to price artworks at the investments.“ Plekhanov University of Economics. In 2016, Ksenia presented the first analytical report on the market for contemporary Russian art in Moscow, of Economics, and the University of investments. The crisis has served as Vienna, and London. In 2017, she Applied Sciences in Dresden. a litmus test for the level of trust and released the first InArt ratings and loyalty among potential investors and launched the online platform in-art. Ksenia launched InArt in 2016 to help is determining the future direction ru. InArt provides information on people navigate the contemporary art of the Russian art industry”, says Ms. contemporary Russian artists and market, identify contemporary artists, Podoynitsyna. That is why her team are Russian art-market developments, and understand how much artworks cost working on systematizing quantitative generates annual analytical reports, and why, price trends, market size, and data on the domestic contemporary and maintains a market database, which main drivers. The insights accumulated art market, as it promotes higher includes top contemporary artists and by InArt from 2009 onwards show that transparency and a better understanding art organizations working with Russian the right infrastructure and a high degree of pricing models and key trends. Ms. artists internationally. of transparency, delivered through Podoynitsyna believes that this data also reliable data, are essential if the Russian provides insights into investor loyalty Before taking up contemporary art art market is to be brought into line with and creates a positive trajectory for the dealership and research, Ksenia worked the international market more broadly. market as a whole. at Fleming Family and Partners, VTB Capital, and Deutsche Bank. Ksenia believes that data collection The data used by InArt to measure the and analysis are important milestones size of the domestic market is public Ksenia earned her master’s degree on the road to setting high standards information on auction and gallery sales, from ESCP Europe in 2009, majoring for the art business and elevating it to and the revenue from the Cosmoscow in Marketing and European Business. a global level. “The current crisis has Art Fair. At present, the InArt database She earned her two bachelor’s degrees shown that contemporary art is not a key contains records on around 1,500 in Economics, majoring in Finance and priority for investors who are diversifying contemporary Russian artists (including Credit, at the Russian Plekhanov Academy their assets or pursuing alternative the publicly available auction sale

25 Art & Finance Report 2019 | Introduction

prices for 594 artists). InArt gathers Here is how InArt pictures the evolution and Cosmoscow sales in 2018, as data from 322 auction houses, including of the auction market for Russian well as surveys of gallery owners and international giants such as Sotheby’s, contemporary art, based on their experts, InArt estimates that the Russian Christie’s, and Phillips; MacDougall’s (an findings: contemporary art market generated auction house specializing in Russian revenues of €22.41 million in 2018. art); Russian auction houses Vladey and The national market has gone through Sovcom; and auction houses in Germany, three stages since the early 2000s: As for the auction sales forecast, InArt France, Belgium, Italy, Switzerland, has developed two scenarios for the •• Emergence (2000–2005). Small market , the United States, and other period between 2017 and 2024—one volume (max. €2 million per year). countries. moderate and one optimistic—both •• Explosive growth (2006–2008). The suggesting gradual market growth. The platform provides data on domestic market grew more than tenfold over •• According to the moderate scenario, sales of Russian contemporary artworks. three years, followed by a sharp 85 annual auction sales will reach €11.44 InArt believe that sales abroad are less percent decline to €4.21 million in 2009 million by 2024 (i.e., the market will impressive for several reasons, including due to the global financial crisis. grow by 18 percent between 2017 and the weak profile of Russian artists •• Gradual recovery (2010 onwards). 2024). internationally. However, InArt is working hard to find a niche for Russian art within •• According to the optimistic scenario, the global market. Although the results The period from 2012 through 2014 annual auction sales will reach €14.29 have been rather disappointing so far, saw short-term declines in sales, mainly million in 2024 (i.e., the market will grow InArt is making every effort to integrate due to the political and economic by 47.5 percent over years). Russian contemporary art into the global environment. There has been a steady industry. increase in the number of lots sold since 2015, with a peak in 2018 (993 artworks According to InArt, the main market sold representing an increase of 63 drivers that influence the Russian percent compared with 2017). contemporary art market are the Based on an analysis of the auctions following:

Macroeconomic Global market Internal market factors development indicators

•• Growth of Russian •• Overall growth of the •• Auctions GDP, % art market Number of auctions •• Average annual RUB/ •• Growth in auction selling contemporary EUR rate sales of post-WWII art Russian artworks Number of lots exhibited •• Annual inflation in Russia, % •• Art fairs •• Purchasing power •• Museums parity (RUB/USD) •• Galleries •• Average annual Brent •• Media and insights crude price, USD InArt uses media statistics to analyze media coverage statistics

SALES OF CONTEMPORARY RUSSIAN ART AT AUCTION

26 Art & Finance Report 2019 | Introduction

Key report findings 2019

Section 1 •• Record level of guaranteed sales in 2018 Wealth and the global art market The use of auction guarantees has •• Anemic global art market growth increased steadily, with the total value of in the past 10 years stands in stark guarantees in Post-War & Contemporary contrast to growth in wealth: Whilst evening sales increasing from US$988 HNWI financial wealth more than million in 2017 to US$1.29 billion in doubled between 2008 and 2018, from 2018. Guarantees have now become an estimated US$32.8 trillion in 2008 an “invisible hand” in the art market; on to US$68.1 trillion in 2018, global art the one hand, they are a key indicator market sales only saw a nominal increase of investor sentiment and art market of 9 percent over the same period2. confidence, and, on the other hand, they This report looks at the challenges represent a new source of art market risk facing the art industry and how a lack of (see section 1 p.56 for more information). transparency is preventing the market from reaching a broader audience.

•• Is the art market heading for a Section 2 Art and wealth management slowdown? The first half of 2019 has demonstrated that the art market is •• Wealth managers forced to rethink facing tougher conditions on the back the client experience: Recent wealth of heightened political and economic management research3 suggests that uncertainty. Global auction sales from wealth industry stakeholders will have Christie’s, Sotheby’s, and Phillips were to change their business models and down 20.3 percent year-on-year in the the relationships they have with clients. first half of 2019. Value propositions focused on personal and emotional connections will become •• Art and collectible wealth is increasingly important as a way to stand estimated to be worth US$1.74 out from the competition. trillion: In this year’s report, we report that UHNWI wealth associated with art •• Holistic wealth management is and collectibles was worth an estimated a key driver behind the focus on US$1.742 trillion in 2018, up from art-related services: The benefits of US$1.622 trillion in 2016. The projection developing a holistic wealth management for 2023 is that this will grow to an advisory service remain the key argument estimated US$2.125 trillion (see footnotes for service providers to include art and p.49). collectibles in their service offering. A large majority (83 percent) of wealth •• Risk perception rose by 10 percent managers said that a desire to offer more over the last 12 months: The overall holistic services to their clients was a vital perception of risk in the art market motivating factor. increased by 10 percent by September 2019 from the previous reading in •• In general, stakeholders agree on September 2018, with the ArtTactic Risk the value of art as one aspect of a Barometer coming in at 7.0 (which was wealth management offering:This above its 10-year average of 6.4). year’s findings show the highest reading since the launch of the survey in 2011, and a strong consensus among

2 T he Art Market Report 2019 by Art Basel and UBS 3 W orld Wealth Report 2019, 27 Art & Finance Report 2019 | Introduction

wealth managers, art professionals, and planning and generational wealth art collectors on the importance of art transfer, and art professionals strongly as one aspect of a wealth management agreed with collectors on this point. service offering. •• Art philanthropy and social impact •• The wealth management community investment are attracting more has introduced more art-related attention: Another area in which the services for clients in recent years: collectors surveyed this year said that This year, 72 percent of wealth managers they believed wealth managers could play said they offered art-related services to a more significant role is art philanthropy. their clients. This was up from 64 percent 65 percent of collectors said this would of wealth managers in 2017. This shows be a helpful service, up from 45 percent that more private banks and family in 2017. offices are responding to client demand •• Urgent need to address art and for more services. estate planning issues: With new •• Collectors increasingly see their transparency requirements due to art as an integral part of their enter into force, wealth managers must total wealth: 81 percent of collectors anticipate and adapt to upcoming surveyed said they wanted wealth changes. With more than a third of the managers to incorporate art and private banks surveyed yet to discuss collectibles into their service offering, art-related wealth with their clients, which was up from 66 percent in 2017 addressing how art assets should be and the highest reading since the report organized is now an urgent matter. was launched in 2011. This suggests that collectors are increasingly seeing art and collectibles as part of their overall wealth. Section 3 Art-secured lending •• Consolidated reporting is needed: With a large majority (84 percent) of art •• Collector finance dominates the art- collectors surveyed this year saying that secured lending market: The market they wanted to include art and other for art-secured lending has grown over collectible assets in their wealth reports, the past ten years, with the market size there is strong demand for consolidated in 2019 estimated to be between US$21 reporting. This could be an effective way billion and US$24 billion in outstanding for wealth managers to introduce an loans against art. Based on existing art-related wealth management offering research and interviews with art finance and to be in a position to offer a proactive providers, we estimate the value of loans and meaningful value proposition to their underwritten to collectors and private clients. individuals to be between US$18 billion and US$20 billion, which represents •• Wealth transfer is boosting demand around 90-92 percent of the overall art- for art and estate planning services: secured lending market. Most collectors (76 percent) said that estate planning would be the most •• Art-secured lending ranks among relevant service for them (up from 69 the most popular art and wealth percent in 2017). This indicates that management services in 2019: There collectors’ top priorities are estate seems to be a greater degree of interest

28 Art & Finance Report 2019 | Introduction

in art-secured lending among collectors development of regulations and new an indicator that they could be the killer this year, with 60 percent stating that technology aimed at reducing risk and blockchain application many people have this is one of the most relevant wealth standardizing processes. been waiting for. As such, tokens could management services, compared with become a catalyst for new developments 46 percent in 2017. in the art and finance industry.

•• Collector demand for art-secured Section 4 •• Shift towards impact investing as the Art as an investment lending is on the rise: 69 percent of world faces ever-greater challenges: collectors said they would be interested •• Positive returns in the art market Investors are increasingly calling for in using their art collection (or parts of it) between 2000 and 2018: artnet’s their money to have a positive impact as collateral (versus 57 percent in 2017). Index for Top 100 Artists produced an on society and the world at large, and 8 percent Compound Annual Growth there is a global shift in investment •• European private banks are reluctant Rate (CAGR) between 2000 and 2018, trends towards a focus on more than the to offer art-secured lending compared with 3 percent for the S&P financial returns of a given investment. services: Despite significant demand 5004. for art-secured lending services among •• Socially responsible investment collectors and art professionals, only •• Art is thought of as an asset class products in art and culture rank 26 percent of the wealth managers (32 that holds its value: Across all highly among private banks: In this percent of private banks and 13 percent collecting categories, art has a stronger year’s survey, 28 percent of wealth of family offices) surveyed this year said positive correlation with the price of gold managers said that socially responsible that this would be an area of focus in the than with other asset classes reviewed investment products in art and culture next 12 months. However, 80 percent in this study, indicating investors’ would be most relevant to their clients. of US private banks said they will focus perception of art as a value-preserving •• Technology is driving changes in on art-secured lending services in the asset class rather than an investment impact investing: With the advent of next 12 months, compared with only 16 vehicle5. blockchain technology and tokenization, percent of European banks. •• Long holding periods: Analysis of the next generation of art and cultural •• The lack of a legal framework is repeat auction sale data from Sotheby’s impact investment models, combining holding European art lending back: Mei Moses suggests that works of art fractional ownership with social impact The European art lending market has held off the auction market for at least investment, could emerge. been affected by the fact that the notion ten years benefitted from the “holding •• Investment in art and cultural of art as an asset class is less widely period effect”, in which works were more infrastructure: The past three years understood in Europe than it is in the US likely to be sold for a profit and had less have seen annual investment in art and and that there is no uniform system of volatile Compound Annual Returns (CARs). cultural infrastructure projects hovering registering charges over chattels such •• With the visible global art fund at between US$8 billion and US$9 billion as the US Uniform Commercial Code industry not developing, new art based on an average of 115 completed (UCC). Each European country has its investment models are emerging: projects according to AEA Consulting. own system and many of these systems Fractional art ownership models/projects are unsuited to the art-secured lending •• Impact investment in art and have emerged in recent years aimed at market as constituted in the 21st century. culture is gaining momentum democratizing the art investment market. This has resulted in the US internationally: Organizations such for an estimated 90 percent of the global •• Tokenization could become a catalyst as Nesta and their Arts Impact Fund art-secured lending market. for new art & finance initiatives: have attracted significant international While the existence of tokens in general, attention, with funders, policymakers, •• The art-secured lending business and digital tokens in particular, is not new, and national agencies across many has yet to reach the mainstream: the speed with which these cryptographic countries looking at how to replicate the However, there is the potential for tokens are being deployed and issued is fund in their own jurisdictions. future growth in this area thanks to the

4 S ource: artnet 5 S ource: artnet 29 Art & Finance Report 2019 | Introduction

•• Could private-public partnerships Section 6 under the new regulation, dealers, pave the way for new social impact auction houses, and other artwork Risk management and regulation investment models in the cultural traders fall under the same regulation sector? In the future, could we see •• More wealth managers in Europe as other “gatekeepers”, such as banks, partnerships between the public and believe the art market needs accountants, and lawyers. the private sector redefine the notion government regulation: In 2017, 60 •• Identifying beneficial owners: Art of ‘public’ assets (i.e. collections) and percent of the wealth managers surveyed professionals (notably auction houses, maybe turn collections into investable said that they thought self-regulation dealers, and galleries) must perform assets, which could form part of a public would be the best way to regulate the art due diligence checks and identify the institution’s funding strategy? market. The past two years have seen a beneficial owner of each transaction change in sentiment among European under the new EU anti-money laundering wealth managers: 54 percent of those regulation. Section 5 surveyed said that they thought the art Art and technology market should face more government •• Museums need to know their regulation and only 46 percent said patrons: In light of the controversy •• ArtTech startups have raised US$600 that self-regulation would be the right around certain patrons and their support million over the past eight years6: approach. US wealth managers showed of the art world, there is likely to be The first generation of ArtTech startups a preference for self-regulation, with 73 increasing scrutiny of corporate and have received nearly US$600 million percent of respondents advocating this private financial support and donations in investment, with 50 percent of this view. to museums. In the context of greater investment going towards transaction- reliance on funds from the private sector, related businesses, 25 percent to •• There are mounting calls for art institutions should adopt an up-to-date discovery and social, 15 percent to market business practices to be policy on donations. Such policies logistics and collection management, modernized: In this year’s survey, the are aimed at enforcing pre-emptive and 10 percent to data-related ArtTech majority of all stakeholders felt that behaviors to ensure that the source startups. current business practices needed to of funds and their use are scrutinized. be modernized, with 80 percent of art •• The next generation of ArtTech This is similar to the approach required professionals (up from 74 percent in startups are focusing more on under the fifth EU anti-money laundering 2017), 81 percent of collectors (up from peripheral business segments: The directive. 64 percent in 2017), and 76 percent of next generation of startups are likely wealth managers (up from 73 percent in to focus on several key areas: logistics, 2017) expressing this view. It is possible , contracts, legal, storage, data, that the entry into force of the fifth anti- standardization, education, and new money laundering directive in January artist discovery. 2020 will act as a driver of this much- •• Technology will drive change in the needed change. art market: Collectors, art professionals, •• The fight against money-laundering and wealth managers believe that has widened to encompass the art technology could have a profound impact trade: The scope of EU anti-money on a number of aspects of the art market, laundering regulations is being extended including transparency and regulation. to include the art trade from January 2020. The global trend has been to broaden the scope of industries required to help in the fight against financial crime, on the back of innovative money laundering schemes and the increasing threat of terrorism. This means that

6 S ource: Fuelarts

30 Art & Finance Report 2019 | Introduction

Priorities

Since the inaugural issue of the Deloitte Art & Finance Report in 2011, we have identified a number of key priorities we believe are important in relation to overcoming challenges and encouraging further investment in the art and finance industry.

Like the previous five editions, this year’s 01. Wealth managers need to rethink This year’s survey findings point to report aims to prioritize key considerations the client experience and take a an increasing emphasis on wealth for the future of the art and finance new strategic approach to art and reporting, estate planning, art-secured industry and to encourage dialogue wealth management lending, social impact investing, and and collaboration among the three key The wealth management industry philanthropy: all areas in which the stakeholder groups: wealth managers, art faces significant challenges linked to a wealth management sector is already professionals, and art collectors. need to adapt to a new generation of active. younger clients. Changing behaviors, We have structured this year’s priorities motivations, and requirements will force With collectors increasingly seeing their into five main areas: the industry to innovate and focus on art as an integral part of their total new client services and experiences. wealth, and with a strong consensus An interesting finding from a recent among stakeholders (wealth managers, Capgemini report suggested that the art professionals, and collectors) on next generation of investors seek the importance of art as part of a connections—particularly emotional wealth management offering, it seems and personal connections. We believe that we have arrived at a point where that this is a domain in which art and stakeholders’ interests are aligned. wealth management can develop a mutually beneficial partnership. New transparency requirements (see article by Pascal Noel p.100 in section Developing a client relationship model 2, and section 6) also mean that there based on clients’ interests and passions is a need for wealth managers to have could deliver tangible benefits and play better knowledge about their clients’ an important role in creating these art and collectible assets in order to personal connections. There are also ensure adequate protection. Now is valuable opportunities to leverage the time to develop a new strategic existing services and areas of expertise, and holistic approach to art and as collectors are increasingly shifting wealth management incorporating towards more finance-driven art the emotional and financial factors ownership models. associated with wealth preservation and management.

31 Art & Finance Report 2019 | Introduction

02. Collaboration between Art & Finance stakeholders is essential The aim would be to establish a in order to develop common guidelines and standards to strategy for the future around address deteriorating trust in the art market how to best regulate/self-regulate Many of the issues and challenges raised in this report cannot be addressed by a single stakeholder the art market. group or a single country. They would require a cross-disciplinary approach involving all stakeholders (national and international) in the art and finance industry, including potentially governments, coming together to regulation, which could increase of the stakeholders in the art and develop a common vision, and to the industry opacity, meaning less finance industry. Maybe the wealth promote standards and guidelines transparency rather than more. One management industry, in partnership to achieve this collective aim. This is way to achieve this is by setting up a with art valuers and appraisers, could becoming increasingly pressing as shared platform where all stakeholders play a role in standardizing and creating trust among the stakeholders in the (art dealers, art professionals, and a framework for how should current art market is deteriorating. This wealth managers) can discuss ideas, put be carried out to promote trust and poses a significant threat to the future forward arguments, and offer advice transparency. The findings from this development of the art and finance and guidance on best practice. The aim year’s survey also show that there is a industry. would be to establish a strategy for the significant lack of trust when it comes future around how to best regulate/self- to art market data. This is a serious So, what role should the wide array regulate the art market. problem, as decision-making tools of existing art-related associations for valuation and risk models depend (representing various stakeholders A collaboration between existing heavily on this data and the trust we from art dealers to authenticators, art industry associations and place in it. Blockchain technology and appraisers, museum registrars, representatives from the wealth the creation of data models art logistics providers, art lawyers, management community would be a might help in this regard. and other art-related professionals) possible outcome. The goals would be: play in this development? Their firm •• Legal frameworks and regulation commitment to acting in their members’ •• Awareness raising and advocacy One such area is the European art- best interests often means that clashing To promote awareness around specific lending market, which has been affected agendas and conflicting motivations are Art & Finance issues. The industry by the lack of a registration system of obstacles to finding optimal solutions for needs to become collectively better at charges over chattels like the Uniform the industry as a whole. We believe that coordinating initiatives and campaigns Commercial Code (UCC) in the US. Each the expertise and knowledge are there, around Art & Finance issues, but this European country has its own system, but that a new collaborative model is will not be possible without increased and many of these systems are unsuited required to address many of the issues cooperation/involvement from the to the art-secured lending market as and challenges facing the development wealth management community. it is constituted in the 21st century. of the art and finance industry over the If we are to develop a Europe-wide, coming decade. •• Promotion of industry standards and eventually worldwide, compatible Challenges regarding the valuation framework, there is a need for a global The art and finance industry needs of art and collectibles, coupled industry body to advocate, coordinate, a more unified voice. Without this with the perceived threat of price and advise on the best way to develop common voice, the art market risks manipulation, have been highlighted such infrastructure. falling under additional government as key areas of concern by the majority

32 Art & Finance Report 2019 | Introduction

•• Education and capacity building 5 percent from crowdfunding. To support the growth and 40 percent of ArtTech companies development of the art industry, firstly have between one and five investors. through education and professional The nature of the art market calls development and secondly through for a different type of investment the development of art and wealth model (one is outlined below): one management services. better aligned with the long-term nature of the investment horizon 03. Supporting ArtTech: new required to overcome the resistance investment models required that technology often faces from This year’s survey responses indicate a stakeholders in the current art market. much stronger sense among collectors and art professionals that technology •• Investment angel network has an important role to play in One of the key challenges for ArtTech addressing many of the industry’s startups is that they do not have current hurdles and challenges. access to an investment community of However, building the next generation individuals who are passionate about of ArtTech companies will require art and understand the challenges substantial investment. facing the industry. An angel network for ArtTech startups backed by •• Infrastructure building collectors and art professionals could Research findings7 in this report be the solution to this dilemma, suggest that the next generation of both in terms of ensuring a more ArtTech investment will flow from effective allocation of capital towards “transactional” businesses towards initiatives that address real issues for art infrastructure investments in the art world, and to align investors’ tech startups that tackle areas such expectations and motivations with the as logistics, insurance, contracts, long runway model outlined above. legal, storage, data, standardization, education, and new artist discovery. 04. Social impact investment models Solutions in these areas would help for art and culture should be build a better and more efficient art explored market ecosystem. We are seeing a global trend among investors to focus on investments that •• Long runway models have a positive impact on society and ArtTech businesses often see a the world at large. With art sales having mismatch between the long runway reached record levels in recent years that is required to establish art-related and works of art frequently selling for businesses and the funding available many millions of dollars, the questions for these types of investment. With and conversations about the impact many ArtTech businesses aimed at of wealth on the art and cultural small but important niche markets, landscape are also changing. Simply which are often unattractive to larger acquiring art and building a collection investors, ArtTech businesses rely for private enjoyment feels increasingly heavily on the support of individual outdated in today’s world. In this year’s angel investors in achieving their survey, 65 percent of collectors said goals. Research findings8 suggest that that art and philanthropy services 33 percent of funding comes from were the most relevant service that individual collectors, with a further a wealth manager could offer.

7 S ource: Fuelarts—see article on page 177 8 S ource: Fuelarts—see article on page 177 33 Art & Finance Report 2019 | Introduction

The community of wealth managers become a valid partner in a new type of surveyed seem to have responded to public-private partnership whereby the this trend, with more than half saying private sector becomes a co-owner of they would focus on this area in the national heritage pieces so as to fulfil a coming 12 months, up from 40 percent social impact investment objective? who said the same in 2017. According to Wealth-X, art and culture were ranked 05. The new anti-money laundering as the third most important cause in regulation is an opportunity for 2016 in terms of global philanthropic the art industry to become a giving among UHNWIs, with the sector’s more transparent and trusted share increasing from 9.1 percent in marketplace 2014 to 10 percent in 2015. In this year’s survey, 82 percent of private banks and 90 percent of On this basis, it obviously makes family offices said that the lack of strategic sense for the wealth transparency in the art market was one management sector to combine of the biggest challenges facing the clients’ interests in art and culture art and wealth management industry. and their art-related wealth with Meanwhile, 85 percent of private both philanthropic and social impact banks said that money laundering investment models. was a key threat to the reputation of the art market. Could the new AML This is an area in which there is regulation act as a catalyst for the significant scope for rethinking the creation of a more trusted art market? most suitable social investment models And if so, how should the art industry and approaches for art and culture. In best embrace these new changes and the past, philanthropic investment in what support is needed to help the art art and culture has often been viewed industry overcome and meet the new through the narrow lenses of private compliance environment in the future? patronage and museum building. Now, however, new ideas with a broader and •• An opportunity rather than a more ambitious scope are called for, threat such as social investment models in It is important to understand that AML and cultural infrastructure, requirements should not be complied and the funding of non-commercial art with out of fear of sanctions. Instead, and cultural projects and institutions professionals should try to embrace the through innovative investment and objectives of the legislation: enhancing financing programs. the reputation of the art market sector and helping the government to combat Given the mounting financial pressures money laundering. AML compliance will faced by cultural institutions, there entail transitional pains and challenges, should be a discussion about how but in the long term it is likely to provide to turn the value of existing public the foundation for a more transparent collections into working assets. For and trustworthy marketplace, which example, would it be inconceivable to would attract more clients and increase explore and leverage the economic the overall size of the industry. value of the collections of public institutions, to support the institutions’ •• Raising industry awareness and future strategies and development? Is providing guidance it feasible that the private sector could Lessons from other industries, such

34 Art & Finance Report 2019 | Introduction

As more art dealers and intermediaries are encouraged to take compliance to the next level, the reputation of the art market is likely to improve and potentially lead to a broadening of the market and new business opportunities.

as the diamond trade, have taught us could be provided by an industry that investing in awareness raising, body on behalf of its members or guidance, and support on how stakeholders. This is exactly what to implement the new legislation the Antwerp World Diamond Centre in practice will pay off. (AWDC) has done for its members and associations, such as LAPADA, SLAD, the diamond industry. As mentioned and CINOA are already assisting their above, maybe a new industry body members in their efforts to comply representing the art and finance with the new legislation. However, industry could serve such a function. efforts to raise awareness among the Sector bodies should seek inspiration less organized parts of the art market, and advice from other bodies that such as younger contemporary serve other sectors but fall under the galleries, art advisors, and other art same legal framework. This will ensure intermediaries that might not have an professionals have access to the best industry body representing them, will practices available. also be important. These efforts call for an urgent coordinated program As more art dealers and across the entire art trade. intermediaries are encouraged to take compliance to the next level, the •• Sharing tools and resources and reputation of the art market is likely learning from other industries to improve and potentially lead to a Again, lessons from the diamond broadening of the market and new industry, for example, suggest that business opportunities. The evidence there could be huge advantages from the diamond industry shows that in sharing resources and tools banks (which had steered clear of the at industry level. Such initiatives industry as part of a “better safe than could include providing access to sorry” approach) are slowly entering compliance databases and due the sector again thanks to its focus on diligence tools, which would be too compliance and transparency and a expensive for individuals or smaller reduction in the perceived risk level. companies to purchase alone but

35 Art & Finance Report 2019 | Introduction

The big picture Art & Finance is an emerging industry

As the population of high-net-worth transparency requirements will create a The global art market individuals grows and the art market new compliance environment for the art is rapidly creating new matures, there will be an increase in market in the coming years and address demand for financial innovation. The some of the concerns raised in this year’s opportunities at the trend towards greater wealth allocation report. in the form of collectibles—such as art, intersection of art and collectible cars, wine, and jewelry—is The art and finance industry has the finance. creating demand for financial services to potential to grow and expand further manage and preserve the value of these in the coming years as a new economic tangible assets. reality in the cultural sector is forcing public organizations to think about finance Technology continues to shape the art in new and different ways. This could open market and the art industry by making up new opportunities for public-private art more accessible and changing how partnerships and broaden the scope of Art art is promoted, discovered, traded, and & Finance to include the wider cultural and produced. In addition, regulation and new creative sectors.

Art trends Finance trends

Expanding class of Globalization & democratization Ultra-High-Net-Worth (UHNWI) buyers and Millennials’ aspirations

Transparency, regulation, Financialization: professionalism art as a capital asset

Art & Art & technology, digitization Finance Art-secured lending & virtualization

New economic reality for public cultural institutions, soft power Philanthropy, tax and estate of culture, economic driver, world assistance cultural heritage

New business models & sales Risk management, collection channels, creative sectors, management and asset allocation cultural citizenship

Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

36 Art & Finance Report 2019 | Introduction

The art and finance industry has the potential to grow and expand further in the coming years as a new economic reality in the cultural sector is forcing public organizations to think about finance in new and different ways.

37 Art & Finance Report 2019 | Introduction

Deloitte Art & Finance: the art and finance industry is uniquely positioned at the intersection of these three interconnected sectors Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Finance Culture

•• Private bankers •• Large public museums

•• Wealth managers •• Private museums

•• Family offices •• Corporate collectors

•• Private •• Private collectors investors/collectors •• Public authorities •• Art/collectible (country, region, city, etc.) fund promoters

•• Art insurance companies

•• Art trading companies

Business

•• Companies selling art •• Art & media companies

•• Digital art companies •• ArtTech companies

•• Art logistics companies •• Cultural and creative sectors

•• Art fairs

38 Art & Finance Report 2019 | Introduction

For the past eight years, we have been monitoring the development and evolution of the art and finance industry, and particularly the role of art and collectibles within wealth management services.

Types of art wealth management services Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Accumulating Protecting wealth growing wealth managing assets risks •• Museum •• Art advisory endowments •• Valuation •• Art investment •• Assets consolidation •• Art funds •• Reporting •• of art •• Art insurance businesses •• Passive portfolio •• Private Equity management in start-ups •• Art collection •• Financing of art Wealth management business manager •• Art risk management •• Social impact investment

Transfering Wealth Converting wealth Creating a legacy to income - Creating •• Philanthropy advice an income stream •• Art related •• Art-secured lending inheritance & estate planning •• Securitization

Not included •• Client entertainment •• Internal education •• Art sponsoring •• Corporate collection

39 Art & Finance Report 2019 | Introduction

The role of Art & Finance within the cultural and creative sectors

The increasing importance and recognition of the cultural and creative sectors as rapidly growing economic areas are likely to have a positive effect on the development of the art and finance industry in the future.

Companies active in the Cultural and Creative Sectors (CCS) often face difficulties in accessing debt financing for their projects, owing to the challenges inherent to these sectors, such as the intangible nature of their assets and output. For this reason, the European Investment Fund has launched the Cultural and Creative Sectors Guarantee Facility: the first EU financial instrument with a specific focus on the CCS. Under the Guarantee Facility, the consortium of Deloitte Digital and KEA European Affairs has been selected to provide capacity building services to Financial Intermediaries (FIs).

The objective of capacity building is to tackle FIs’ lack of expertise when it comes to financing CCS companies by providing guidance on CCS business models through technical assistance and knowledge/ networking-building.

40 Todos los destinos © Lina Sinisterra (2015) Art & Finance Report 2019 | Introduction

PERCEPTION VERSUS REALITY: THE UNDERRATED POTENTIAL OF THE Pascal Martino Partner - Deloitte Digital Leader CULTURAL AND CREATIVE SECTORS & Banking Leader Deloitte Luxembourg

The cultural and creative sectors (CCS) are festivals, music, literature, performing often ignored by policymakers, financiers, arts, publishing, radio, , and other economic actors as they are architecture, activities related to archives, perceived to be of little relevance to the libraries and museums as well as artistic overall economy. Despite this widespread crafts and cultural heritage”10. For all misconception about the CCS, economic of these activities, creativity (or “art”) data shows that the CCS constitute constitutes the origin and key element Andreas Steinbach a driver of growth in many countries of value generation. The artistic content Manager - Strategy Regulatory around the globe. Setting purely generated through this process benefits & Corporate Finance (EU Policy Team) economic questions to one side, the the CCS market as well as the wider Deloitte Luxembourg CCS also spur creativity and innovation, economy. thereby helping to stimulate social development and employment. It will For instance, a written by an author hence come as no surprise that according (i.e., artistic content) could be published to UNESCO, “the creative economy is one and sold by a publishing house. The story of the most rapidly growing sectors of the may then be adapted for film or inspire a world economy”9. video game generating spillover effects in related cultural and creative sub-sectors. So, what are the CCS? In a nutshell However, the spillover effects do not stop Miranta Evangelia Boura the CCS cover “inter alia audio-visual at this point, as related industries and Senior Consultant - Strategy Regulatory activities (including film, television, video sectors benefit from the artistic content. & Corporate Finance (EU Policy Team) games and multimedia), design activities, In fact, a wide range of industries Deloitte Luxembourg

The CCS and their influence on other industries Source: based on a graph by KEA European Affairs “Economy of Culture in Europe” 2006

Visual art Cultural & creative The Art Performing art sectors Use generated Related content Heritage sectors Crafts Film & video Video games

Music Advertising Architecture Television & Radio Book & Press Consumer electronics Fashion design Luxury brands Luxury brands Design

Telecom Industrial design Tourism Education Software

9 UNESCO (2013), Creative Economy Report 2013 Special Edition. Accessed in June 2019, available at: http://www.unesco.org/culture/pdf/creative-economy-report-2013.pdf 10 E IF (2019), “Market Analysis of Cultural and Creative Sectors in Europe: a sector to invest in”. Accessed in June 2019, available at: https://www.eif.org/what_we_do/guarantees/cultural_creative_sectors_guarantee_facility/ccs-market-analysis-europe.pdf 41 Art & Finance Report 2019 | Introduction

depend on the creative output arising program from 2014 to 2020, which aims whole economy15. The adoption of digital from CCS such as consumer electronics, to promote Europe’s cultural heritage solutions has boosted the expansion of telecom services and hardware, and diversity as well as to reinforce the the CCS on a global scale and created new merchandising, industrial design, competitiveness of the CCS. A financial sources of revenue and growth. tourism, software, and education. instrument has been set up to support the program, named the Cultural and The EU has recognized the importance of The spillover effects triggered by the Creative Sectors Guarantee Facility, the CCS market and launched programs CCS thus affect other sectors and foster managed by the European Investment such as Creative Europe to support the innovation in the wider economy. Fund (EIF). The facility aims to increase CCS and enable them to increase their The skills generated through the CCS access to finance for small and medium- contribution to jobs and growth. Further can contribute to the development sized enterprises (SMEs) active in the CCS public support at national and regional of new products and services, better through portfolio credit risk transfer (via level is crucial to make sure that countries management of a guarantee) and through the provision reap the benefits of the CCS. According allowing creativity to prosper in of capacity building aimed at improving to Pascal Martino, Digital Co-Leader companies and organizations, financial intermediaries’ ability to assess at Deloitte Luxembourg, “the CCS are improvement of organizational processes the risks associated with SMEs. becoming important due to their ability by contributing to creative production to combine creativity, business, and or delivery methods, and the creation The versatility and dynamism of the CCS technology, which are important drivers of the branding/identity of a company are highlighted by the fact that they are of economic growth and social inclusion”. or territory11. Cities and regions can early adopters of digital technologies. promote these spillovers by allowing In practical terms, this means that 11 K EA European Affairs (2015), “The smart guide to knowledge to spread and by enhancing new digital solutions are transforming creative spillovers”. Accessed in June 2019, available at: http://www.keanet.eu/wp-content/up- networking between businesses and CCS existing business models, creating new loads/SMARTGUIDE-FINAL-PDF.pdf entrepreneurs. To highlight this, it should products and revenue sources that 12 O ECD (2018), “Cultural & Creative Industries (CCIs): be noted that the CCS are an important are contributing to the growth of the Fulfilling the Potential”. Accessed in June 2019, available at: http://www.oecd.org/cfe/leed/ factor driving the regeneration of urban industry. The table below provides some venice-2018-conference-culture/documents/B1- areas that have previously been in decline examples of CCS that have seen new DiscussionNote.pdf 13 Unctad (2018), “Creative Economic Outlook”. Accessed and fostering the development of new business models arise and well-known in June 2019, cultural and economic communities. global players enter the market. available at: https://unctad.org/en/ PublicationsLibrary/ditcted2018d3_en.pdf 14 EIF (2019), “Market analysis of Cultural and Creative Furthermore, on a global scale, the To conclude, the CCS should be Sectors in Europe: a sector to invest in”. Accessed in June 2019, available at: https://www.eif.org/what_ CCS are a significant source of jobs recognized not only for their economic we_do/guarantees/cultural_creative_sectors_guaran- and economic growth. According to value to inherent industries but also tee_facility/ccs-market-analysis-europe.pdf UNESCO, the CCS market employs for their resilience and ability to create 15 European (2015), “Boosting the competi- tiveness of cultural and creative industries for growth 12 around 30 million people worldwide . spillovers to other seemingly unrelated and jobs”. Accessed in June 2019, available at: Notwithstanding the challenges facing economic sectors and their potential to http://www.dekuzu.com/en/docs/Boosting_the_com- petitiveness_of_cultural_and_creative_industries.pdf the global economy, the creation, act as a catalyst for innovation for the production, and dissemination of CCS products generated an annual average growth rate of 7.34 percent during the period from 2003 to 2015. On top of this, CSS Main impacts of digitalization exports of creative goods worldwide increased from US$208 billion in 2002 to • Rise of streaming services Music US$509 billion in 201513. • Changes in consumer behavior when accessing music in real time

In the (EU), the CCS • Shift towards shorter formats that can be easily accessed through account for approximately 4 percent Film mobile devices of GDP, which is comparable to the ICT, • Increasing amount of subscriptions to video-on-demand services accommodation, and food services sectors. They also generate 6.7 million • Increased demand for mobile games jobs representing around 30 percent of Video games • Online and mobile opportunities facilitating the distribution of video total employment in the EU. The EU has games by developers recognized the economic and cultural significance of the CCS as one of its most • Increased demand for e-books dynamic economic sectors14. For this Publishing • Online retail available reason, it has made the promotion of the CCS market a priority. Concrete initiatives include for instance the Creative Europe Source: European Commission (2017), “Mapping the creative value chains - a study on the economy of culture in the digital age

42 Art & Finance Report 2019 | Introduction

“The CCS are becoming important due to their ability to combine creativity, business, and technology, which are important drivers of economic growth and social inclusion.”

Big Bang - Excéntrica © Lina Sinisterra (2014)

43 Art & Finance Report 2019 | Table of contents Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Section 1

Wealth and the Global Art Market

487 Horas Pensando - Galeria El Museo © Lina Sinisterra (2009) 45 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Highlights

Anemic global art market growth in the last 10 years stands in The outlook for economic stark contrast to growth in wealth: Whilst HNWI financial growth and political stability wealth more than doubled between 2008 and 2018, from an estimated US$32.8 trillion in 2008 to US$68.1 has repeatedly been cited as trillion in 2018, global art market sales only saw a nominal increase of the most important risk to the 9 percent in the same period16.

Global wealth decline in 2018 contemporary art market. largely led by the Asia-Pacific region: A recent wealth report17 by Capgemini showed a decline in global wealth in 2018 relative to 2017, after seven consecutive years of growth. The Asia-Pacific region Risk perception is up 10 percent Post-War & Contemporary art experienced the most negative in the last 12 months: The overall market up in 2018 and 2019: After impact, with China cited as the key perception of risk in the art market a 40.3 percent rise in sales in 2017, reason for the decline. increased by 10 percent since the Post-War and Contemporary September 2018, with the ArtTactic art market saw robust sales growth Art and collectible wealth Risk Barometer coming in at 7.0, of 18 percent in 2018. For the first estimated to be $1.74 trillion: In which was above its 10-year average half of 2019, the Post-War and this year’s report, we estimate that of 6.4. Contemporary market UHNWIs wealth associated with defied the global negative trend and art and collectible wealth to be an Autumn events may reignite sales were up 2.7 percent to US$2.26 estimated $1.742 trillion in 2018, fears in the art market: the billion. up from $1.622 trillion in 2016. The outlook for economic growth and projection for 2023 is that this will political stability has repeatedly Chinese & Asian art market sales grow to an estimated $2.125 trillion18. been cited as the most important dropped in 2018 and 2019: After a risk to the contemporary art market. 21 percent rise in sales in 2017, the Is the art market heading for a Experts have raised concerns about Asian art market experienced a 17 correction? It was evident in the the heightened risks of Brexit and percent decline in total auction sales first half of this year that the art Trump’s trade war with China. based on auctions at Sotheby’s and market is facing tougher conditions Experts expect Brexit uncertainty Christie’s in 2018. The weakening on the back of heightened political to come to the fore again in the continued in the first six months and economic uncertainty. Global early autumn as the new deadline of this year, with a 48.9 percent auction sales from Christie’s, approaches. decrease in sales compared to the Sotheby’s, and Phillips were worth same period last year. US$5.55 billion in the first six Contemporary art market months of 2019, down 20.3 percent confidence down: The ArtTactic New York has retained its from US$6.96 billion in the first half Confidence Indicator reading for market share whilst London of 2018. The decline in auction sales Post-War & Contemporary Art in sales struggle on the back of had already started in the second September 2019 saw a decline of 29 Brexit uncertainty: New York half of 2018 and has continued into percent from May 2019. The current auction sales across the three the first six months of this year. reading is signals that there is more auction houses generated US$2.76 negative than positive sentiment in billion in the first six months of the among experts. year, down from US$3.54 billion in

16 S ource: The Art Market Report 2019 18 H owever, with the growth in annual art market by Art Basel and UBS sales failing to keep pace with the increases in 17 S ource: World Wealth Report 2019 global wealth over the last 10 years, this estimate 46 Capgemini (July 2019) might be too optimistic Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

2018, but up from US$2.58 billion in 2017. The results mean that New York now accounts for 49.8 percent of auction sales value. This is lower than New York’s 50.9 percent market share in 2018, but still confirms its position as the main driver of the global auction market. The London market shrank in 2019, with Brexit uncertainty looming large: sales were down by 24 percent to US$1.45 billion, giving a market share of 26.1 percent (down from 27.4 percent in 2018).

Guaranteed sales jumped to record level of 30 percent in 2018: The use of guarantees has risen steadily from 39 percent of total low estimates in 2016 to 58 percent in 2018. The total value of guarantees based on low estimates increased from US$988 million in 2017 to US$1.29 billion in 2018. Introduction The value of guarantees has more than doubled since the art market The main aim of this section is to take a closer look at how current and future dip in 2016 and ended last year trends in the global art market are re-shaping, and will continue to re-shape, 5.5 percent higher than when the the landscape and context in which the art and finance industry is currently market was at its peak in 2015. operating. We analyze recent regional art market trends and combine these with corresponding wealth and economic indicators, in order to get a better understanding of the relationship between the art market and the world of wealth management. We also look at the opportunities and challenges ahead.

In this context, we are delighted to have a contribution by Marion Maneker, President and Editorial Director of ArtNews Media (see p.66), giving his view The value of on key aspects and trends that will influence the art market in the coming five years. guarantees We are also pleased to have contributions focusing on specific art markets. In an interview with Hayashi Yasuta, Deputy Director, Cultural Economy and has more than International Affairs Division, Agency for Cultural Affairs in Japan (see p.68), we take a closer look at the need for the re-vitalization of the Japanese art doubled since market, in the context of Asia’s transformation into one of the global centers in arts and culture. This is followed by an overview of some of the recent art the art market market trends in Holland and how they are impacting the evolving and Finance landscape, provided by Rudolf Janssen and Duco Wildeboer from dip in 2016. Deloitte Netherlands (see p.70).

“Green” - Series: 487 Horas Pensando © Lina Sinisterra (2009) 47 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Art and collectible wealth

In recent years, new art price records implies a decrease in real terms (i.e., when Global art market have frequently hit the headlines: from adjusted for inflation) in global art market sales have declined the US$450 million paid for a Leonardo sales over the last 10 years. da Vinci in 2017 to the US$91 million in real terms over price tag of the “Rabbit” stainless steel If we combine these findings suggesting sold by in May 2019. a stagnant global art market with data the last 10 years, as Based on these ground-breaking prices, from Capgemini’s annual World Wealth growth has failed it is easy to assume that the last 10 years Report, which shows that HNWI financial were a golden age for art market sales. wealth more than doubled between 2008 to keep pace with However, figures from the Art Basel and and 2018 (from an estimated US$32.8 UBS Global Art Market Report 2019 show trillion in 2008 to US$68.1 trillion in 2018), increases in global that global art market sales in 2018 were it suggests that although individual art wealth. only 9 percent higher in nominal terms prices may have reached new highs, than global sales registered in 2008. This the overall art market has not. On the contrary, it seems that the global art market has failed to attract and keep pace with the wealth that has been generated Figure 1. HWNI wealth growth (US$) vs global art market sales (US$) growth over this period. Source: Capgemini World Wealth Report, Art Basel and UBS Global Art Market Report Global wealth declined in 2018, with the Asia-Pacific region most affected 19 250 A recent wealth report by Capgemini showed a decline in global wealth in 214 2018 relative to 2017 levels. After seven 208 consecutive years of growth, global HNWI 194 200 wealth declined in 2018 by 3 percent 179 172 from 70.2 to 68.1 US$ trillion, primarily 160 as a result of a drop in equity market

150 141 performance and slowing economies. The 130 128 Asia-Pacific region experienced the most 119 negative impact, with China cited as the 110 109 100 104 102 103 103 key reason for the decline. It accounted 100 92 91 92 for almost 25 percent of the fall in global wealth while Europe, Africa, and Latin 64 America also experienced a noticeable dip in HNWI wealth last year. The Middle 50 East was the only region that experienced an increase in both HNWI wealth and population, while North America saw a 1.1 percent decline in HNWI wealth. 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 The wealth of -HNWIs (who represent HNWI Wealth Index Global Art Sales Index 1 percent of the HNWI population) declined by 6 percent but still accounted for three quarters of the total global wealth decline and was the hardest hit by global economic and political .

48 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Figure 2. Global UHNWI art & collectible wealth 2018 estimates In this year’s report, we estimate that UHNWIs wealth associated with art and collectible wealth to be an estimated $1.742 trillion in 2018.

North America EuropeRussia & CIS

2023 2023 2023 $744 bn $492 bn $41 bn 33% market 19% market 2.4% market share 2023 share 2023 share 2023

2018 2018 2018 $630.5 bn $403 bn $33.3 bn 36% market 23% market 2% market share 2018 share 2018 share 2018

5% market 1% market 5% market 21% market share 2018 share 2018 share 2018 share 2018

2018 $79.3 bn 2018 $13 bn 2018 $92.7 bn 2018 $370 bn

4% market 0.7% market 5.2% market 29% market share 2023 share 2023 share 2023 share 2023

2023 $96 bn 2023 $15 bn 2023 $111 bn 2023 $455 bn Latin America Africa Middle East Asia

Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Against a backdrop of geopolitical and already discussed (p.48), the growth in wealth in 2017 and 2018, assuming the UHNWI wealth has changed at the same rate as HNWI wealth using trade concerns, the near-term global annual art market sales have failed to keep World Wealth Report by Capgemini as a source. The economic recovery remains uncertain. pace with the increases in global wealth. adjusted estimated figure for total UHNWI wealth of in 2018 was US$29.034 trillion. Based on an estimate In this year’s report, we estimate that Therefore the estimate might be too from the “Knight Frank Wealth Report 2017, which UHNWIs wealth associated with art and optimistic, as the evolution of prices for art states that six percent of global UHNWIs allocated to art and collectible assets (p.63) the estimated wealth collectible wealth to be an estimated and collectibles as well as the rise in annual allocated to art and collectibles is US$1.742 trillion. $1.742 trillion20 in 2018, up from $1.622 collectible sales, may not be sufficient to 21 We have assumed that UHNWIs wealth (US$) grows trillion in 2016. The projection for 2023 compensate for the slow growth in art at the same growth rate as the expected growth in that this will grow to an estimated $2.125 market sales. the UHNWI population according to Knight Frank Wealth Report 2019. We maintain the same allocation 21 trillion . However, this projection assumes to art and collectibles (6%) as we estimated for 2018. that art and collectible wealth will grow as a 19 S ource: World Wealth Report 2019, Capgemini (July 2019) However, as the growth in annual art market sales in recent years have failed to keep pace with the increases constant function of the overall estimated 20 W ealth-X reported total UHNWI wealth of US$27.035 in global wealth, this high-level estimate has to be growth in global wealth. But, as we have trillion in 2016, this was adjusted for changes in HNWI considered as an indication.

49 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

GLOBAL ART An art market correction MARKET REVIEW or just consolidation after a record year?

Comparing the first half of 2019 It was evident in the first half of this year that the art market is facing tougher with the first half of 2018 conditions on the back of heightened political and economic uncertainty caused by events such as the US trade war with China and the Brexit process. Global auction 6.96 sales from Christie’s, Sotheby’s, and Phillips BILLION amounted to US$5.55 billion in the first six 5.55 months of 2019, down 20.3 percent from BILLION US$6.96 billion in the first half of 2018. The decline in auction sales had already started in the second half of 2018 and has continued into the first six months of this year.

Figure 3. Auction sales by category H1 2019 vs H1 2018 H1 2018 H1 2019 At Sotheby’s, Christie’s and Phillips in billions US$

5001.000 1.5002.000

1.524 Modern & Impressionist Art 2.351

2.258 Post-War & Contemporary Art 2.198

447 Chinese & Asian Art 875

427 Jewels & Watches 561

77 percent American Art 200

137 & Drawings auction sales 142

126 fell in H1 2019 Decorative Arts & Furniture 98

550 Other 531

First Half 2018 First Half 2019 Source: ArtTactic

50 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Post-War & Contemporary market Figure 4. All auctions by total sales per location back on top: the Post-War and At Sotheby’s, Christie’s and Phillips in billions US$ Contemporary art auction market defied the negative trend in the 5001.000 1.5002.000 2.5003.000 3.500 first half of 2019 as sales rose by 2.7 percent to US$2.26 billion. This market 2.762 accounted for 40.7 percent (up from 3.540 31.6 percent in 2018) of total auction New York sales in the first half of this year, ahead of the Impressionist and Modern art market at 27.5 percent (down from 33.8 1.448 percent in 2018). Overall, Impressionist 1.907 and Modern art auction sales were London down 35.2 percent in the first half of 2019, although this has to be seen in light of the unique Rockefeller 886 collection sold through Christie’s in the 947 Hong Kong first half of 2018.

Continued decline for Chinese and Asian art as auctions see 48.9 227 percent decreases in the first six 267 months of the year: one of the art market drivers in recent years has been the strength of the Asian market. However, the first six months of this 64 59 year point to a weaker sales trend. Geneva Total sales of Chinese and Asian art only generated US$447 million in the first half of 2019, down from US$875 million in 2018, and US$951 million in 1.524 2.351 2017. This 53 percent decline over the Other last two years was largely caused by a significant fall in Chinese and Asian auction sales for Christie’s, which saw its sales value drop from US$604 First Half 2018 First Half 2019 Source: ArtTactic million in the first half of 2017, to US$392.6 million in 2018, and US$211.3 million in 2019. In 2019, Sotheby’s added to the decline as its auctions the three auction houses generated large. Sales were down by 24 percent to decreased their sales by 32 percent US$2.76 billion in the first six months US$1.45 billion, giving a market share of from US$482.7 million in 2018 to of the year, down from US$3.54 billion 26.1 percent (down from 27.4 percent in US$235.7 million in the first half of this in 2018, but up from US$2.58 billion in 2018). As London and New York battle year, after having bucked the negative 2017. The results mean that New York for the top two positions, the Hong trend in 2018. now accounts for 49.8 percent of the Kong auction market is cementing its total auction sales value. This was lower position as the third-largest hub and New York has retained its than the 50.9 percent seen in 2018, but absorbing market share from the top market share and Hong Kong has still confirms its position as the main two. In 2019, Hong Kong’s market share strengthened its position as the driver of the global auction market. amounted to 16 percent (up from 13.6 third-largest hub in the first half of The London market also shrank in percent in 2018) based on auction sales 2019: New York auction sales across 2019, with Brexit uncertainty looming worth US$886 million.

51 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Art market sales up despite a decline in global wealth in 2018

Figure 5. Christie’s and Sotheby’s: Auction sales (in millions US$) by category 2000 - 2019 (H1) Source: ArtTactic

$9,011 $8,787 $8,270 $8,227 $7,675

$6,641 $6,274 $5,906 $5,816 $5,621 $5,313

$4,365 $3,967

$2,820 $2,875 $2,393

$1,519 $1,396 $1,267 $1,275

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 1st Half

Chinese Art Old Masters Impressionist & Modern Contemporary

Auction sales among top H1 2019 update auction houses rose by 8.9 percent in 2018 Global auction sales from Last year ended on a positive note, but global Christie’s, Sotheby’s, and Phillips auction sales slowed in the second half of 2018. Global auction sales from Christie’s, were worth US$5.55 billion in the Sotheby’s, and Phillips amounted to US$12.21 billion in 2018, up 8.9 percent from 2017. After a strong first six months, the auction market first six months of 2019, down 20.3 slowed down in the second half of 2018 and this negative trend has continued into the percent from the first half of 2018. first half of 2019. Phillips saw the largest jump in sales in 2018, with public auction sales up The decline in auction sales had 28 percent last year. This was followed by Sotheby’s with an 11 percent increase in total already started in the second half sales and Christie’s with a more modest 6 percent rise in auction sales last year. of 2018.

52 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Post-War & Contempo- Modern & Impressionist Chinese & Asian art rary art market up 18 art auction sales grew market sales fell by 17 percent in 2018 by 36 percent in 2018 percent in 2018 After a 40.3 percent rise in sales in 2017, While the contemporary art market After a 21 percent rise in sales in 2017, the market saw robust sales growth of 18 slowed down in 2018, the Impressionist the Asian art market experienced a 17 percent. Total sales for 2018 came in at and Modern art market continued percent decline in total sales last year. US$3.88 billion (up from US$3.28 billion to experience positive growth. Since The decline in overall sales was largely in 2017). The Post-War and Contemporary 2016, the Impressionist and Modern due to a significant drop in sales at art market still accounts for the largest art sales category has seen the highest Christie’s, from just over US$1 billion share of sales at Christie’s, Sotheby’s, and growth rate, with 36.3 percent auction in 2017 to US$708 million in 2018. Phillips, with a 31.8 percent share of the sales growth in 2018. Sales have more Sotheby’s sales came in at US$734 million auction sales total. Sotheby’s and Phillips than doubled since 2016. This category last year, which was marginally higher saw the strongest growth in this auction accounted for 26.9 percent of total than the US$730 million seen in 2017. category last year. auction sales last year (up from 21.5 The weakness in the Asian art market percent in 2017). Total sales for 2018 continued in 2018. came in at US$3.28 billion (up from US$2.41 billion in 2017).

H1 2019 update H1 2019 update The Post-War and Contemporary H1 2019 update The decline continued for art auction market defied the Overall, Impressionist and Chinese and Asian art as negative trend in the first half Modern art auction sales were auction sales were 48.9 percent of 2019 as sales were up 2.7 down 35.2 percent in the first lower in the first six months of percent to US$2.26 billion. half of 2019, although this has this year than they were in the to be seen in light of the unique same period last year. Rockefeller collection sold through Christie’s in the first half of 2018.

The Old Masters H1 2019 update category suffered from Old Masters sales decreased by the Leonardo effect just over 3 percent in the first six months of 2019 compared After a record year in the Old Masters with the same period last year. market in 2017, on the back of the This shows that the sector US$450 million sale of “Salvatore Mundi” remains resilient in what by , the market seems to be a weaker global art reverted back to its long-term trend, market. with Sotheby’s and Christie’s generating US$407 million in 2018 vs. US$797 million in 2017—a drop of 49 percent.

53 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Art market confidence

in the Post-War & Contemporary art market

Art market confidence in the Post-War Figure 6. Art Market Confidence Index & Contemporary art market Source: ArtTactic The ArtTactic Confidence Indicator22 for Post-War & Contemporary art in 100 September 2019, saw a drop of 29 percent 94 94 93 from May 2019. The indicator measuring 87 the art market sentiment among experts, has deteriorated after a small recovery in May 2019. The overall ArtTactic Confidence 80 80 Indicator for September 2019 came in 75 74 70 73 at 42 (down from 60 in May 2019). A 68 reading below 50 signals that there is 70 67 more negative than positive sentiment 61 65 58 60 in the current art market, and reflects 60 55 56 58 the increasing economic and political 57 56 59 uncertainty facing the US, UK and China in 51 particular. 48 45 42 Although art market confidence has 40 weakened in the last five months, the majority of experts believe the art market 28 will consolidate around current levels, with 60 percent of experts saying so (up 20 from 40 percent in May 2019), a further 29 percent of experts believe that the market will go up in the next six months (down 11 from 51 percent who said the same in May

2019). Only 11 percent think that art market 0 conditions will deteriorate in the coming

months (slightly up from 9 percent in May Jul-14 Jan-12 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jun-10 Jun-11 Jun-12 Jun-13 Jun-15 Jun-16 Jun-17 Sep-18 Sep-19 Dec-09 Dec-10 Dec-12 Nov-05 Nov-06 Nov-07 Nov-08 2019). May-05 May-06 May-07 May-08 May-09 May-19

The outlook for economic growth and political stability has repeatedly been cited as the most important risk to the Despite the uncertainty around Brexit, contemporary art market. In September London’s Post-War and Contemporary 2019, the Economic Indicator component Art Evening auctions in March and June of the ArtTactic Confidence Index dropped sales delivered approximately as expected by 40 percent relative to May 2019 levels, with total sales of £305.6 million against where experts raised continued concerns a pre-sale estimate of £296.4 million to about the heightened risks of Brexit and £408.4 million. The sales total was 17 22 T he ArtTactic Art Market Confidence Indicator was the impact of Trump’s trade war with China. percent lower than in March and June launched in May 2005 and is now in its 42nd edition. 2018. However, New York’s evening auction Data is collected and the survey findings are made available every 6 months. The questions asked to London’s winter and summer sales sales of Post-War & Contemporary art in compute the indicator has remained constant since the meet expectations, whereas spring May 2019 brought in US$844 million—7.6 launch in 2005. The September 2019 survey was based on a sample of 109 international collectors, auction sales in New York rise 7.6 percent vs. percent higher than the figure from May specialists, art dealers, art advisors and market ana- May 2018 2018. lysts and commentators.

54 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Figure 6. Art Market Confidence Index Source: ArtTactic Risk perception up 10 percent in the edge off ? Despite falling market 29 percent of experts last 12 months confidence levels, the ArtTactic Art Market The overall perception of risk in the art Speculation Barometer saw a 3.4 percent believe that the market market increased by 1.4 percent since May increase from May 2019. The Barometer is 2019, with the Risk Barometer coming in currently standing at 7.3, and is still sitting will go up in the next at 7.0. This was above its 10-year average 10 percent above the 10-year average. six months, versus 51 of 6.4. (The Risk Barometer operates (The barometer operates on a scale from on a scale from 1-10 where 1 = No risk 1-10 where 1 = No speculation and 10 = percent who said the and 10 = Extremely high level of risk.) Extremely high level of speculation.) This The Risk Barometer has increased by 10 could suggest that speculative behavior same in May 2019. percent in the last 12 months, and signals is still prevalent in today’s art market, and a heightened level of risk, reflected in the could act as a destabilizing factor in what overall decline in art market confidence. appears to be an increasingly nervous and fragile art market. Is the risk of a speculative bubble in the contemporary art market waning? Could the heightened uncertainty in the art market over the last 12 months take the 10

Figure 7. ArtTactic Risk & Speculation Barometer: 2006 - May 2019 Source: ArtTactic 8.3 8 7.8 7.7 7.4 7.6 10 7.2 7.37.3 7.3 6.9 7.177.1 .1 6.8 6.9 7 6.966.8 .9 6.4 6.6 7 6.6 6.9 6.2 6.9 7 6.8 6.6 6.5 6.4 6.6 6.5 6.3 6.4 6 6.2 6.3 6.2 6.2 5.4 6.1 8.3 6.3 5.9 6.0 5.7 5.8 5.6 8 7.8 7.7 7.6 7.4 5.3 5.2 7.2 7.37.3 7.3 6.9 7.177.1 .1 5.1 6.8 6.9 7 6.966.8 .9 6.4 6.6 7 7 6.6 4 6.9 6.2 6.9 6.8 6.6 6.5 4.1 6.4 6.6 6.5 6.3 6.4 6 6.2 6.3 6.2 6.2 3.6 5.4 6.1 6.3 5.9 6.0 5.7 5.8 5.6 5.3 5.2 5.1 2

4 Jul-14 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jun-11 Jun-12 Jun-13 Jun-15 Jun-16 Jun-17 Sep-18 Sep-19 Dec-09 Dec-10

4.1 Nov-06 Nov-07 Nov-08 May-19 May-07 May-08 May-09 May-10 3.6 Risk Speculation

2 Jul-14 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Jan-18 Jun-11 Jun-12 Jun-13 Jun-15 Jun-16 Jun-17 Sep-18 Sep-19 Dec-09 Dec-10 Nov-06 Nov-07 Nov-08 May-19 May-07 May-08 May-09 May-10

Risk Speculation 55 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Auction guarantees

487 Horas Pensando © Lina Sinisterra (2009)

What is an auction guarantee? Why do auction houses offer An auction guarantee is a pre-arranged guarantees? agreement between the seller and the In a highly competitive marketplace, auction house and/or an external third auction guarantees can be an effective party who agrees to pay a fixed amount tool in attracting consignments away from for a specific lot coming up for auction. If rival auction houses, as it gives the seller the lot fails to sell, the auction house or certainty that the lot will sell. It also helps the third party becomes the owner of the the auction house shore up its overall lot and pays the seller the full guarantee. If sales figure by limiting the chances of a the lot sells for more than the guaranteed work going unsold and thereby affecting amount, the winning bidder becomes the the overall total. It can also provide a good owner of the lot and the auction house or source of profits for the auction house, third party receives a proportion of the if the lot sells for an amount above the excess of the guaranteed amount from the guaranteed amount. seller.

56 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Figure 8. Auction guarantees: Total estimated value (based on Auction guarantees have become an low estimate) and % of guaranteed value out of total low estimate “invisible hand” in the art market, that on At Christie’s, Sotheby, Phillips Post-War & Contemporary Evening Sales in London and New York one hand provide a sign of investors’ art market confidence (i.e. employing capital 1,287 towards artists and art works that is likely 1,219 to increase in value), and on the other - introduces a new type of financial risk the art market (i.e. a market dependency on auction 987 guarantees to ensure a successful outcome). With guarantees accounting for more than half of the total sales value in 2018, it is clear that these types of financial arrangements

591 in the auction market is having an increasing influence on sales trends at the top end of Total guarantees the global art market. (by low estimate value in millions US$) Record level as guaranteed sales jump 30 percent in 2018: the use of guarantees has steadily increased from 39 percent of Guarantee as % total low estimates in 2016 to 58 percent in of total low auction 2018. The total value of guarantees based 44%39% 54% 58% estimate on low estimates increased from US$988 2015 2016 2017 2018 million in 2017 to US$1.29 billion in 2018. Source: ArtTactic The value of guarantees has more than doubled since the art market dip in 2016 and ended last year 5.5 percent higher than the level seen when the market was at its peak in 2015.

Figure 9. Auction guarantees: Number of lots guaranteed in Post-War Auction guarantee levels fall as the & Contemporary Art evening sales in London and New York At Christie’s, Sotheby, Phillips Post-War & Contemporary Evening Sales in London and New York market weakens: guarantees for Post-War & Contemporary art sales were down 20.8 percent year-on-year in February 2019, 299 down 3.5 percent year-on-year in May 2019, and down 43.4 percent year-on-year in June

247 2019. 230 Improved returns attract more guarantors in 2018: the estimated average return on guarantees has increased from

161 a low of 3.4 percent in 2015 to 11.8 percent in 2018, based on the performance of individual lots above the low estimate. The question is whether these levels can be maintained throughout 2019, with March sales in London this year showing guarantees yielding a 9.2 percent return above the low estimate. An estimated profit of US$151.7 million was generated Total guarantees on guaranteed lots in 2018 (hammer price (by lots) vs. low estimate). This was typically shared 2015 2016 2017 2018 between the guarantors and the sellers. Source: ArtTactic

57 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Figure 10. Average guarantee price Figure 11. Estimated return on guarantees At Christie’s, Sotheby, Phillips Post-War & Contemporary Evening At Christie’s, Sotheby, Phillips Post-War & Contemporary Evening Sales in London and New York Sales in London and New York 151,7

151,7 $5,300,461

$4,303,330 103,1

$3,996,664 103,1 $3,672,263

56,8

Profit/Loss 41,5 on guarantees 56,8 (in millions US$) Profit/Loss 41,5 on guarantees Estimated(in returnmillions US$) on guarantees

Estimated return 3.4% 9.6% 10.4% 11.8% 9.2% on guarantees 2015 2016 2017 2018 2015 2016 2017 2018 2019

Source: ArtTactic Source: ArtTactic3.4% 9.6% 10.4% 11.8% 9.2%

2015 2016 2017 2018 2019 Female artists only accounted for 5 percent of guaranteed value in & Contemporary evening sales between 2015 and 2018. Last year, the gap widened Post-War & Contemporary evening further with only 3 percent of guaranteed value accounted for by female artists. sales between 2015 and 2018. The New York auction market accounted for 73 percent of guaranteed value in 2018, but London Christie’s drops back in the guarantee While Sotheby’s and Phillips saw average is now taking a larger share: auction race to secure major single-owner guarantee prices come down between guarantees in New York evening auction sales in 2018: after Christie’s reduced 2017 and 2018—by 5 percent and 15 sales accounted for 73 percent of the total, its guarantees by 69 percent between percent respectively—Christie’s have seen with London auctions accounting for 27 2015 and 2016, the auction house has an increase in their average guaranteed percent (up from 19 percent in 2017). steadily moved back into the guarantee prices of 25 percent. The increase in race, with a 51 percent increase in the guarantees can be largely attributed to two Paintings accounted for 89 percent of the guaranteed value in 2018. This amounted high-profile single-owner collections: The guaranteed value in 2018: painting is clearly to an estimated US$636 million based Collection of Peggy and David Rockefeller the medium favored by guarantors, as it on the low estimate, which was only 15 and The Barney A. Ebsworth Collection. accounted for an estimated US$1.14 billion percent lower than it was at the peak of the in guaranteed value in 2018 (based on low market in 2015. Christie’s accounted for 49 Is the guarantee market fueling estimates). This was 37 percent higher than percent of the guaranteed value in 2018, gender bias in the auction market? in 2017. Sculpture accounted for US$97.4 compared with Sotheby’s 41 percent share Female artists only accounted for 5 million in guaranteed value in 2018, down and Phillips’ 10 percent guarantee share. percent of guaranteed value in Post-War from US$106.4 million in 2017.

58 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Figure 12. Top 10 artists by auction guarantee value 2015-2018 (based on the low auction estimate in millions US$) At Christie’s, Sotheby, Phillips Post-War & Contemporary Evening Sales in London and New York

700

600 Top 10 artists by auction guarantee value

500 A ndy Warhol US$ 495,376,659

Jean-Michel Basquiat US$ 452,422,750 400 Mark Rothko US$ 234,945,396

R oy Lichtenstein US$ 230,311,712

300 G erhard Richter US$ 216,476,027

W illem de Kooning US$ 198,670,000

200 Fr ancis Bacon US$ 178,996,283

Christopher Wool US$ 148,475,313

100 P eter Doig US$ 146,661,063

L ucian Freud US$ 115,057,182

Source: ArtTactic 2015 2016 2017 2018

59 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Regional trends

GLOBAL UNITED UNITED EUROPE CHINA MIDDLE SOUTH LATIN SOUTHEAST RUSSIA AFRICA TREND STATES KINGDOM EAST ASIA AMERICA ASIA

Real GDP Growth 3.3% 2.3% 1.2% 1.6% 6.3% 0.3% 6.8% 1.1% 5.0% 1.6% 3.6% 2017 to 2018*

Real GDP Growth Negative Negative Negative Negative Negative Negative Neutral Positive Neutral Negative Positive Trend +/- *

HNWI wealth growth -3.0% -1.1% -6.0% -3.1% -4.8% 4.3% -6.0% -3.6% -4.8% Not available -7.1% 2017 to 2018** ECONOMIC REVIEWECONOMIC 2018

Real GDP Growth 3.6% 1.9% 1.4% 1.8% 6.1% 2.9% 7.0% 2.4% 5.1% 1.7% 3.8% Outlook 2020

Economic Positive Negative Positive Positive Negative Positive Positive Positive Positive Positive Positive Outlook Trend

Wealth Outlook 2023 (5 year growth 22% 18% 21% 24% 35% 20% 39% 21% 26% 25% 23% in UHNWI

ECONOMIC OUTLOOK 2020 OUTLOOK ECONOMIC population)****

Art Market Modern & Contemporary 4367.1 2510 1170 251 112.2 26.6 92 74.9 41.1 41.1 48.2 Sales 2018 (US$ million)

Market Share 100.0% 57.5% 26.8% 5.7% 2.6% 0.6% 2.1% 1.7% 0.9% 0.9% 1.1% % in 2018

Art Market Sales 14.9% -7.2% 51.8% 36.9% 25.3% -19.0% 48.0% 4.0% -16.0% -19.9% -13.4% Growth 2017 to 2018

5 Year Sales CAGR - 0.9% 11.2% 9.0% -11.8% 7.5% 10.1% -15.5% -4.2% -8.3% 22.6%*** AUCTION MARKET SALES IN 2018 (2013-2018)

UP: 30% UP: 35% UP: 13% UP: 21% UP: 30% UP: 26% UP: 25% UP: 20% UP: 33% UP: 14% UP: 47% Art Market FLAT: 42% FLAT: 49% FLAT: 39% FLAT: 54% FLAT: 35% FLAT: 51% FLAT: 56% FLAT: 49% FLAT: 49% FLAT: 49% FLAT: 40% Outlook 2020***** DOWN: 28% DOWN: 16% DOWN: 49% DOWN: 25% DOWN: 35% DOWN: 23% DOWN: 19% DOWN: 31% DOWN: 18% DOWN: 36% DOWN: 13% OUTLOOK

60 * Source: IMF DataMapper- April 2019 ** Source: Capgemini, World Wealth Report 2019 *** CAGR - is based on the period 2016 -2018 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Wealth, economics, modern and contemporary art markets

GLOBAL UNITED UNITED EUROPE CHINA MIDDLE SOUTH LATIN SOUTHEAST RUSSIA AFRICA TREND STATES KINGDOM EAST ASIA AMERICA ASIA

Real GDP Growth 3.3% 2.3% 1.2% 1.6% 6.3% 0.3% 6.8% 1.1% 5.0% 1.6% 3.6% 2017 to 2018*

Real GDP Growth Negative Negative Negative Negative Negative Negative Neutral Positive Neutral Negative Positive Trend +/- *

HNWI wealth growth -3.0% -1.1% -6.0% -3.1% -4.8% 4.3% -6.0% -3.6% -4.8% Not available -7.1% 2017 to 2018** ECONOMIC REVIEWECONOMIC 2018

Real GDP Growth 3.6% 1.9% 1.4% 1.8% 6.1% 2.9% 7.0% 2.4% 5.1% 1.7% 3.8% Outlook 2020

Economic Positive Negative Positive Positive Negative Positive Positive Positive Positive Positive Positive Outlook Trend

Wealth Outlook 2023 (5 year growth 22% 18% 21% 24% 35% 20% 39% 21% 26% 25% 23% in UHNWI

ECONOMIC OUTLOOK 2020 OUTLOOK ECONOMIC population)****

Art Market Modern & Contemporary 4367.1 2510 1170 251 112.2 26.6 92 74.9 41.1 41.1 48.2 Sales 2018 (US$ million)

Market Share 100.0% 57.5% 26.8% 5.7% 2.6% 0.6% 2.1% 1.7% 0.9% 0.9% 1.1% % in 2018

Art Market Sales 14.9% -7.2% 51.8% 36.9% 25.3% -19.0% 48.0% 4.0% -16.0% -19.9% -13.4% Growth 2017 to 2018

5 Year Sales CAGR - 0.9% 11.2% 9.0% -11.8% 7.5% 10.1% -15.5% -4.2% -8.3% 22.6%*** AUCTION MARKET SALES IN 2018 (2013-2018)

UP: 30% UP: 35% UP: 13% UP: 21% UP: 30% UP: 26% UP: 25% UP: 20% UP: 33% UP: 14% UP: 47% Art Market FLAT: 42% FLAT: 49% FLAT: 39% FLAT: 54% FLAT: 35% FLAT: 51% FLAT: 56% FLAT: 49% FLAT: 49% FLAT: 49% FLAT: 40% Outlook 2020***** DOWN: 28% DOWN: 16% DOWN: 49% DOWN: 25% DOWN: 35% DOWN: 23% DOWN: 19% DOWN: 31% DOWN: 18% DOWN: 36% DOWN: 13% OUTLOOK

****Knight Frank, The Wealth Report 2019 ***** ArtTactic Art Market Confidence Survey - May 2019 61 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Regional profiles

Data Sources •• HNWI Wealth Population figures are estimates from the Knight Frank Wealth Report 2019 (p.86) •• GDP figures are from IMF DataMapper, April 2019 •• Art market data is provided by ArtTactic

UNITED STATES UNITED KINGDOM

ECONOMIC & WEALTH MODERN & CONTEMPORARY ECONOMIC & WEALTH MODERN & CONTEMPORARY INDICATORS ART MARKET INDICATORS ART MARKET

HNWI Wealth Population Auction Sales in 2018 HNWI Wealth Population Auction Sales in 2018 (thousands): 5,944 (US$ million): 2,512 (thousands): 759 (US$ million): 1,170

Change in HNWI Population Sales Growth 2017-18 Change in HNWI Population Sales Growth 2017-18 2017-18: 3.0% -7.20% 2017-18: 3.0% 51.80%

Real GDP Growth 2017-18 Global Market Share Real GDP Growth 2017-18 Global Market Share 2.3% 57.50% 1.2% 26.80%

UP: 35% UP: 13% GDP Growth Outlook 2020 Art Market GDP Growth Outlook 2020 Art Market FLAT: 49% FLAT: 39% 1.9% Outlook 2020 1.4% Outlook 2020 DOWN: 16% DOWN: 49%

5-Year CAGR 2,402 2,909 2,245 1,572 2,707 2,512 5-Year CAGR 688891 983580 7711,170 0.9% 11.2%

Post-War & Modern Contemporary & Contemporary Auction Sales Auction Sales (US$ million) (US$ million) 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

The world’s largest art market experienced a slow down in auction Despite Brexit uncertainty, the UK art market did well in the first half sales in 2018, a trend that is likely to continue as both economic and of 2018, however modern and contemporary sales in London were political headwinds are putting a damper on buyers. slowing significantly in the latter half of 2018 and first half of 2019. The outlook for the next 12 months remains uncertain, with a significant Art Market Analysis is based on Post-War & Contemporary Evening & Day Auctions - Sotheby’s, Christie’s, & Phillips in New York. downside risk. Art Market Analysis is based on Post-War & Contemporary Evening & Day Auctions - Sotheby’s, Christie’s, & Phillips in London. 62 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

EUROPE CHINA

ECONOMIC & WEALTH MODERN & CONTEMPORARY ECONOMIC & WEALTH MODERN & CONTEMPORARY INDICATORS ART MARKET INDICATORS ART MARKET

HNWI Wealth Population Auction Sales in 2018 HNWI Wealth Population Auction Sales in 2018 (thousands): 4,957 (US$ million): 251 (thousands): 1,535 (US$ million): 112.2

Change in HNWI Population Sales Growth 2017-18 Change in HNWI Population Sales Growth 2017-18 2017-18: 3.0% 36.90% 2017-18: 4.0% 25.30%

Real GDP Growth 2017-18 Global Market Share Real GDP Growth 2017-18 Global Market Share 1.60% 5.70% 6.30% 2.60%

UP: 21% UP: 30% GDP Growth Outlook 2020 Art Market GDP Growth Outlook 2020 Art Market FLAT: 54% FLAT: 35% 1.80% Outlook 2020 6.10% Outlook 2020 DOWN: 25% DOWN: 35%

5-Year CAGR 163164 189150 184251 5-Year CAGR 210183 1089190112 9.0% -11.8%

Post-War & Contemporary Contemporary Chinese Auction Sales Auction Sales (US$ million) (US$ million) 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

The European art market also experienced strong growth in 2018, China’s slowing economy and the uncertainty surrounding the ongoing however, experts have become significantly more cautious about the trade-war with the US, is likely to have a negative impact on the art market. coming 12 months. Experts are increasingly expressing a wait-and-see attitude, with downside risk heightened in the next 12 months. Art Market Analysis is based on Post-War & Contemporary Evening & Day Auctions - Sotheby’s & Christie’s in Paris, , & Milan. Art Market Analysis is based on Contemporary Chinese Auctions - Sotheby’s, Christie’s, Poly Auction, & China Guardian in Hong Kong & Beijing.

63 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

MIDDLE-EAST SOUTH EAST ASIA

ECONOMIC & WEALTH MODERN & CONTEMPORARY ECONOMIC & WEALTH MODERN & CONTEMPORARY INDICATORS ART MARKET INDICATORS ART MARKET

HNWI Wealth Population Auction Sales in 2018 HNWI Wealth Population Auction Sales in 2018 (thousands): 459 (US$ million): 26.6 (thousands): 326 (US$ million): 41.1

Change in HNWI Population Sales Growth 2017-18 Change in HNWI Population Sales Growth 2017-18 2017-18: 3.0% -19% 2017-18: 4% -16%

Real GDP Growth 2017-18 Global Market Share Real GDP Growth 2017-18 Global Market Share 0.30% 0.60% 5% 0.90%

UP: 26% UP: 33% GDP Growth Outlook 2020 Art Market GDP Growth Outlook 2020 Art Market FLAT: 51% FLAT: 49% 2.90% Outlook 2020 5.10% Outlook 2020 DOWN: 23% DOWN: 18%

5-Year CAGR 19 23 24 36 33 27 5-Year CAGR 51 60 76 54 49 41 7.5% -4.2%

Modern Modern & Contemporary & Contemporary Auction Sales Auction Sales (US$ million) (US$ million) 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018

Auction sales of modern and contemporary art slowed down in 2018, Southeast Asian auction sales was down 16 percent in 2018, with more however, the majority of experts believe the market will level out from experts casting doubts about the direction for the coming 12 months. here. The main risks are the uncertain global economic outlook and The market has been on a decline since the peak of the market in 2015. elevated geopolitical risks in the region. Art Market Analysis is based on Modern & Contemporary Auctions - Sotheby’s & Art Market Analysis is based on Modern & Contemporary Auctions - Sotheby’s, Christie’s in Hong Kong. Christie’s, Bonhams, & Tehran Auction in Dubai, Doha, London, & Tehran.

SOUTH ASIA LATIN AMERICA

ECONOMIC & WEALTH MODERN & CONTEMPORARY ECONOMIC & WEALTH MODERN & CONTEMPORARY INDICATORS ART MARKET INDICATORS ART MARKET

HNWI Wealth Population Auction Sales in 2018 HNWI Wealth Population Auction Sales in 2018 (thousands): 438 (US$ million): 92 (thousands): 610 (US$ million): 74.9

Change in HNWI Population Sales Growth 2017-18 Change in HNWI Population Sales Growth 2017-18 2017-18: 6.0% 48% 2017-18: 3.0% 4%

Real GDP Growth 2017-18 Global Market Share Real GDP Growth 2017-18 Global Market Share 6.80% 2.10% 1.10% 1.70%

UP: 25% UP: 20% GDP Growth Outlook 2020 Art Market GDP Growth Outlook 2020 Art Market FLAT: 56% FLAT: 49% 7.00% Outlook 2020 2.40% Outlook 2020 DOWN: 19% DOWN: 31%

5-Year CAGR 57 56 68 64 62 92 5-Year CAGR 73 76 94 88 72 75 10.1% 0.6%

Modern Modern & Contemporary & Contemporary Auction Sales Auction Sales (US$ million) (US$ million) 2013 2014 2015 2016 2017 2018 2013 2014 2015 2016 2017 2018 South Asia experienced strong growth in 2018, and experts retain Latin American auction sales experienced 4 percent growth in 2018, despite a neutral-to-positive outlook on the South Asian art market in the Sotheby’s and Phillips discontinuing their dedicated twice-a-year Latin coming 12 months. American sales. However, experts are in doubt whether this growth will continue this year. Art Market Analysis is based on Modern & Contemporary Auctions - Sotheby’s, Christie’s, Saffronart, Bonhams, Pundoles, Artiana, AstaGuru in Mumbai, Art Market Analysis is based on Modern & Contemporary Auctions - Sotheby’s, New Delhi, London & New York. Christie’s, & Phillips in New York & London 64 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

RUSSIA

ECONOMIC & WEALTH MODERN & CONTEMPORARY INDICATORS ART MARKET

HNWI Wealth Population Auction Sales in 2018 (thousands): 163 (US$ million): 41.1

Change in HNWI Population Sales Growth 2017-18 2017-18: 6% -19.90%

Real GDP Growth 2017-18 Global Market Share 1.60% 0.90%

UP: 14% GDP Growth Outlook 2020 Art Market FLAT: 49% 1.70% Outlook 2020 DOWN: 36% The global art market 5-Year CAGR 63 73 27 20 51 41 experienced strong -8.3% growth in the first half of 2018, however Modern & Contemporary the market slowed Auction Sales (US$ million) 2013 2014 2015 2016 2017 2018 down considerably in The Russian art market has been struggling since the sanctions were the second half, with imposed in 2014, however in the last years, experts have seen market confidence creeping back. the negative trend Art Market Analysis is based on Modern & Contemporary Auctions - Sotheby’s, Christie’s, & MacDougall’s in London. continuing into first half of 2019. A combination AFRICA of increasing political ECONOMIC & WEALTH MODERN & CONTEMPORARY and economic INDICATORS ART MARKET uncertainty, coupled HNWI Wealth Population Auction Sales in 2018 (thousands): 177 (US$ million): 48.2 with heady valuations Change in HNWI Population Sales Growth 2017-18 in the art market, has 2017-18: 3.00% -13.4%

Real GDP Growth 2017-18 Global Market Share raised the stakes of 3.60% 1.1% a possible art market UP: 47% GDP Growth Outlook 2020 Art Market FLAT: 40% contraction. 3.80% Outlook 2020 DOWN: 13%

2-Year CAGR 32 56 48 22.6%

Modern & Contemporary Auction Sales (US$ million) 2016 2017 2018 Auction sales in the first half of 2019 are down 11 percent year on year. There is more uncertainty surrounding the next 12 months outlook as less than half of the experts believe the market will go up, compared to 70 percent of experts last year.

Art Market Analysis is based on Modern & Contemporary Auctions - Sotheby’s, Christie’s, Phillips, Bonhams, Piasa, Strauss, and ArtHouse Nigeria 65 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Expert voices

10 THINGS YOU NEED TO KNOW TO UNDERSTAND THE NEXT FIVE YEARS OF THE ART MARKET

There is a ceiling The money keeps growing Marion K. Maneker If the years since 2014 have taught us The market for works of art is a function President and Editorial Director anything, it is that there is a top to the of global wealth. Although global wealth of ArtNews Media art market, and we have reached it. In has increased greatly among Ultra High 2011, 2014, and 2018, global sales volume Net Worth Individuals over the last decade, peaked, according to Clare McAndrew’s Knight Frank predicts the population will annual report; 2018’s high point was also grow by another 22 percent in the next five lower than the 2014 total. Since 2011, years. That means by 2023 another 43,000 year-on-year growth has never exceeded individuals will have more than US$30 13 percent. So far in 2019, auction sales million in liquid assets. suggest another downward phase in the cycle. The auction houses are shifting focus The dramatic news that Patrick Drahi will There’s a top—but there is a bottom take Sotheby’s private should not mask too the fact that auctioneers’ strategies are For much of the last 15 years (a period shifting. Just as Hollywood studios shifted in which the art market expanded from producing movies to marketing them, dramatically before the global financial the three main auction houses are now crisis), talk of the art market in the popular acting more as distributors of material and financial press has been reflexively gathered from collectors’ estates. That paired with expectations of an eventual means the financial deals that drove much or imminent crash. After all, a booming of the top of the art market for the period art market had to be a bubble. Any from 2006 until 2014 are now taking place rational person knew that. Since 2014, outside of the auction houses themselves. those predicting an art market crash have changed their tune. A new breed of advisor is gaining prominence During the big drops in 2012, 2015, 2016, The shift to selling estates has enabled and this year, lower sales results have been the rise of a new kind of estate advisor— received with equanimity. This is so normal often a prominent former auction we almost forget how different it is from house specialist—who solicits financial the past. guarantees, attracts buyers, consults on

66 Art & Finance Report 2019 | Section 1 - Wealth and the global Art Market

Excéntrica © Lina Sinisterra

the presentation of the works and, in some Warhol takes a rest more artists. Globalization has created cases, even participates in the publicity. After nearly two decades as the primary greater value for the world’s best and force in the growth of the Contemporary most admired artists including Picasso, The buyers are changing art market, ’s works are Giacometti, Rothko and many more. But At the very top of the art market, the increasingly scarce on the market. Pricing there is also a global search for artists collectors are a small group of very wealthy remains an issue for the artist’s canvases from all regions who can rise to the level of people who remain remarkably consistent though we know that Warhol’s imagery global artists. We can see this in the rising year after year. In the middle of the market, remains important to buyers from the market value of modern British artists and there is a whole new group of buyers— activity in the print market. Surpassing European post-war artists. Hong Kong has many coming in through the internet. Warhol in auction turnover is an artist like created a distinctive market for a growing Asian buyers continue to wield the crucial Zao Wou-ki whose work is beginning to rival number of pan-Asian artists. swing money that can light up a specific, global artists like . sought-after lot. But their taste remains sophisticated and the buyers are well- Technology has already transformed educated and advised. the art world Email, the video transmission of auctions, New buyers have new tastes and increasing access to public prices New collectors (who are new either outside of paid databases have already Asian buyers because the basis of their wealth is in had a massive impact in creating visibility, emerging markets or because of their transparency, and trust in the art market. continue to wield age) are likely to find different types of The current shape of the art market would objects valuable in coming years. We’ve be impossible without digital imagery and seen a growth in value for everything from dealers having access to direct, immediate, the crucial swing watches to sneakers to comic books which and constant contact with clients. That recapitulates an earlier growth in the value happens on WeChat, WhatsApp, email, and money that of wine and classic cars. Instagram—tech platforms all. can light up a Collectors value objects that have Globalization turns regional artists historical, personal, and emotional into global artists specific, sought- significance as well as objects that connect For the art market to continue at this them to history and superlative talent. level—or go higher—it needs the work of after lot.

67 Art & Finance Report 2019 | Section 1 - Wealth and the Global Art Market

Expert voices

THE ART ECOSYSTEM Hayashi Yasuta FOR FUTURE GENERATIONS Deputy Director, Cultural Economy and International Affairs Division UNITING THE BUSINESS WORLD, Agency for Cultural Affairs, Japan THE CULTURAL SECTOR, AND THE HOSPITALITY INDUSTRY IN OPENING UP A CLOSED MARKET

Against the backdrop of Asia’s transformation into one of the world’s bastions of art and culture, there are growing calls for the revitalization of the Japanese art market. With 2020 as the key driver, Agency of Cultural Affairs,

Daisuke Kuwabara Japan (ACA) has set out a culture and economic strategy that Partner signals a departure from the traditional focus on heritage Country Lead of Art & Finance Japan conservation. Deloitte interviewed Yasuta Hayashi, Deputy Risk Advisory division, Deloitte Director, Cultural Economy and International Affairs Division Touche Tohmatsu LLC Agency for Cultural Affairs on the strategy and his vision for the desired art ecosystem.

Demystifying Japanese in the context lives, cemented through changes in time The current state of the Japanese of art and culture: the harmonious and undergoing millennia of evolution. art market: domestic centricity integration of nature, , and Since Japan opened its doors to the world and limited recognition of art as an mindfulness through art in 1853, a thirst and admiration for foreign investment Japanese culture has traditionally cultures and lifestyles have greatly affected A recent study published in March emphasized living in harmony with nature. the values assigned to traditional arts. 2019 estimated the size of the current With a devastating natural catastrophe Intense efforts to rebuild the nation in the Japanese art market as US$2.25 billion. so fresh in our memory, a key part of our aftermath of World War II have also led to While this represents three consecutive national experience is our ongoing desire the unintended consequence of distancing years of growth, and thus a move in the to build a harmonious relationship with and aesthetics from modern Japanese right direction, the Japanese art market majesty of nature. This has, in turn, shaped lives. Our agency’s goal is to close this has yet to blossom and our cultural GDP our sense of aesthetics and our attitude distance, and to bring the joy of aesthetic remains considerably lower than that of towards art and culture. Japanese tradition appreciation, collection, and patronage our peers as a consequence. While the has at its heart our desire to assimilate firmly back into our national vocabulary. reasons for this are multifaceted, relatively elements of nature and aesthetics into our low recognition of art as an investment

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Key drivers of change: tax reform and our traditional focus on the conservation ArtTech and other governmental pushes towards of cultural heritage, reflecting a growing market vitalization recognition of the potential of the arts As an example of a governmental push, to spark a virtuous cycle of economic traceability: we enacted a tax reform in 2019 that activities. introduced conditional exemptions to redefining the inheritance tax linked to artworks. In Support mechanism for emerging conjunction with our efforts to encourage artists: borderless curatorial network Japanese art donation to museums and other academic Several Japanese artists have entered collections, we hope this serves to protect the global art scene and been met with market on a artworks when they change hands, as well considerable support and recognition. as enhancing what our public collections Yayoi Kusama and have can offer. We are also revisiting the roles become household names, and Shinro global scale. museums play in our society and how they Ohtake, Leiko Ikemura, Kōhei Nawa, and could evolve to keep pace with the times. Izumi Katō are following in their footsteps. In addition to our international artist As seen in many recent examples overseas, exchange program, the ACA is actively leading museums are increasingly moving seeking ways to enhance our support for beyond the traditional bounds of collection the next generation of artists. For instance, and display to make their voices heard we are focusing on building an international on societal issues. Without diluting the curatorial network that will play a central can certainly offer one explanation. emphasis on conservation and academic role in promoting emerging artists. We Despite increasing popularity among new excellence, we would like museums to envisage a positive exchange where generations of collectors, viewing art as incorporate entrepreneurial spirit in their overseas artists find support in Japan and an investment vehicle has not entered the operations so as to utilize their valuable Japanese artists find support overseas. Our mainstream of Japanese art collecting. assets fully and in a more globalized vision for supporting emerging artists is This is partly the result of our hesitation to context through joint efforts with the one that transcends national borders and link art to monetary gain. Consequently, hospitality industry. We would like our engages multitudes of players including market, financial, and regulatory museums to explore innovative ways to curators, art galleries, media agencies, and infrastructure surrounding art investment engage with society and play an active part businesses. remains underdeveloped, particularly in shaping our shared future. when compared to other classes of asset Our strength: technology meets art such as real estate where long-standing Culture and economic strategy: Recent years have seen the emergence asset valuation mechanisms exist. In establishing an art ecosystem for of artists who integrate technological addition, the Japanese art market has so sustainable investment in arts and elements in their expression. TeamLab and far operated somewhat in isolation from culture Rhizomatiks are the chief examples of our the global supply channel, in that reputable In December 2017, our government position in this field. Various collaborative department stores known for safety enacted a culture and economic strategy projects and successful permanent and quality remain the main suppliers of with the ultimate aim of establishing exhibitions continue to captivate audiences artworks in Japan. Such domestic centricity an art ecosystem that unites different from across the globe. Since 1997, the has so far limited the growth of Japanese sectors in sustainable value creation agency has sought to promote the art collectors, as well as serving to cap the and reinvestment. Through strategic intersection between technology and art active promotion of Japanese artworks coordination of the public and private through the Japan Media as overseas and the value at which artworks sectors, we hope to build a mechanism the primary forum for talent discovery. can be priced with a primarily domestic bringing together the business world, We hope to elevate the festival to the audience in mind. Another key element the cultural sector, and the hospitality international stage in the near future. is the mandatory arts education in Japan, industry to elevate the Japanese art Another key recent development is the which has traditionally emphasized output industry. Various initiatives are currently birth of Japanese blockchain platformers, to allow children to express their creativity. being considered, including appropriate who are intensifying their preparations incentives to encourage foreign investment for market launch. Whether they focus on This differs from the arts education in many in the Japanese art ecosystem as well as traceability or seamless compliance with comparable countries, where children are proactive coordination with Government the incoming AML stipulations in Europe, taught how to establish a personal link with of Japan such as the Ministry of Economy, we hope that our technological expertise artists and artworks from an early age, and Trade and Industry and the Financial can help to redefine the Japanese art thus naturally progress from appreciation Services Agency in our efforts. The strategy market on a global scale. to collection. represents a significant departure from

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Expert voices

Rudolf Janssen Director, Cross-Border Tax Deloitte Netherlands ART & FINANCE HIGHLIGHTS FROM THE LOW COUNTRIES

The views expressed in this article are the personal views of the author and not those of Deloitte.

selection was a preparatory by hammer price of US$7.2 million. Given the Rubens for one of his masterpieces that estimate of US$2.5 million to US$3.5 million, adorn the Cathedral of our Lady in Antwerp, the Boymans clearly pushed the the magnificent “Raising of the Cross”. The to its limits. Meanwhile, an independent provenance of this drawing included the committee has been instructed to advise on collection of the princess’s forebears and the efficiency of current legislation aimed at renowned art collectors King William II protecting artwork of national importance. and his wife Anna Pavlovna (or Paulowna Again, installing independent committees to Duco Wildeboer to use the Dutch spelling). In the Dutch investigate touchy subjects is a very Dutch Senior Manager, Financial Advisory, press a rather lively discussion was held measure to take. To be continued. IPO & Governance Services on whether or not this was the royal way of Deloitte Netherlands disposing of an artifact that had in particular Rotterdam Rubens the Boymans van Beuningen Museum of The Boymans Museum was a key participant Rotterdam frothing at the mouth. As the in the discussion on the Rubens that it drawing was considered private property by wanted to secure. It was also involved in the Dutch government, it felt it had no say a string of lawsuits regarding a collection The Dutch have an interesting track record in what should or shouldn’t be done with including several Rubens drawings that it in the Art & Finance sphere. Just think of it by its proprietress. In a rather unusually might stand to lose. Ms. Christine Koenigs our compatriots Mr. Joseph Duveen and of direct way, even by Dutch standards, the has been claiming ownership of a collection ’s brother and uncle, who director of the Boymans and the of drawings that her grandfather Franz were both associated with the firm of Goupil Association took clear positions arguing that Koenigs had assembled and that includes & Co. We were delighted to contribute to the drawing should be offered to a Dutch works by Fra Bartalomeo, Rembrandt this edition of the Art & Finance Report a museum before being turned into more and 45 drawings by Rubens. Part of this summary of recent events within the Dutch liquid assets on the international art market. collection is with the Boymans Museum, and Art & Finance landscape to show that this part of it was sold to the Führer museum tradition is still very much alive. An alliance between the Boymans Museum and is still held by Russia as compensation and several Dutch supporting funds for damages during WWII. While the District Royal Rubens engaged Bob Haboldt to bid at the auction. Court of The Hague ruled against Ms. One sale that received considerable media Even Mr. Haboldt’s last bid, with which Koenigs’ claim to the collection earlier this attention was Sotheby’s auctioning off of a he surpassed the instructions given to year, another descendant offered a bust of small selection of drawings that came with him, could not secure the drawing for the Mr. Koenigs to the museum as a token of an impressive royal pedigree. Consigned museum as he was outbid and the lot went support. To be continued? by Her Royal Highness Princess Christina to an unknown buyer (rumored to be Leon The Boymans van Beuningen Museum of the Netherlands, the highlight of this Black, the US hedge fund tycoon) for a will, in any case, very much remain in the

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spotlight, given that it is constructing an art modern realism (hence the name “mo-re”) to lead the fairs. Patrick van Maris van Dijk storage facility that will give the public access and includes a collection of Dutch magic was engaged as CEO of the TEFAF a few to its entire collection. A world first, it is due realism. Interestingly, all three museums years ago and very recently his ex-Sotheby’s to open in 2021 in a building as splendid are located outside large urban areas colleague was appointed Managing Director as they come: entirely covered in mirrors. and all three have turned out to be major of PAN Amsterdam. Again, this new venue has been created as a successes in attracting crowds. This success collaboration between the museum, the city has also brought Museum Voorlinden and This new crossover trend is luckily working of Rotterdam, and the privately funded De Museum More into disputes with their both ways as former Christie’s MD Jop Verre Bergen Foundation. respective municipalities because of there Ubbens is making waves as a private dealer being too few parking spaces to cope with great taste. The Rembrandt divorce: the sequel? with the traffic they generate. Obviously, Despite an appeal for private funding, in the even where private art is concerned, the Buddha litigation end the portraits by Rembrandt of husband Dutch government and public opinion are An Amsterdam court case that ended in and wife Marten Soolmans and Oopjen important factors. December 2018 and generated considerable Coppit were bought in 2015 by the French media attention had a Song dynasty Buddha and Dutch states from Eric de Rothschild: Reshaping the TEFAF as its litigious centerpiece. Two Marten’s portrait was acquired by the Dutch Once a year, the attention of international Chinese municipal committees claimed that state and Oopjen’s by the French. Although art lovers with deep pockets is focused the statue, held by an Amsterdam dealer, exhibited together, legally they would remain on the Netherlands. In early March, the and containing the mummified remains apart, never to be joined in ownership again. TEFAF offers entry options with varying of Master Zhang Gong, had in fact been Recently there have been rumors that degrees of exclusivity: some viewings are stolen from them in 1995. However, as representatives of the Rijksmuseum are highly selective whereas others are open to these municipal committees could not be in conversation with the children of Elie paying guests and others can be accessed recognized as legal entities, the claim could de Rothschild who inherited yet another by from around the world. not be judged. Rembrandt masterpiece from their father: Whether the visitor is particularly interested “The Flag-bearer”. Rumor has it that this in classical, contemporary, modern Looking to the past and the future single painting will have a similar price tag as or ancient art, the best of the best is Given the strong historical Dutch footprint Marten and Oopjens’ portraits combined. showcased in displays that often constitute in South East Asia, many Dutch collections works of art in their own right. contain yet-to-be-identified treasures that To date, the accuracy of these rumors has will appeal to buyers with a cultural link to been unclear. We are beginning to wonder This practice of combining artefacts from the areas of production. A Chinese Yuan whether this masterpiece, that was part across the globe and from all periods has dynasty vase from a Dutch estate was of the collection of George IV, will also increasingly come to the fore because the auctioned off at Christie’s in 2013 for €23 end up returning home through a French competition in this part of the financially million. The object is said to have been in connection. To be continued (and if so, very relevant artistic stratosphere is becoming use as an umbrella stand. Local auction publicly, no doubt). more and more fierce. In a move that was houses are reported to be seeing increased at once drastic and effective, the new interest from Asian buyers looking for Renaissance of the public private management team shook things up by hidden gems for which they are willing to pay collections not renewing their invitation to particular appropriate prices. A picture by Indonesian A fascinating recent development is the dealers who had been part of the TEFAF artist Lee Man Fong was hammered off in opening of a number of privately funded since its inception and by adding new names 2018 at €402,000 at Vendu Notarishuis in yet publicly accessible museums. Museum to the list to increase the level of quality Rotterdam. This record did not last long Voorlinden, initiated and funded by collector across all sections. Indeed, this revamped as the news reports on staggering prices Joop van Caldenborgh, showcases modern and tweaked selection of dealers gave a made a young heiress in Iceland check the and contemporary art from his eclectic refreshed, upbeat image to the TEFAF, and family records on a painting, and another Caldic collection in the idyllic setting of the meant that everyone knew they had to earn Lee Man Fong was found. Due to its strong Voorlinden estate surrounded by gardens their place in the next event. reputation in selling Asian works of art, the designed by Piet Oudolf. The Lisser Art family consigned the painting of an eagle to Museum is an initiative of Jan van den Broek. The art trade looks to auction house the Zeeuws Veilinghuis. The auction itself It will focus on contemporary art from the veterans to lead their fairs was spectacular! Bidding went in increments collection of the VandenBroek Foundation Both the TEFAF and PAN Amsterdam of €200,000 and a hammer price of and will be part of the Keukenhof estate were created by and for the art trade in €900,000 set a new record for the artist. (world famous for being the showcase of the Netherlands and have proven such We expect more of these finds to turn up Dutch flower expertise, including those once a success that they have been copied at Dutch auctions and generate significant overpriced tulip bulbs!) And then there is extensively. Now that many of the original interest from foreign buyers. That brings the Museum More, which is another private founders have passed away, the younger us back to our history as traders on the art initiative from a Dutch entrepreneur: in generation of art dealers is increasingly market: a history that is very much alive this case, Hans Melchers. It specializes in turning to former auction house directors today.

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Art & Finance Report 2019 | Section 2 - Art & Wealth Management

Section 2

Art & Wealth Management

Noospheres © Lina Sinisterra (2017) 73 Art & Finance Report 2019 | Section 2 - Art & Wealth Management

Highlights

Wealth managers forced to The wealth management rethink the client experience community has introduced more Value Recent wealth management art-related services for clients in research23 suggests that wealth recent years propositions industry stakeholders will have This year, 72 percent of wealth to change their business models managers said they offered art- and the relationships they have related services to their clients. This focused on with clients. Value propositions was up from 64 percent of wealth focused on personal and emotional managers in 2017. This shows that personal and connections will become increasingly more private banks and family important as a way to stand out offices are responding to client from the competition. Creating a demand for additional services; emotional personal and emotional connection however, the future is somewhat with clients through passion-related uncertain. connections wealth could be the key to unlocking the value of art and wealth-related Collectors increasingly see their services. art as an integral part of their will become total wealth Holistic wealth management is 81 percent of collectors surveyed increasingly a key driver behind the focus on said they wanted wealth managers art-related services to incorporate art and collectibles The benefits of developing a holistic into their service offering, which was important as wealth management advisory up from 66 percent in 2017 and the service remain the key argument for highest reading since the report was a way to stand service providers to include art and launched in 2011. This suggests that collectibles in their service offering. collectors are increasingly seeing A large majority (83 percent) of art and collectibles as part of their out from the wealth managers said that a desire overall wealth. to offer more holistic services to competition. their clients was a vital motivating Consolidated reporting is needed factor (down from 85 percent in With more collectors viewing art 2017). and collectibles as part of their overall wealth, there is also a need In general, stakeholders agree for consolidated reporting. A large on the value of art as one majority (84 percent) of art collectors aspect of a wealth management surveyed this year said that they offering wanted to include art and other This year’s findings show the collectible assets in their wealth highest reading since the launch reports so as to have a consolidated of the survey in 2011, and a strong overview of their wealth and a better consensus among wealth managers, understanding of their exposure (up 86 percent of whom said art should from 61 percent in 2017). Including be part of a wealth management art in wealth reporting could be an offering. The vast majority (86 effective way for wealth managers percent) of art professionals and to introduce an art-related wealth art collectors (81 percent) said the management offering and be in a same. position to offer a proactive and meaningful value proposition to their clients.

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Changing perceptions around interest among wealth managers, the financial aspect of art with 51 percent saying they will focus Urgent need to address art and ownership on this in the coming 12 months (up estate planning issues This year’s survey findings among from 40 percent in 2017). The role of In this year’s survey, art and estate collectors indicate a shift towards impact investing in art and culture planning was the service identified more financially motivated art will be explored in greater depth in by the highest number of collectors ownership models. The numbers of section 4. (76 percent this year compared respondents who reported buying with 69 percent in 2017) and art art for the purposes of boosting Collectors are increasingly professionals (78 percent compared investment returns or diversifying willing to share their collections with 80 percent in 2017) as the most their portfolio have seen an increase with the public relevant art wealth management since 2017: 52 percent of collectors Art foundations, private museums, service. With the entry into force said that portfolio diversification and new technological platforms of new transparency requirements was a strong/very strong motivation (virtual collections, virtual reality, for entities, discussed on p.100, it for buying art this year (up from 36 etc.) are increasingly making private is essential for entities to anticipate percent in 2017). This is the highest collections accessible to the public. and adapt to upcoming changes. reading since 2011. We are seeing a paradigm shift in With more than a third of the private the way private collectors share banks surveyed yet to discuss art- A transfer of wealth to the next their collections for the good of related wealth with their clients, generation is boosting demand wider society, and we are likely to addressing how art assets should be for art and estate planning see this trend continue among the organized is now an urgent matter. services next generation of art buyers. The Most collectors (76 percent) said notion of being a “caretaker” rather Strategic approach to art and that estate planning would be the than an owner is likely to be one of wealth management required most relevant service for them the motivations underpinning art Over the eight years we have been (up from 69 percent in 2017). philanthropy models over the next surveying the wealth management This indicates that collectors’ top decade. This is discussed further by community, we have seen issues priorities are estate planning and Christian Kaspar Schwarm (p.82) around art and wealth move from generational wealth transfer. Art the periphery to the mainstream professionals agreed with collectors, Collectors and art professionals as a central part of the discussion with 78 percent saying this would feel valuation services should on how wealth managers should be a very valuable service. Mounting be provided by the wealth respond to clients’ needs as part of pressure to ensure transparency management industry a more holistic service offering. It and regulatory changes may also be 87 percent of art professionals is evident from this year’s findings driving this trend. (versus 74 percent in 2017) and 73 that collectors want more from their percent of collectors (compared trusted advisors, and it is important Art philanthropy and social with 74 percent in 2017) said that that wealth managers are prepared impact investment are valuation would be one of the to respond to questions and put attracting more attention most relevant services for wealth forward a clear client proposition Another area in which the collectors managers to offer. This could when it comes to art and collectible surveyed this year said that they indicate that there is demand wealth. believed wealth managers could for a higher level of trust and play a more significant role is standardization around valuation, art philanthropy. 65 percent of and suggests there is demand for collectors said this would be a the wealth management industry helpful service, up from 45 percent to help standardize the valuation in 2017. This is also the only area process (see also Priorities section in which we have seen increasing p.31).

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It is evident from this year’s findings that collectors want more from their trusted advisors. It is important that wealth managers are prepared to respond to questions and put forward a clear client proposition when it comes to art and collectibles wealth.

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Introduction Creating a personal and emotional connection with clients through passion-related wealth

Professionals in the wealth management industry are going through a transition process as they seek to adapt to the different needs of a younger generation of clients. Recent research by Capgemini24 shows that a new wealth manager/ client dynamic is forcing the industry to reinvent the client experience. Industry executives and wealth managers agree that this trend will continue to accelerate and ultimately transform the industry.

An interesting finding from the abovementioned research was that the next generation of wealth management clients seek connections—particularly emotional and personal connections. To improve the client experience, the (Connection Leaders) outperformed the developing a client relationship model research suggests that wealth managers bottom 25 percent (Connection Laggards) built around clients’ interests, hobbies, must consider connecting emotionally in a comparative analysis on several and passions will be an essential part of with clients. 28 percent of surveyed HNWIs measures. understanding and engaging with these cited their advisor’s lack of emotional individuals. intelligence as the reason they did not The findings suggest that wealth managers connect well. HNWIs also said that to will have to rebuild their business models From the perspective of art-related build an authentic emotional connection, and redefine the relationships that wealth wealth, this would mean devising a their wealth manager needed to offer managers and clients share. A value strategy that identifies and addresses strong investment expertise (35 percent), proposition that focuses on personal client needs when it comes to art and trust and security (28 percent), and and emotional connections will become collectibles. As the survey findings in personalized attention (nearly 15 percent). a differentiating factor in an increasingly this section show, this could range from competitive marketplace. education, events, and experiences to The HNWI survey measured the personal more hands-on services such as art connection between HNWIs and their It is in the domain of personal and advisory and collection management, or primary wealth managers over the emotional connections specifically that we financial services such as estate planning, previous two years and determined that believe that art and wealth management art-secured lending, and art investment. those companies that ranked in the top 25 could develop a mutually beneficial percent for strong personal connection partnership. The tangible benefits of

24 World Wealth Report 2019, Capgemini 487 Horas Pensando © Lina Sinisterra (2009) 77 Art & Finance Report 2019 | Section 2 - Art & Wealth Management

Collectors & Art Professionals Survey findings 2019

Collectors increasingly see their art as Figure 13. Collectors: which of the following motivations are most important an integral part of their total wealth in buying art? If market experts are correct in estimating Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 that 6 percent of the assets held in global wealth portfolios are allocated to “luxury 100% 98% investments”, this would amount to a total of approximately US$1.74 trillion25 in art 83% 85% and collectible wealth held by UHNWIs in 78% 79% 2018. It is also clear that art and collectibles 80% account for a growing share of UHNWIs’ 71% overall wealth. This year, 84 percent of 64% 63% wealth managers surveyed said they had 60% 61% 60% 61% clients with art collections (90 percent of 54% 51% 52% family offices and 82 percent of private 49% 48% 47% 51% 51% 50% 49% banks); this highlights the opportunity for 44% 40% wealth managers to create both emotional 40% 44% 39% 40% 37% 35% and personal connections with their clients 34% 32% 36% 35% 34% around art and collectible wealth. 28% 33% 30% 30% 28% 23% 27% This year, 81 percent of collectors surveyed 20% 20% 21% said they wanted wealth managers to incorporate art and collectibles into their service offering (up from 66 percent in 2011 2012 2014 2016 2017 2019 2017). This suggests that collectors are increasingly seeing art and collectibles as part of their overall wealth and indicates Stronger financial motivations as Emotional Value that the broader wealth management buying art becomes more “normal” Luxury Good industry needs to start thinking about Both art collectors and art professionals a cohesive strategy around integrating see “social value (status)” as less important Investment Returns art-related wealth into existing services than they did in the last reading. This may Safe haven and reporting mechanisms. 84 percent of signal that buying art is becoming less the art collectors surveyed said that they elitist and demonstrate a shift in focus from Portfolio Diversification wanted to include art and other collectible external values (i.e., how we are perceived) Inflation Hedge assets in their wealth reports so as to have towards personal values (i.e., emotional a consolidated overview of their wealth and pleasure, individual happiness, etc.) and Social Value a better understanding of their exposure towards the financial value of owning art.

(up from 61 percent in 2017). Both investment returns and portfolio 25 In the Deloitte Art & Finance Report 2017, we reported diversification have seen an increase since an estimated US$1.62 trillion in art and collectible wealth based on estimated UHNWI wealth in 2016. In Changing perceptions around the 2017. 52 percent of collectors said that this report we have used the same methodology and financial aspect of owning art portfolio diversification was a strong/ assumed that UHNWI wealth has grown at the same rate as HNWI wealth (using growth estimates from The findings set out below indicate that very strong motivation for buying art Capgemini’s World Wealth Report 2017 and World we are seeing a shift towards a more (up from 36 percent in 2017); this is the Wealth Report 2018). We have also assumed that the allocation of assets to art and collectibles is the same financially motivated art ownership model. highest reading since 2011. This finding as that reported in the Knight Frank Wealth Report This could have a significant impact on the clearly resonates with the idea that more 2017 as the Wealth Report 2019 published different figures based on passion investment as a percentage development of the wealth management collectors want art-related services to be of the investment portfolio and not of total wealth as industry over the next few years. included as part of wealth management. in 2017.

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Figure 14. Emotion vs investment: why do your clients buy art? (art professionals) The art trade is increasingly catering Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 to a financially motivated audience 81 percent of art professionals said their clients bought art for collecting purposes, 2% 17% 81% 2019 but with investment in mind (this is slightly lower than the 86 percent who said the same in 2017). 33 percent of the collectors 3% 11% 86% 2017 surveyed said they bought art for collecting purposes and not for its financial value; however, the majority of collectors (65 2016 6% 12% 82% percent) said they bought art for both emotional and financial reasons (same as in 2017). 2014 9% 21% 76% It is interesting to note that 81 percent 0% 20% 40% 60% 80% 100% of the art trade (based on findings from the advisors, dealers, and auction Investment purpose Collecting purpose Collecting purpose but houses surveyed) believe their clients are with an investment view motivated by both emotional benefits and financial returns when buying art (this was up from 79 percent in 2017). Figure 15. Emotion vs investment: why do you buy art? (art collectors) With higher prices, more media coverage, Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 and more financial value associated with art, it is evident that collectors and art professionals alike, including within the art 2019 2% 33% 65% trade, are becoming increasingly aware of the financial aspect of art ownership. We have noted an interesting trend among 2017 3% 32% 65% both auction houses (Sotheby’s acquisition of art index company Mei & Moses) and galleries (such as Gagosian) to launch their 2016 6% 22% 72% own art market tools and analytics for their clients. This is a sign that perceptions around art collecting are changing and that 2014 3% 21% 76% clients are demanding more sophisticated art market data, information, and tools 0% 20% 40% 60% 80% 100% when deciding to acquire or sell a . Investment purpose Collecting purpose Collecting purpose but with an investment view

This year, 81 percent of collectors surveyed said they wanted wealth managers to incorporate art and collectibles into their service offering (up from 66 percent in 2017).

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Demand for art-related services

Where have we seen the biggest shifts and changes over the past two years?

Art valuation very valuable service. Mounting pressure The following are 87 percent of art professionals (versus 74 to ensure transparency and the change in the areas in which percent in 2017) said that valuation would regulation could also be a driver for this be one of the most relevant services for trend (see more on Art & estate section we have seen the wealth managers to offer. Although art p.98 and the article by Pascal Noel on valuation is not typically an area in which p.100). most significant wealth managers have extensive skill and experience, this could signal that art Art philanthropy changes in professionals feel that valuation needs Another area in which this year’s collectors standardization and maybe regulation. believe wealth managers could play a perception among After all, these efforts would boost trust more significant role is art philanthropy. in the valuation process and trust is a 65 percent of collectors said this would be collectors and art fundamental aspect of the entire art a relevant service, up from 45 percent in professionals: and finance industry. also 2017. This should be seen in the context features high on collectors’ wish lists, of collectors’ interest in estate planning with 73 percent of collectors saying that issues, as there is an opportunity for art valuation would be an important service philanthropy to be incorporated into an (compared with 74 percent in 2017). The estate planning strategy. focus on valuation this year also overlaps with both art professionals’ and collectors’ Demand for education fear of price manipulation: 75 percent 63 percent of collectors said that this said that this was a very strong threat would be a relevant service for the wealth to the reputation of the art market. In management community to offer, up from practice, this could mean that the wealth 52 percent in 2017. This indicates that Art valuation management industry, in partnership with wealth managers have an opportunity art valuers and appraisers, could play a to interact with new and existing clients role in standardizing and creating a neutral through educational activities, which framework for how valuation should be could act as a springboard for more carried out in order to promote trust and formal relationships with other wealth Estate planning transparency in art valuations. management services and products.

Estate planning 76 percent of collectors said that estate Art philanthropy planning would be the most relevant service for them (up from 69 percent in 2017). This indicates that estate planning and generational wealth transfer are collectors’ top priorities and should be Demand for education a focus area for wealth managers in the future. Art professionals agreed with collectors: 78 percent said this would be a

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Figure 16. Collectors: which of the art wealth management services are most relevant to you? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

80%

75% 74% 76% 73% 70% 72% 71% 66% 67% 68% 68% 69% 62% 65% 61% 60% 60% 65% 62% 61% 57% 57% 52% 57% 50% 52% 51% 50% 52% 49% 50% 42% 46% 45% 40% 41% 41% 38% 37% 30% 35% 30% 32% 25% 28% 26% 20% 23%

10%

0% 2011 2012 20142016 2017 2019

Investment funds Art Philanthrophy Collection management Art & Estate planning

Art Market Research and Information Art advisory Art Valuation/Appraisal

Figure 17. Art professionals: which of the art wealth management services are most relevant to your clients? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

90% 87% 82% 80% 80% 81% 69% 78% 73% 67% 76% 74% 66% 74% 70% 69% 69% 71% 71% 71% 71% 71% 68% 67% 61% 64% 65% 60% 63% 57% 61% 59% 51% 50% 54% 51% 50% 48% 43% 41% 40% 34% 41% 34% 30% 29% 30% 29% 20%

10%

0% 2011 2012 2014201620172019

Investment funds Art Philanthrophy Collection management Art & Estate planning

Art Market Research and Information Art advisory Art Valuation/Appraisal

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Expert voices

A PARADIGM SHIFT IN COLLECTING ART

A conversation with Christian Kaspar Schwarm, founder of Independent Collectors, by Markus Seiz, Deloitte

Christian, 11 years ago you founded one of our most important principles. the first global, non-commercial, Back then, our website was actually a online platform for collectors of kind of “closed” platform that you had contemporary art. Despite the to apply for. This approach perfectly fact that this was only just over a reflected the prevailing philosophy at decade ago, it seems that we live in a the time: we provided almost 7,000 different world today. What changes free memberships for Independent have you observed among collectors? Collectors and had to deny around There have indeed been major changes 10,000 other applications because in terms of the general mindset and the we could not confirm that the person behavior of most collectors—especially behind them was a “real” collector. This when we look at their basic willingness shows that the most important priority to make their own collections publicly was to create a safe space, free of any visible. Nowadays it has become almost commercial interests, where engaged a kind of social responsibility to give collectors could find likeminded people, the general public the chance to see e.g., people who lived in the same city or Christian Kaspar Schwarm artworks that had previously been kept shared their passion for a specific artist. Founder of Independent Collectors behind closed doors. It does not really matter whether a collector meets this What happened then? obligation by setting up an actual space As you said, it was only a decade ago, but Christian Kaspar Schwarm, in “real life” or by granting access online. let us recall for a moment that Facebook Berlin 2019. Photo: Jana Gerberding Most of the major collectors we work only had 360 million monthly users in with are actually doing both. 2009 (today it’s 2.38 billion) and they only started their chronological timeline Would you call that development a function in late 2011. Instagram did not paradigm shift? even exist before 2010. So, the whole Absolutely! When we started social media phenomenon is one of the Independent Collectors in 2008, the main change drivers, which of course, has guarantee of undisturbed privacy was affected the art world and collectors too.

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So, is social media the only factor step by step. Year on year, we became Casually speaking, there could be maybe behind this drive for greater more public too, by opening up more two or three reasons to buy a luxury car. transparency among collectors? and more categories not only to our But if somebody bought an artwork for As always, it is more complicated than registered art collectors, but also to about the same price, there are actually that. I would describe the tendency every art lover out there. Two years ago, hundreds of possible reasons why she or to make an art collection publicly our website was 90 percent public and he did so. accessible (as mentioned, either offline there was only one single category left or online) as a development based on that was still exclusively reserved for our I have been in meetings where four powerful trends. The first of these members. We have now been completely inexperienced have trends is the rise of a new technological, public since January of this year. So, if destroyed any potential trust with one digital era that brought the ability to you like, our mission as a platform has single wrong question. It might sound send and receive messages worldwide completely changed within a decade— too simple, but always ask. Ask about the almost instantaneously literally to our from a closed community to an open personal reasons why a person collects, fingertips. The second trend, which is hub that acts as a contemporary archive about their personal background and connected to the first, is the general shift showcasing the activities of the world’s knowledge, and about their interest in towards greater publicity, in both the leading private art collections. We a single position or artwork. The most private and the corporate spheres. Third, adapted because collectors’ behavior experienced collectors teach you that art in terms of the art world, the function changed, and they suddenly needed is an endless universe, full of inspiration, of collecting art has changed. It has something totally different. They were questions, and stumbling blocks and that definitely become a multidimensional asking for a different kind of opportunity you’ll only navigate your way through it passion, rather than one based around to reach out to people. with sincere openness and curiosity. a singular aim. The French philosopher and sociologist Pierre Bourdieu An article in Forbes magazine What should the wealth manager’s differentiated between economic, social, quoted your opinion on the changing role be in dealing with collectors? and cultural capital. Whereas in the role of the collector—from market Once you realize that there are already past most collectors focused on one of speculator to cultural interpreter. a lot of other experts who offer their these three aspects at the expense of What do you mean by this? services to collectors—think of all the the others, modern collectors often treat The more collections become public, the gallerists, art consultants, tax advisers, them as completely interdependent. more powerful they get. That might be and lawyers—it is rather difficult to seen as a positive or even as a critical answer this question in a general way. I And the fourth trend? development. But either way I think it am a consultant myself and, as always in Since art can be a very beneficial asset comes with a huge cultural responsibility. business, it is good to focus on whatever to hold, we have also seen literally Art is not just another asset class—in it is that you do better than anyone else. thousands of new foundations spring some ways, every important work of art Keeping that in mind, I see two different up in recent years. This includes many belongs not only to a single collection scenarios for wealth managers: they can foundations that specialize in art but always to the whole of humanity too. either define themselves as linesmen or collection. Again, in most cases there are If we take that seriously, collectors are as referees. As a line judge, they keep an several reasons why an investor might indeed cultural interpreters. eye on what is happening on the playing choose to set up their own organization field and if needed, they wave their flag, or institution. Some collectors just want In contrast to public museums, private and stop the match. to make sure that their collection will collectors are not obliged to collect in the endure and not be split up after their context of a specific social consensus, Alternatively, they place themselves death. Others might be trying to reduce they are free to follow their own nose. right in the center of everything and their tax burden. Giving the public some But this does not excuse us collectors intentionally take control of all aspects form of access to the collection will help from the idea of preserving what is or of the game. In practice, this means in all of these cases. In my opinion, this could become relevant and therefore offering an exhaustive range of services is another important factor driving the important in the future. that may or may not be related to art. shift towards increased public access to That might sound attractive but let collections. Do you have any advice for wealth me be clear: the latter needs a lot of managers on how to deal with expertise and I have definitely come How has your platform reacted to this new, more modern type of art across more people in my life who these trends? collector? have completely underestimated the We have monitored the situation almost Every collector, and therefore every complexity of the art world, than I have “live” (for want of a better expression). collection, is different. So are their met reliable professionals who always This gave us the chance to follow it motives for collecting art in the first place. knew what they were talking about.

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Wealth Managers Survey findings 2019

Key motivations for including art & collectibles in wealth 86% management 86 Wealth managers continue to see percent significant benefits in including art and collectibles as part of their product and service offering of wealth managers said they 86 percent of wealth managers said they thought there was a convincing thought there was a convincing argument for including art in their wealth management service offering (82 percent argument for including art in their of private banks and 94 percent of family offices held this view). This was slightly wealth management service offering lower than in 2017, when 88 percent of wealth managers were strongly in favor of the inclusion of art. This year’s findings show the largest consensus so far among banks describe competition in the sector A number of conclusions may be drawn wealth managers, art professionals (86 as the prime reason for including art in from this. Firstly, the wealth management percent of whom said art should be their wealth management offering, as only community views the rise in art market included in a wealth management offering), 58 percent of wealth managers said this sales and prices with suspicion, and and art collectors (81 percent of whom was the case (down from 72 percent in professionals are not prepared to change agreed). 2017). and adapt their strategy according to these market trends. Secondly, there is a lack of The desire to develop a holistic wealth understanding and knowledge about the management advisory service remains Shifts in opinion art market and how to respond to rising the key argument for including art and among wealth art valuations. In other words, wealth collectibles as part of a service offering managers do not know how to properly A large majority (83 percent) of wealth managers assess the risks and rewards linked to managers said that the growing push to Wealth managers are not motivated by providing art-related services aimed at offer more holistic services to their clients rising art valuations protecting, enhancing, and leveraging the was a prime reason to include art and The fact that art now accounts for a larger increasing value of art. collectibles as part of a broader range of share of clients’ overall assets is seen as a services (this was slightly lower than the significantly less important argument this Less pressure from clients 85 percent seen in 2017). It is clear that year: only 39 percent of wealth managers Just 34 percent of this year’s wealth as more wealth managers move towards said this was important, compared with managers said that they were seeing a holistic management approach, fewer 73 percent who said the same in 2017. growing calls from clients for wealth

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Figure 18. Do you think that art and collectibles should be part of a wealth management offering? % answering Yes - Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

100%

88% 90% 86% 82% 86% 78% 81% 80% 76% 80% 77% 70% 63% 62% 70% 66% 60% 57% 55% 53% 56% 57%57% 50% 53% 53% 54%

40% 43%

30% 33%

20%

10%

0% 201120122014 2015 20172019

Strong awareness among wealth managers Art ProfessionalsArt Collectors Wealth Managers

managers to help with art-related issues Perceptions of the (tax planning, estate planning, etc.). This importance of art as was significantly lower than the 55 percent who expressed this view in 2017. an asset class have diverged and should be The portfolio diversification argument is back in vogue brought back into line While the results from this year’s survey indicate weaker support for many of the Recent years have seen the wealth arguments that were among the most management community respond to important in 2017, it is interesting to note demand by offering clients more art- that more wealth managers (54 percent related services this year compared with 48 percent in 72 percent of wealth managers surveyed 2017) now believe that art and collectibles this year (80 percent of private banks and offer portfolio and asset diversification 53 percent of family offices) said they were benefits and therefore should be included currently offering art-related services to in wealth managers’ services. This finding their clients. This was up from 64 percent also echoes the changing motivations for of wealth managers in 2017. This shows buying art reported by art collectors and that more private banks and family offices art professionals. are responding to client demand for

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Figure 19. Future: which services will you focus on in the next 12 months? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

70% 70% 70% 67% 65% 64% 65% 60% 60% 58%

50% 51% 44% 42% 43% 42% 43% 40% 40% 38% 40% 40% 40% 39% 33% 33% 36% 34% 33% 30% 31% 33% 30% 31% 28% Art-Secured Lending 24% 26% 23% 26% Art Investment Funds 22% 23% 20% Art & Philanthropy

13% Art Advisory 13% Estate Planning 10% 12% 10% Art Entertainment 4% Art & Finance Future Indicator 20112012201420162017 2019

additional services; however, the near Uncertainty around future investment already offering art-related services (up future looks somewhat uncertain. in activities relating to Art & Finance from 64 percent in 2017), it seems more could reflect a maturing market likely that the wealth industry is preparing Strong consensus among stakeholders This year’s survey shows that both to meet client demand for services about the value of art as part of a collectors and art professionals believe associated with art-related wealth. wealth management offering that art and collectibles should be part of This year’s findings show the highest a wealth management offering. This finding We will explore these issues in more reading since the launch of the survey was echoed by the wealth management detail throughout this report in order in 2011, indicating a strong consensus community, with a large majority (86 to better understand the perceptions that art should be part of a wealth percent) of wealth managers expressing and fears that currently exist within management offering among wealth this view (compared with 88 percent in the wealth management sector when it managers (86 percent expressed this view) 2017). However, this year’s findings signal comes to art as an asset class. We will art professionals (86 percent), and art a lower level of focus on most activities also be considering why investment in collectors (81 percent). related to Art & Finance. The exception to services related to Art & Finance seems this was art philanthropy, as 51 percent of to be falling precisely when demand and There has been a slight decrease in wealth managers said they would focus interest among clients are on the rise. awareness among wealth managers about on this in the coming 12 months (up from Are the challenges and threats posed by developments in relation to art as an asset 40 percent in 2017). Whilst these findings current art market practices undermining class; however, this could be the result of could be interpreted as suggesting that confidence within the wealth management differences between this year’s sample and the wealth management community plans industry? If so, how can this trend be the sample from 2017. to invest less in the future, in light of the reversed? other findings and with 72 percent of banks

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Figure 20. Future trend: do you expect your clients to want to include art and other collectible assets in their wealth reports so as to have a consolidated overview of their wealth and a better understanding of their exposure? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

84% Art-related wealth and consolidated reporting 80% 67 percent of wealth managers said they expected their clients to want to include art 75% and other collectible assets in their wealth 73% reports in order to have a consolidated 70% 69% overview of their wealth and have a 67% better understanding of their exposure (compared with 69 percent who said the same in 2017). There was no difference of 60% 58% opinion between private banks and family offices on this point.

Although private banks are aware of the 50% need for consolidated reporting, only 28 percent said they currently offered this service. In contrast, 77 percent of family 40% offices said they already included art and 40% other collectible assets in their clients’ wealth reports.

This year, 84 percent of collectors and 30% art professionals surveyed said that their clients were likely to want to include art 22% and other collectible assets in their wealth 20% reports. Again, this finding suggests that there is a difference between what wealth managers are offering and what their clients would like to see. 10% This could represent an opportunity for wealth managers and be an effective way to introduce an art-related wealth management offering in order to offer a 2011 20122014201620172019 proactive and meaningful value proposition to clients. Wealth Managers Collectors

*This question was first added to the art collector survey in 2017

This year, 84 percent of collectors and art professionals surveyed said that their clients were likely to want to include art and other collectible assets in their wealth reports.

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Art-related services offered by the wealth management industry

What art-related services do wealth managers currently offer?

Client entertainment on client education (compared with 76 This year, 77 percent of the wealth percent in 2017). 73 percent of wealth managers who offered art-related services managers said that these services would said they offered client entertainment in be provided by in-house experts. Client the form of private viewings, visits to art education was also at the forefront of 47 fairs, museum exhibitions, etc. (this was percent of wealth managers’ minds as a key down from 94 percent in 2017). 58 percent focus area for the next 12 months. of wealth managers said they were likely to be investing more in art-related client More than half of wealth managers entertainment over the next 12 months. offer their clients the option of investing in art and collectible Estate planning and philanthropy rank investment funds high on the list of services 44 percent of wealth managers said that 77 percent of wealth managers said they they offered art investment fund services, helped their clients with art and estate with 78 percent of these reporting that this planning issues (compared with 89 service was provided by a third party. Only percent who said so in 2017). 67 percent 4 percent of wealth managers said they of wealth managers offered advice around would focus on this service in the coming art philanthropy and individual giving 12 months, down from 13 percent in 2017. (compared with 72 percent in 2017). 88 percent of wealth managers said they Art collection management remains offered estate planning services in-house a priority (compared with 77 percent in 2017), and 67 percent of wealth managers who 74 percent said they offered in-house art already offered art-related services said philanthropy services (this was the same they offered their clients art collection as in 2017). 65 percent of wealth managers management services (78 percent said said they intended to increase their the same in 2017). 40 percent of wealth involvement in estate planning over the managers said this service was provided next 12 months (compared with 70 percent in-house, while 60 percent said they were who said the same in 2017). using a third-party provider. 37 percent of wealth managers (compared with Client education 36 percent in 2017) said they intended 71 percent of wealth managers who offered to develop art collection management art-related services said they were focusing services for their clients. On the technology

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Figure 21. Which of the following services do you offer? (Percentages shown represent banks who offer art-related services either in-house or through a third-party provider) Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

77% Client Entertainment (Private views, 94% 92% Art Fairs, Museum Exhibitions) 82%

69% Art Advisory 83% 79% (buying/selling art) 67%

67% 88% Art Valuation 69% 61%

63% 78% Sponsorship 64% 33%

71% Client Education 76% 62% (seminars, conferences on art/ art market) 52%

77% Estate planning 89% 79% (incl. inheritance and succession planning) 64%

67% 78% Art Collection Management 59% 55%

44% 34% Art/Collectibles Investment Funds 41% 27%

50% Art Lending/ Finance 67% 69% (using art as a collateral for loans) 48%

67% Art Philanthropy/Individual Giving 72% 64% to the arts (gifts, donations etc) 67%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2019 2017 2016 2014

side, some new tools are being developed in this regard, such as the tool created by 71 percent of wealth managers who Arteïa (see p.181). Frédéric de Senarclens, founder of ArtMarketGuru, discusses offered art-related services said they collection management systems in his article entitled “The holistic wealth manager were focusing on client education. as art adviser” (p.92). 86 percent of wealth managers said they Art valuation services remain would use a third party for this service (79 important and are predominantly percent said the same in 2017). In the short provided by external parties term, 30 percent of wealth managers said 67 percent of wealth managers said they they intended to start providing valuation could help their clients with valuation services for their clients (37 percent said issues (down from 87 percent in 2017). the same in 2017).

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Figure 22. Which art-related services do you offer in-house and which through a third party? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Client Entertainment (Private views, Art Fairs, Museum Exhibitions)

Art Advisory (buying/selling art)

Art Valuation

Sponsorship

Client Education (seminars, conferences on art/ art market)

Estate Planning (incl. inheritance and succession planning)

Art Collection Management

Art/Collectibles Investment Funds

Art Lending/ Finance (using art as a collateral for loans)

Art Philanthropy/Individual Giving to the arts (gifts, donations etc)

Offered in-house Delivered by a 3rd party

Figure 23. Gap analysis: services that are most relevant to collectors and art professionals vs services currently offered by wealth managers Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

67% Art Collection Management 57% 74%

67% Art Philanthropy | Individual Giving 65% 67%

Estate Planning (tax, inheritance and 77% 76% succession planning) 78%

71% Art Market Research & Information 71% 71%

67% Art Valuation 73% 87%

69% Advise on buying art 62% 81%

50% Art loans & finance (using art as a collateral) 60% 55%

44% Art | Collectibles Investment Funds 51% 51%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Wealth Managers Collectors Art Professionals

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Key challenges Why are wealth managers struggling to incorporate art and collectibles into their services?

Low transparency and products, down from 45 percent Despite these challenges, Harvey Lack of market transparency was cited as in 2017. Finding the right expertise was Mendelson, Managing Director of 1858 Ltd. the top challenge by 58 percent of wealth also mentioned by 47 percent of wealth Art Advisory, shares his views on p.94 of the managers this year. However, this was managers as a key constraint (compared recent growth of art wealth management lower than 2017, when 75 percent of wealth with 55 percent in 2017). in the financial world. Melanie Damani, managers said this was the key challenge. Co-founder and Managing Director at Difficulty in measuring benefits Hottinger Art Limited, also shares her The unregulated nature of the market Almost half of wealth managers (43 percent) opinions on an art advisory service within 58 percent of wealth managers said this said it was hard to measure the benefits of an international multi-family office, ruled was a major obstacle to providing art- art-related services (the same figure as in by strict ethical and high professional related services to their clients (compared 2017). However, as wealth managers move standards, on p.96. with 65 percent in 2017). towards focusing on improving the personal connections they have with their clients, it is Lack of internal expertise likely that the benefits of offering art-related 42 percent of wealth managers said that services will become more apparent and the lack of internal expertise was a key therefore easier to sell internally. challenge to offering art-related services

Figure 24. Wealth managers: what do you see as the biggest challenge in offering art-related services/products? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Transparency 58% 75% Lack of information and research on these markets 60%

47% Expertise - Difficult to find the right expertise 55% 46%

58% Unregulated nature of the art and collectibles market 65% 62%

Costs/Benefit –Easy to measure the costs, 43% 43% but difficult to measure the benefits 35%

42% Lack of internal expertise 45% 39%

Lack of interest internally in focusing on 37% 51% art-related services 26%

0% 10% 20% 30% 40% 50% 60% 70% 80%

2019 2017 2016

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Expert voices

THE HOLISTIC WEALTH MANAGER AS ART ADVISER

An opportunity for wealth managers use online art management Over the past 10 years, online platforms systems. These range from basic online and marketplaces have been a dominant artwork tracking systems to more force in re-shaping the art industry. In sophisticated integrated collection the coming five years, ArtMarketGuru management applications. Some foresees a radical shift in the way we providers include: Art Base, ArtBinder, deal and exchange art as art dealers Artbutler, Artcloud, Artlogic, ArtEngine, Frédéric de Senarclens and consultants adapt to a new set of Arteia, Arternal, ArtFundi, Art Galleria, Art consultant and entrepreneur, rules. We believe that this shift will also ArtLook, Artmoi, ArtVault Software, founder of ArtMarketGuru present the opportunity for wealth Artwork Archive, CatalogIt, CollectorIQ, managers to offer new services and GallerySystems, galleryManager, ultimately play a bigger role in the GalleryTool, Managed Artwork, management of their clients’ art and PastPerfect, PortoVenere, and WrkLst. collectible wealth. Powerful inventory management Holistic wealth management From paper to digital services The wealth management industry is well For many years, managing collections Most of these applications offer data established, regulated, and fast-growing. meant logging an object’s every move protection, inventory management, Private bankers and family officers offer in a book. Artists, collectors, dealers, customer relationship management sophisticated asset management and and museums recorded all activities (CRM), and built-in marketing tools. concierge services to high-net-worth and information relating to artworks They allow users to securely store individuals (HNWI) and families. (acquisition, inventory, loan, sale, images and documents relating condition, damage, location, etc.) in a to artworks such as certificates of The Credit Suisse Global Wealth Report dedicated filing system. At the end of authenticity, invoices, provenance 2018 estimates global household wealth 1990, the transition to office computers information, condition reports, and in 2018 to be US$317 trillion and records and the availability of easy-to-use location history. Most providers have that there are 42.2 million millionaires software meant that organizations were built-in search and tagging capabilities, worldwide. It defines ultra-HNWI as able to record their collection in a digital easy-to-use interfaces to browse and adults with a net fortune above US$50 format, using Word or Excel. In addition, share inventory, standard insurance million and it estimates that there are a popular software program allowed and personalized reporting functions 149,890 ultra-HNWI worldwide. Credit inventory managers to create their (overview by artist, price, location, etc.), Suisse is expecting these numbers to own framework and environment with with advanced providers also offering continue to grow and predicts that global personalized fields. embedded art market research tools, wealth will reach almost US$400 trillion Today, the art market has seen start-ups competing with the existing price data by 2023, with 55 million millionaires and flourishing, offering practical, easy-to- players. 205,000 ultra-HNWI26.

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A wealth manager’s main goal is Art and collectibles: an asset class The need for robust art collection to safeguard the interests of their that cannot be ignored management systems clients. This covers everything from Analysts estimate that worldwide, Holistic wealth managers should be preserving family harmony to arranging privately owned art and collectibles equipped with software that allows for a fortune to be passed on to the make up trillions of dollars’ worth of them to securely store and share next generation. Traditionally, wealth assets. In the Art & Finance Report 2017, collection information, analyze market managers help their clients to optimize Deloitte estimated that UHNWI held data, receive alerts, and gather price and grow their investment US$1.62 trillion in art and collectible estimates and information on asset portfolio. However, with digital assets. It expected this figure to grow liquidity. Wealth managers should have a transformation and the emergence to US$2.7 trillion by 202627. Some dashboard they can use to better value, of technologies such as blockchain, analysts even claim that art and monitor, and promote art collections Artificial Intelligence (AI), Robotic Process collectibles worldwide account for whilst optimizing art assets. New players Automation (RPA), and Application US$6 trillion28. We believe wealth are already pushing the boundaries by Programming Interfaces (API), wealth managers cannot ignore the value of offering efficient and sophisticated tools management software programs are the art industry and it is their duty to to collectors and art advisers. They are enabling even small and mid-size firms ensure adequate reporting, valuation, enabling collection managers to have to offer a more holistic approach. insurance, promotion, and management. a better sense of value and facilitating Firms are increasingly managing more Holistic wealth managers should keep liquidity over time. Furthermore, they than just their clients’ wealth and are appropriate records of all acquisitions, are developing APIs allowing wealth expanding to areas including estate loans, and sales and keep an overview of managers to connect with their existing planning, debt, loan management, insurance and day-to-day art logistics. wealth management software and education, insurance, and retirement synchronize client collections, whilst planning. Collecting art is not just a matter aggregating data and keeping track of of accumulating objects: it is about art market trends. ArtMarketGuru has interviewed a understanding trends, pricing, future variety of family officers and bankers taste, cultural differences, and market CollectorIQ, a relatively new player who report growing demand for opportunities. It is about mastering based in New York, is actively working sophisticated services and holistic logistics, branding, and promoting to deploy their application with wealth wealth management among HNWI. pieces through museum lending and managers. It claims to be the “Preferred Potential clients now expect that the cataloguing. In short, art management Art Services Provider for UBS” and ability to monitor the value of an art is not something a person can or should provided ArtMarketGuru with concrete asset will be offered as standard. try to improvise. It is about time for an examples of wealth managers taking Although wealth managers are application to provide an all-in-one art interesting new roles in managing increasingly reporting allocations decision and management tool dedicated client’s assets. For instance, they involving “passion assets” such as wine, to meeting wealth managers’ needs. mentioned an Atlanta-based money art, jewelry, and cars, many private manager contributing to the sale of bankers lack art expertise and rely Traditionally, the role of art experts— artwork or and a family office reducing on third-party experts for auditing, e.g., art consultants, dealers, and their client’s tax exposures by arranging collection management, and valuation. auctioneers—has been to act as a charitable contribution. “Our core business is to manage money, an authority on price, quality, and not art,” says one Zurich-based family authenticity. Art collectors agree to pay Collection management application office manager. large premiums to secure an acceptable providers should go one step further level of transparency and avoid fraud and give family office managers enough Collections are generally recorded at the and forgery. New technologies are confidence to actively enter the sector buying price and are manually updated pushing the boundaries and setting new and offer new services to their clients, as and when needed. Wealth managers standards in this regard. For instance, either in-house or in collaboration with are generally cautious when it comes to blockchain technology combined with third-party art experts. providing advice or services in relation smart tagging is creating environments to managing art and collectibles as with increased trust between parties they perceive collection management and will eventually reduce the need to be challenging given that art assets for intermediaries. New applications are illiquid and yield no recurring utilizing AI will, at some point, provide revenue. Most wealth managers are not sufficient data for anyone to be able to 26 C redit Suisse, Global Wealth Report 2018, October 2018, pp. 2, 4, 22-23, 33 equipped to offer and charge for any art make decisions on an art acquisition or 27 Deloitte, Art & Finance Report 2017, p.36 management services. sale. 28 This estimated figure was given by CollectorIQ

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Expert voices

MATCHMAKING FOR THE FUTURE—WEALTH MANAGEMENT AND ART ADVISORY

As an art advisory firm operating across the art and wealth management space, we have gained an extraordinary amount of market insight from our banking Harvey Mendelson partners over the years and are delighted to share it with Managing Director Deloitte for the sixth edition of the Art & Finance Report. 1858 Ltd. Art Advisory

Why we believe art advisory services These goods are commonly referred to can now access expert advice at home in are becoming increasingly important as “passion investments”. Confidence in Moscow whereas they previously had to for the wealth management sector this sector has grown steadily and it has travel to London. The timing of this recent Despite an uncertain economic outlook, gained in popularity over the past 15 years, service launch in Russia coincides with a the stakes are high with the global UHNWI inadvertently enhancing our business along change in Russian law in 2018. At long last, population forecasted to rise by 22% over the way. We have expanded our team of legislation has been passed recognizing the next four years, meaning an extra preferred partners to include car, wine, and contemporary art as art. Previously, works 43,000 people will be worth more than watch specialists to service the 30 percent of art created under 50 years ago were US$30 million by 2023. increase in demand for advice on passion treated as “luxury goods” and subject to a investments. 30 percent import tax. The new law passed Now is the time for wealth managers to on 29 January 2018 was one aspect of a act pre-emptively to seize the immense Through our global operations, we have radical revision of Russian art import-export potential offered by this market. Private observed several of our banks ramping-up regulations. The legislation prevailing before banks are well aware that HNWIs and their service offerings in H1 of 2019. One of that date (created in the chaos of the 1990s UHNWIs maintain relationships with the more exciting expansions saw one of following the collapse of the Soviet Union) multiple banking institutions at once our existing clients roll out their art advisory prohibited the exportation of cultural and that if they are to compete in an services to offices across Continental treasures. This also made it impossible increasingly competitive marketplace they Europe and Russia. The acquisition of a for collectors to import art. Import tariffs need to provide expert advice in relation Russian bank has meant that the bank’s and the fact that there was no guarantee to a growing number of aspects of clients’ clients now expect access to the same of re-export made it difficult for many of lives. Securing assets under management services their European counterparts our clients to enjoy their collections in (particularly over the long term) means were receiving. We have since designed a Russia. As a result, they would often base following clients’ interests, which we have unique range of services for the bank and their collections in Europe, where we noted are increasingly moving towards trained the private wealth teams in how to would deliver the majority of our collection art, cars, watches, wine, and more. deliver this expertise to their clients. Clients management services.

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We partner with banks and third-party provide such services and no longer feel a client a six-figure sum on his premium advisers to work with a number of Russian the need to contact an external service while at the same time obtaining broader clients, ensuring they are able to enjoy provider. Furthermore, we are working with coverage that included earthquake and their collections both in Russia and abroad. them at the onboarding stage, meaning that water damage protection, which the We are now able to import art directly clients joining the bank will be aware of the previous provider had excluded. for our clients in a much more cost- and art and passion investment advice available time-efficient manner and this has driven to them from the outset. Making life less complicated up demand for the new holding structures. Another reason we are seeing increased When a relationship manager concludes These examples typify a new way of thinking interest in art advisory services is that that a client could benefit from our art- for wealth managers, who now see that the clients are looking to simplify life by having market expertise, they bring in our team question is not “if” but rather “when” and a single point of contact for multiple to meet with the client and identify ways in “how” they will provide this service to clients requirements. If a private bank is trusted which we can improve buying and selling before clients seek it elsewhere. To a certain to look after most financial assets, then it processes, logistics around importation, extent, this is a prudent and proactive way is a logical step to entrust it with passion and strategies to seamlessly integrate of safeguarding the interests of all of their investments too, so all matters can be the client’s art collection with holding clients. coordinated for the client by the bank structures in Russia and abroad. and its trusted advisers. From a practical Families are becoming more standpoint, once the relationship manager Art bankers of the future sophisticated and mobile identifies that a client has art-related We are delivering a growing number of Family offices and/or in-house managers requirements, we are brought in to meet lectures to business school students recognize the need to provide services in the client and deliver a detailed schedule enrolled on wealth management programs relation to collectible assets such as art, of services tailored to the client/family’s at institutions. The trend to educate cars, watches, and wine across a number objectives, timescales, and budget. Some future bankers on the importance of of geographical locations. From fast cars clients have one-off requirements such as the art market and investing in art is in France, to Monets in Monaco, there is a arranging insurance, shipping, logistics, or another strong indicator that the banking need to insure, maintain, and track these a valuation. Others have transaction-based community is not shying away from valuable assets as well as to decide on a or finance-led requirements. Depending on engaging with clients’ passion investments. strategy for acquiring and divesting along the requirement, clients are charged a fee Over the past two years, we have also the way. We recently received a request based on performance and/or specialist noticed unprecedented demand from to curate an art fair that the client was advisory time. Our clients with major North American and offshore banks, which considering organizing on his mega yacht. collections across multiple locations tend are taking advantage of the substantial first- This involved marine insurance, multiple to prefer a monthly or annual retainer for mover advantage those already specializing boat-loads of art, maritime police, security us to meticulously manage all aspects of in passion investments have as they seek teams, climate-control equipment, and the collection. to serve their existing clients and win over so on. prospects. This is especially true in relation We have found that transparency and to setting up and managing art finance The links between the art world and the responsiveness are key and these have services, which banks see as a growing area yachting community are plentiful. This is helped us to build strong relationships and an additional revenue channel. The arguably a result of the fact that major art with bankers and their clients. The macro same could be said for our partner banks in collectors are often owners of super yachts environment is also playing a pivotal role, South East Asia and demand is particularly themselves. Moreover, displaying art on we believe, in how clients view art advisory high in Hong Kong and where a yacht makes sense—the experiences services. More than ever, they are looking the service offers added value to existing of both yachting and collecting art for trusted advice during these turbulent clients and acts as a strong calling card for are the height of leisure, passion, and times—and that is before we even broach prospects. The latter are now more likely to luxury. The main issues we advise clients the thorny topic of Brexit. During periods do business with a bank and bring in assets on tend to concern the best ways of of financial and political instability, art under management if an art and collectibles displaying artwork on a yacht, including has historically been viewed as a safe advisory service is available. environmental safeguards, security, and haven because it is a reliable long-term insurance. Insurance in itself is a complex store of value as well as an inflationary One of our Swiss banking clients is topic and the devil is in the detail when and currency hedge. We are likely to see continuing to see major advantages in it comes to ensuring that artworks are more funds flowing in this direction as a effective art-related trust advice—opening properly covered at all times. Clients are consequence of further uncertainty. up a whole new type of dialogue and increasingly coming to realize that valuable service offering to its clients. We are also art assets require and merit appropriate For more information on 1858 Ltd. advising the bank on due diligence for its advice and expertise in line with the advice and their services, please visit art-finance services, which are already in that they seek out in relation to the other www.1858ltd.com high demand among its HNWI and UHNWI assets they hold. Furthermore, a review clients. This increase in uptake is due to of a client’s insurance coverage can be a Source for all figures included in this article: the fact that clients now trust their bank to worthwhile exercise. We recently saved The Knight Frank Wealth Report 2019

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Expert voices

THE EVOLUTION OF ART ADVISORY SERVICES

In a landmark case, the Court of Appeal certain standards of practice through in London recently ruled in favor of an education, professional associations or art dealer who facilitated the sale of even regulations. As a consequence, it is artwork belonging to a long-standing difficult: (1) for collector to be sure that friend and collector without a formal they have hired a serious and competent commission agreement in place. The advisor, (2) for excellent advisors to Court accepted the dealer’s case that they be rewarded fairly for high-quality should nevertheless be entitled to receive performance in a market that does not US$10 million in commission. The three operate at a uniformly high standard, judges unanimously rejected the appeal and (3) for other industries to take the art of the seller, who had refused to pay the world as seriously as they perhaps should. commission, stating that despite the lack of written agreement, the commission Quality control amount was part of a ‘gentleman’s Art advisors should be operating agreement’, sealed with a handshake. according to the values expected of them, Melanie Damani such as independence, transparency, Attorney-at-law (LL.M. Berkeley) This decision—undoubtedly an interesting suitable qualifications, and avoidance of Co-founder and Managing Director precedent when it comes to the nature conflicts of interest. When it was launched Hottinger Art Limited of a contract in general—forces us to in January 2019, Hottinger Art Limited question the common practices of decided to implement a advisors in the art world. Should it not that would set the highest standards be necessary to sign an agreement for of ethics and professionalism for an art a transaction involving potential fees advisory firm. As part of an international of US$10 million? Would it not be the multi-family office, the idea was to case for a similar transaction in another combine best practice from the wealth industry? Can it really be argued that such management industry and legal sector, an agreement is not compulsory when drawing on the professional experience dealing with a friend? of its founder Melanie Damani. This model was created to meet growing The art world is certainly one of the last demand from collectors, who are often industries providing complete freedom in an uncomfortable and weak position to its professionals in terms of the way in which they are forced to play by the they conduct their business. The issue is rules of the art market rather than relying that without some form of limit or set of on their advisor to put their interests acceptable parameters, any aspirational first. For example, collectors confess to individual can become an art advisor, feeling pressured to follow instructions whereas many other professions ensure from galleries to grant access to certain

96 Art & Finance Report 2019 | Section 2 - Art & Wealth Management works. Inexperienced collectors often all costs and charges are required to be prevent money laundering affect art pay more for works than established disclosed to clients in good time before transactions. Financial institutions are collectors. These days, collectors are the relevant services are provided. In that now forced to document the source of growing impatient of paying extortionately sense, an art advisory firm operating in any funds passing through their services. high commissions, well above what is partnership with a financial institution As such, clients of banks cannot simply considered acceptable in most other like a bank or a family office provides receive or transfer money using their industries. In an ideal world, any business the assurance of transparency, since its bank account and describe the origin of model should be created to serve the art advisory work will fall in line with its the funds as the sale of an artwork “by clients’ best interests and to ensure a other established practices. Whilst not handshake”. More recently, the Council sustainable and long-term existence for regulated, art advisory firms can also of the European Union adopted the Fifth the company. As such, business models benefit from applying such regulatory Anti-Money Laundering Directive (AMLD5), should primarily focus on independence principles. In fact, some art advisory firms which will enter into force in 2020 and and transparency. And yet, in the art have now voluntarily opted or requested be directly applicable to art galleries and world, this starting point is seen as a to fall under the remit of the financial auction houses. This will force European disruptive model rather than the norm. services regulator to provide this extra art businesses to implement anti-money layer of comfort to their clients. Some laundering protocols and strictly limit Stand alone other non-regulated art advisors, , disclose cash payments to €10,000, as well as To illustrate the point, a focus on in writing the fees they have received from restricting payments to third parties. In independence immediately prevents the clients and business partners, which is the USA, there is not yet a direct regulation art advisor from accepting commissions a welcome new practice on the market applicable to art dealers but discussions from third parties. Yet this is contrary to and a sign of a move towards greater are already underway in this regard. On 13 the norm and third-party kickbacks are in transparency. March 2019, the House of Representatives fact often a large part of the art advisor’s agreed to House Resolution 206, whereby income. Would it not be possible for an Whilst it is undoubtedly the right thing to they recognized the global nature of art advisor to be paid on a retainer basis do and should benefit all sides as detailed money laundering and its relevance for like advisors in many other professions? above, it is not always easy to be the first the art market. Although the Resolution Such a model actually benefits all parties. mover with respect to adopting best is not binding, it suggests that legislation First of all, the client has the guarantee practice. The question might therefore similar to AMLD5 may be passed in the that their art advisor does not have be: can an art advisor with high values near future. another agenda besides serving their best and standards of practice have a chance interests—they should be reassured that of survival in an industry that has been Tomorrow’s business nothing other than achieving the best functioning without independence and Finally, and with a long-term strategy in outcome for their client will influence transparency for many years, and in mind, art advisors will soon be serving their choice of strategy or third party. For which less scrupulous providers may not only millennials but also Gen Z. So example, if the art advisor is assisting the decide not to adopt what are (at least far, these generations have shown a client with building a collection, the client currently) voluntary standards? From the high interest in the DNA and values of will be assured that recommendations to perspective of the wealth management the brands and companies they opt to buy an artwork will be given for the right industry, the answer is yes. embrace. This might mean that even reasons and not because the advisor Earlier this year and for the first time, the without a regulatory revolution on the art would receive a higher commission if panel at the Goodacre UK City of London market, we are organically moving toward the artworks are sourced from specific Wealth Management Awards awarded a better place, where high standards of galleries. The galleries themselves are a business development prize to an art ethics and professionalism will matter certainly happier to receive the full price advisory firm, as testament to the efforts and make a difference in terms of winning for the sale of an artwork rather than made to implement an offering that business. having this eaten into by third-party assures independence and transparency commissions. Similarly, even the artist is for clients. This is a sign that the wealth In conclusion, art advisors should follow more likely to receive the full amount due management industry, if not the art the best practices possible to at least to them on the sale of the artwork and market, is willing to encourage better ensure independence and transparency not just, as occurs in some cases, their practice, with the aim of creating a better for their clients. This business model, share after the deduction of commission global market for all participants. when widely adopted, works in the payable to the art advisor. As a side note, favor of all the other participants on this also creates healthy competition Rules and regulations the art market. Art advisors can always between galleries and encourages a level Furthermore, if the art market does not be inspired by the best practices of playing field with merit-based decision- clean up its act from within, it is most likely other industries, including the wealth making, which can be absent where a that it will eventually be forced to do so management industry. It can be different fee model is used. by the introduction of new regulations. challenging at times to operate as one of In fact, the art market has already had to the pioneers of this approach in the art Just to be clear adjust to regulations that are not directly world. However, the rewarded of clients, Transparency is also a key value. Financial aimed at art businesses, but which have who embrace such a practice and the institutions follow a heavily prescriptive an indirect effect on them. For example, peace of mind it affords them, is very range of regulations (e.g., MiFID II), where the recent more conservative rules to fulfilling.

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Art & Estate Planning Survey findings 2019

Wealth planning with respect to a future art legacy can be complex, and the challenges it poses are often far easier to avoid than to address. However, effective planning can reduce the likelihood of family disputes as well as the possible tax burden associated with the passing of a loved one. Regardless of the size of an art- related estate, a basic estate plan is an essential step toward addressing fundamental issues such as the disposal of assets, charitable bequests, and responsibilities for carrying out the express wishes of the deceased.

El Silencio Del Color © Lina Sinisterra (2016)

In this year’s survey, art and estate planning property, worth US$30 million or more) are explains why it is important to anticipate was identified by most collectors (76 percent likely to transfer their wealth to the next and adapt to these upcoming changes. this year versus 69 percent in 2017) and art generation, which is likely to include art and On p.102, Markus Seiz (Director) and professionals (78 percent this year versus 80 collectible wealth. This will be the greatest Maida Mulic (Senior Manager, German percent in 2017) as the most relevant art and transfer of wealth the world has ever seen. Tax Advisor, Deloitte Germany), look wealth management service. How prepared are wealth managers to take at art and taxation in Germany and on on this art and estate planning challenge? p.104 Janet Xanthopoulos (Legal Adviser, With an estimated US$1.74 trillion of art Yacht Ownership & Administration and collectible wealth currently held by Later in this section, we will be taking Department Manager at Rosemont Yacht UHNWIs, it is estimated that over the next a closer look at the new transparency Services) and Karolina Blasiak (Art Advisor, decade, more than 14,000 ultra-high-net- requirements for entities, as explained by Rosemont International) discuss particular worth individuals (UHNWIs, defined as Pascal Noel (Director, Deloitte Monaco) considerations when art is stored on a those with assets, excluding their main in the article on p.100. Section 6 also yacht.

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of wealth managers said 67 their clients had an estate percent plan that included their art 67%

More than a third of private banks have Figure 26. Private banks: my clients maintain an inventory of their collection that yet to discuss art-related wealth with at a minimum identifies each piece, its present location, and its approximate their clients value so that we could help to administer the estate without the collector’s input 19 percent of private banks and 53 percent Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 of family offices said their clients maintained an inventory of their collection that at a 35% I'm not sure, we haven't discussed it 39% minimum identifies each piece, its present location, and its approximate value so that 5% they could help to administer the estate No, we’ve discussed it and have decided 7% without the collector’s input. A further 28 not to do it right now 14% percent of private banks and 24 percent No, but we’re thinking about doing that 11% of family offices said that their clients kept 28% an inventory of the collection, but that the Yes, but it’s probably outdated 21% information was not up to date. However, 35 percent of private banks and 12 percent of 19% Yes, and we keep it updated 13% family offices said they were unsure as they had not had this discussion with their clients. 0% 5% 10% 15% 20% 25% 30% 35% The findings suggest that wealth managers 40% need to increase their efforts in terms of Private Banks 2019 Private Banks 2017 finding out and mapping what art-related wealth clients have in the first place. This could be an opportunity for wealth managers to build more of a personal connection with clients around the things that matter to Figure 27. Family offices: my clients maintain an inventory of their collection that them. This is an important trend that was at a minimum identifies each piece, its present location, and its approximate mentioned at the beginning of this section. value so that we could help to administer the estate without the collector’s input Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Figure 24. My clients have estate plans 12% that sufficiently address their I'm not sure, we haven't discussed it 11% art collection Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 No, we’ve discussed it and have decided 0% not to do it right now 0% 38% 35% 24% 12% No, but we’re thinking about doing that 11%

Wealth Wealth 24% Yes, but it’s probably outdated 17% Managers Managers 2017 10% 2019 53% Yes, and we keep it updated 61% 67%

27% 0% 10% 20% 30% 40% 50% 60% 70%

Yes Not sure No Family Offices 2019 Family Offices 2017

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Expert voices

DO THE NEW TRANSPARENCY REQUIREMENTS FOR ENTITIES AFFECT YOU?

The European Union (EU) and the this may no longer be easy to achieve Organisation for Economic Co-operation considering the impact of the following and Development (OECD) have recently new transparency requirements: developed new standards mainly dealing with the fight against: Automatic Exchange of Information (AEOI) •• Money laundering Introduced in 2014 through the US •• by individuals Foreign Account Tax Compliance Act (FATCA) and in 2016 through the OECD’s •• Tax optimization by multinational Common Reporting Standard (CRS), the groups objective of the new rules is to ensure These new standards will have that the tax authorities in an investor’s implications for professionals in the art country of tax residence receive market as well as investors who use information on the investments they hold dedicated structures to hold their assets. abroad. Fine art is not a financial asset; Pascal Noel Sophisticated investors have many good this may lead people to conclude that Director, Deloitte Monaco reasons to invest in fine art and other investments in collectible assets should collectible assets through dedicated not be affected by the new rules. structures such as tax efficiency and However, this is not always the case, estate planning, facilitating the considering that most asset-owning management of the assets by experts, entities are passive entities holding a facilitating the acquisition of assets by bank account. Under the CRS, multiple investors, and allocating assets information on the bank accounts of to a charitable foundation. Confidentiality passive entities (including the account regarding the beneficial owner of the balance and financial income generated) assets was also one of the key reasons for may potentially be reported annually to structuring investments using dedicated the tax authorities of the country of entities such as offshore companies, residence of their controlling persons (i.e., trusts, and investment funds. However, individuals who are the ultimate

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beneficial owners with an interest of New requirements for substance the banks involved in the structure had to more than 25 percent in the structure). If Locating an asset-owning company in an check the identity of the beneficial the collectible assets are directly or offshore jurisdiction is becoming more owner(s) and the source of the wealth indirectly owned by a trust, such difficult and expensive. This is linked to used to acquire the assets. Today, tax and reporting may not only cover the grantor new regulations forcing such jurisdictions AML authorities are automatically but also the beneficiaries, protector, and to introduce stricter rules on the receiving and sharing information on the trustees. Investing through a Collective substance of local companies. This is bank accounts and beneficial owners of Investment Vehicle (CIV) will not always mandatory to comply with the OECD’s passive entities, while the public is now prevent reporting to the taxman. If the Base Erosion and Profit Shifting (BEPS) getting access to the identity of all assets are owned by the CIV through recommendations on substance as well beneficial owners of EU companies and asset-owning companies, all investors in as to avoid EU blacklisting. trusts. From next year, tax authorities will the CIV will potentially be subject to As a result, many financial institutions are automatically be informed of any new reporting regardless of the size of their becoming reluctant to open financial tax-efficient cross-border structure used investment in percentage terms. The accounts for entities located in offshore by EU individuals to hold their assets, rules are relatively similar under FATCA jurisdictions, even if those jurisdictions including fine art. but the reporting only targets US persons are not blacklisted. For accounts already (residents or citizens of the USA). opened, banks will need to be informed With this context in mind, we recommend in advance of all significant cash transfers that you consider taking the following Trade register and register of linked to the purchase or sale of assets. action in anticipation of MDR beneficial owners Entities that fail to provide banks with the implementation: In most countries, information on local required documentation in advance run •• If you are an adviser, make sure you companies is available to the public the risk of having their bank accounts understand your new responsibilities (articles of association, names of blocked, which will affect their ability to and have identified and contacted directors and sometimes shareholders, buy and sell assets. the relevant clients. You will need annual financial statements, etc.). to coordinate with a range of other Previously, offshore companies and Mandatory disclosure rules (MDR) advisers (lawyers, tax advisers, trust nominees could minimize the information Finally, the EU recently introduced new companies, and potentially banks) available to the public, especially rules (based on the OECD BEPS in order to avoid duplicate reporting regarding the identity of beneficial recommendations) requiring under mandatory disclosure rules owners. intermediaries such as advisers, lawyers, trust companies, and banks to inform •• If you are the investor, revisit your Following the introduction of the new their home country tax authorities of all current set up with your advisers in anti-money laundering directive (AMLD5), transactions considered to be tax order to understand whether your this is no longer possible within the EU. aggressive. Since these rules target all structure will be subject to reporting All member states are now required to types of taxes (including inheritance from 2020. If not, bear in mind that keep a register of beneficial owners of taxes) and all transactions of which tax changes to the structure may be subject companies and trusts. Similar rules have optimization is the main benefit, MDR to reporting at a later stage. For new been introduced in a large number of may potentially affect all types of or existing reportable structures, you non-EU countries, including offshore tax-efficient structure currently used to need to determine which adviser will jurisdictions. While the law in many hold private art collections. Keep in mind be in charge of reporting to the tax non-EU countries states that only that a reportable structure/transaction authorities professionals with AML obligations can will need to be reported by the beneficial •• In all cases, you should minimize cross- access the register, the EU directive owner of the structure if it is not reported border investments subject to reporting requires all member states to ensure by an intermediary. It is vital to pay close and favor investment in the country of public access. AMLD5 also requires EU attention to the dates on which the new tax residence of the beneficial owner. If members states to set up, from 2020, a rules take effect: MDR reporting will start this is not possible, you should consider register of all existing payments and bank on 31 August 2020 (quarterly reporting) investments in countries that are robust accounts (identified through their IBAN but the initial reporting will cover from a data protection point of view number), as well as all safe-deposit boxes transactions and structures set up as held by credit institutions. Only local from 25 June 2018. authorities will have access to this Deloitte would be delighted to guide you information initially, but the directive How to proceed through this process, especially as anticipates a connection with other Until recently, ensuring confidentiality in regards the identification and monitoring member states in order to facilitate AML relation to a structure dedicated to of reportable transactions, as well as investigations by foreign authorities. holding a collection was possible even if reporting to the tax authorities.

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Art and taxation in Germany

Case study

In Germany and further on the market; this article will focus on afield, collecting art is a small number of options that are best suited to private collectors who are tax likely to remain one of residents of Germany. It is important to the most popular ways remember that each collector’s personal situation is unique and must be considered to invest energy, time, individually. and money. Irrespective How can works of art be passed on of the individual’s goals to family members in Germany at a and reasons for collecting favorable rate of gift tax? If a collector wants to give privately art—they may be driven held art to family members, the by enthusiasm, a desire persons involved (i.e., the donor and the beneficiary) should consider the tax to have fun, investment implications they will face. In Germany, objectives or something many of the relevant tax obligations are set out in the German Gift and Inheritance else entirely—there comes Tax Act (which also covers inheritance). In a time when art collectors general, a gift tax liability arises if either of the parties involved (donor or beneficiary) Markus Seiz will start asking questions: is a resident of Germany. In this instance, Director a “resident” of Germany is defined as Deloitte Germany anyone who is domiciled in the country for tax purposes. Maida Mulic What can I do to pass on my collection to Senior Manager the next generation at a favorable (gift) tax? Deloitte Private Company Services Hence, even if the work of art itself is What about donating my collection to a located abroad, the donation is generally foundation in order to preserve it? subject to German gift tax. In the rare I would like to dispose of my assets—what event, that only the work of art is located is the smartest way to sell? in Germany, but neither the donor nor the What will happen to the art collection when beneficiary is a tax resident of Germany, the collector passes away and whether to the gift is not subject to German gift tax. donate the collection to charity or sell it are In principle, the gift/inheritance tax is challenging questions that merit careful assessed on the basis of the fair market consideration on the part of the collector. value of the artwork. Determining the market value of a work of art is therefore In this article, we will be highlighting some crucial to defining the tax burden for the specific German tax planning ideas that parties involved; as such, expert opinions both collectors and advisors may find are usually sought at this stage of the useful. There are many potential solutions process.

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Under certain conditions, the German Gift and Inheritance Tax Act grants an Under certain conditions, the allowance of either 60 percent or 100 percent of the value of privately owned artwork. This means that only 40 percent German Gift and Inheritance Tax of the value of the artwork is subject to taxation or that it is completely tax-exempt. Act grants an allowance of either To be eligible for the 60 percent tax exemption, the artwork must especially meet the following criteria: 60 percent or 100 percent of the •• Preservation of the artwork is in the value of privately owned artwork. public interest

•• Annual costs normally exceed the revenue generated

•• The artwork is or will be used for the purposes of research or public education are tax-deductible. If a donation cannot Collectors resident in Germany should To qualify for the 100 percent tax be completely deducted in one year, it can make sure that they do not switch from exemption, two additional requirements be considered in subsequent years. The private sales to commercial sales. Although must be met: firstly, the work of art must donation reduces the person’s taxable there is in principle no legally defined have been in the possession of the family income, which is taxed at an individual threshold to commercial sales here, it can for at least 20 years. Secondly, the piece rate of up to 45 percent. There is no direct be assumed that someone who becomes must be subject to the requirements of refund of the donation from the income active as a dealer through the purchase state monument protection. It has to be tax amount payable. A donation of art to and sale of artwork and regularly appears said that at least the second condition is charitable institutions can also be tax- externally on the market will be classified typically difficult to achieve. deductible. In such cases, the artworks in as a commercial entrepreneur. This would question are valued at the market rate. mean that proceeds from sales outside It should be noted that the tax exemption, the period mentioned above would also whether 60 percent or 100 percent, ceases In addition, works of art that are donated to be subject to German (and to apply with retroactive effect if the works a foundation can be deducted in the year trade tax). Under certain circumstances, of art are sold within 10 years after the gift of the donation and in the following nine additional VAT of 19 percent of the sale or the conditions for the tax exemption years up to a total amount of €1 million. price may also be payable. cease to apply within this period. For spouses filing their tax return jointly, In addition to the allowances mentioned, the total amount rises to €2 million. One This article contains general information only, and none of Deloitte GmbH or Deloitte Touche Tohmatsu Limited there are other allowances that depend on of the prerequisites for this is that the (“DTTL”), any of DTTL’s member firms, or any of the fore- the relationship between the donor and the foundation is charitable. Donations to the going’s affiliates (collectively, the “Deloitte Network”) are, by means of this article, rendering professional advice or beneficiary (or the testator and the heir). consumable assets of a foundation are services. In particular, this article cannot be used as a sub- These vary from €20,000 to €500,000. not tax-deductible. Donations of art to stitute for such professional advice. No entity in the Deloitte Network shall be responsible for any loss whatsoever The German gift and inheritance tax rate is foundations domiciled in the EU or EEA are sustained by any person who relies on this article. between 7 percent and 50 percent. also generally eligible.

How can a donor benefit from art What is the most tax-efficient way to donations under the German Income sell art in Germany? Tax Act? If a resident of Germany wants to sell art Under the German Income Tax Act, from their , the profit anyone who is subject to German income from the sale is generally not subject to tax (usually people who are resident in German income tax if a holding period of at Germany or foreigners with German least one year between the purchase and income) may, under certain conditions, the sale is observed. However, it has to be deduct donations to charitable institutions pointed out that the period is extended to from their income to reduce their tax ten years if the artwork is used as a source burden. In principle, donations worth up to of income (e.g., rental income is earned by 20 percent of an individual’s annual income the owner).

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Expert voices

ART ON YACHTS: Karolina Blasiak WHEN ONE LUXURY ASSET Art Advisor Rosemont International

HOUSES ANOTHER Janet Xanthopoulos Legal Adviser - Yacht Ownership & Administration Department Manager The views expressed in this article are the personal views of the author and not those of Deloitte. Rosemont Yacht Services

emotion involved, which sometimes take because a client’s luxury assets define The global markets report the place of rational decision-making. who they are and should be protected just the increasing prevalence What passion investor, caught up in their as much as their real estate, liquid funds, own enthusiasm, is going to stop to think and other investments. of high-value luxury items about tax reporting? And who would have such as fine art, classic the penalties for inadvertently failing to Keeping art aboard yachts is a growing comprehend tax rules at the forefront trend. Indeed art can be successfully cars, and yachts among of their mind when experiencing the joy carried within a yacht interior, but there the assets of ultra high net of seeing their favorite Picasso painting are sadly examples of tragic ignorance on their superyacht for the first time? resulting in loss of precious art and worth (UHNW) clients. Art, Investors and wealth planners ought artefacts. Taking a holistic look at the in particular, is on the up. to apply the same level of tax and legal subject, the following is a list of important consideration to the purchase of a luxury points—predominantly the legal, tax, asset as they do when investing in a and insurance implications—that need The number of billionaires worldwide business or investment portfolio. There to be addressed when carrying and/or has more than quadrupled since 2000, is a common misconception that luxury internationally transitioning art aboard a and many devote part of their wealth to “real” assets cannot be structured in the yacht. a passion for art. The Deloitte & ArtTactic same way as traditional financial assets. 2017 Art & Finance Report forecasted that This means that there is a significant 01. Proper insurance and security UHNW individuals would hold US$2.7 opportunity for wealth managers to Very often the value of the art outweighs trillion in art and collectible wealth by introduce appropriate structures to the value of the boat. Marine insurance 2026. These facts and figures show us protect and make the most of these policies are rarely standardized, so your art the scale of the opportunity in front of us assets. By doing so, wealth practitioners collection can probably be incorporated today. One of the main risks associated stand to significantly increase assets into it. However, if the art is likely to with so-called “passion investing” is in its under management and grow their clients’ outweigh the value of the vessel, you may name—the high level of adoration and portfolios. This is all the more important need additional specialist art insurance.

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02. Proper light and climate control to extend the life of art on board and climate control is very important, as too much light can damage a yacht’s artwork. Considering fluctuations in light, humidity, and heat is vital. Photography, watercolours, and drawings need to be protected from natural light and require specific framing.

03. The art of installing, conservation, and maintenance Hanging art on board a yacht needs an adequate installation system. The same goes for fixing small and objects, which is where you need to use museum quality tools for installation. Proper education for your crew on how to handle and maintain art on board is ultra important.

04. Get expert advice from a trusted art advisor Seek qualified advice before buying so you can plan the perfect surroundings for existing pieces or choose the perfect piece for an existing interior. Also be mindful that you do not engage in art acquisitions related to protected species (e.g. ivory or Excéntrica © Lina Sinisterra butterflies), and looted or forged art.

There is, of course, the danger of your art country and even from port to port. All of A convergence of factors in recent years being seized by Customs & Excise if you these complications make climate and light has generated higher interest in art as an attempt to avoid paying duty on objects control seem like the least of a collector’s asset that has the potential to appreciate. bought in other parts of the world. Recent concerns. While many yacht owners opt to These include interest rates at historic court cases should serve as warnings to enjoy their valuable artworks by displaying lows, stock market volatility, technology collectors trying to hide their assets by them on board, this decision has hidden creating increased transparency in the sending them out to sea. risks when sailing to multiple destinations. art market, and increased interest in art It is crucial to know the tax status of both globally. Such cases raise interesting questions in a the yacht and the art—and how this will be world where yachts, often with a complex treated by different tax authorities. Although demand for art fluctuates, web of ownership, transport valuable art with different areas of the art market from one jurisdiction to another. In 2015, Each holistic wealth manager should work experiencing varying levels of demand, for example, French customs officers closely with their network of independent the growing tendency to view art as an seized Picasso’s “Head of a Young Woman” legal, tax, and art advisers, specialist asset class has meant increased interest (1906) from the Adix, the Spanish billionaire insurers, auction houses, and free ports among wealth management professionals. Jaime Botín’s yacht. Although it was moored to hold and maximize returns from their Nearly 90 percent of wealth managers said in Corsica, he argued that it was sailing clients’ luxury assets. Beyond portfolio they think art and collectibles should be under a British flag and was thus in the enhancement, structuring these assets included in wealth management offerings, UK’s jurisdiction, but this held no sway with provides clients with multiple other according to the Deloitte 2017 Art & Finance Spain’s judges, who deemed the work a benefits. These include long-term asset Report. national treasure and ruled that the Adix protection, facilitation of estate planning was subject to Spanish law. and wealth transition, and comprehensive administrative support including ongoing There are a whole host of local rules and reporting, accounting, and audit as well as regulations governing the inventories of arrangements for insurance, safe storage, yachts, and they vary from country to maintenance, transportation, and more.

105

Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Section 3

Art-Secured Lending

“Gap” - Series: Noospheres - on cotton paper (70x70) © Lina Sinisterra (2019) 107 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Highlights

Collector finance dominates the art-secured lending market This year, 69 percent of The market for art-secured lending has grown over the last ten years, with market size in 2019 estimated collectors said they would to stand at between US$21 billion and US$24 billion in outstanding be interested in using their loans against art. Based on existing research and interviews with art art collection (or parts of it) finance providers, we estimate the value of loans underwritten29 to collectors and private individuals to as collateral. stand at between US$18 billion and US$20 billion: around 90-92 percent of the overall art-secured lending market. European private banks The lack of a legal framework reluctant to offer art-secured is holding European art lending Art-secured lending ranks lending services back among the most popular art and Despite significant demand for The European art lending market wealth management services in art-secured lending services among has been affected by the fact that 2019 collectors and art professionals, the notion of art as an asset class There seems to be stronger interest only 26 percent of wealth managers is less developed in Europe than in art-secured lending among (32 percent of private banks and 13 in the US and the fact that there is collectors this year, with 60 percent percent of family offices) surveyed no uniform system for registering saying that this was one of the this year said that this would be charges over chattels such as the most relevant wealth management an area of focus in the coming 12 US Uniform Commercial Code services, compared with 46 percent months. In contrast, 80 percent of (UCC). Instead, each European in 2017. US private banks said they would country has its own system, many focus on art-secured lending of which are unsuited to the services in the coming 12 months, art-secured lending market as Collector demand for art- while only 16 percent of European constituted in the 21st century. This secured lending is on the rise banks said the same. has resulted in the US accounting This year, 69 percent of collectors for an estimated 90 percent of the said they would be interested global art-secured lending market. in using their art collection (or Consolidation among asset- parts of it) as collateral (versus 57 based lenders percent in 2017). This was echoed The low interest rate environment Risk management by art professionals, 72 percent of and easy access to finance In this year’s survey, 71 percent whom said that their clients would combined with increasing of private bankers said that consider using their art collection competition resulted in two the difficulties associated with as collateral for a loan (compared acquisitions in the first half of 2019, measuring and assessing risk were with 75 percent in 2017). It is also with Falcon Fine Art acquired by the a key challenge to incorporating evident that the art trade (art Fine Art Group in January 2019 and art-secured lending in their art and dealers, auction houses, and art Athena Fine Art acquired by Yield wealth service offering (the same advisors) also sees the benefit of Tree in April 2019. percentage as in 2017). art finance, with 69 percent saying their clients would take advantage of such a service.

29 In 2017

108 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Assessing the value of art Valuation is another source of concern for private bankers when it comes to art-secured lending, with 63 percent of private bankers saying this was one of the main hurdles (down from 73 percent in 2017).

Lack of art market knowledge 61 percent of private bankers said that a lack of knowledge of the art market was a key hurdle (compared with 66 percent in 2017).

The art-secured lending business has yet to reach the mainstream However, there is potential for growth in this area in light of the development of regulations and new technologies aimed at reducing risk and standardizing processes.

71 percent of Introduction private bankers said that the The market for art-secured lending has experienced growth over the last ten years, with a conservative size estimated in 2019 to be difficulties between US$21 billion and US$24 billion30 in outstanding loans against art. Although this might seem like a large amount of leverage, associated with it only accounts for just over an estimated 1 percent of art and collectible private wealth31 today. measuring In this section, we present the results of the surveys and trends in and assessing the art-secured lending market supported by the contributions of US Trust, the Fine Art Group and Griffin Art Partners. risk were a key challenge. 30 S ource: Art & Finance Report 2017 by Deloitte and ArtTactic, adjusted for an average annual growth rate of 10% per annum. This is the most conservative annual growth rate estimate from a sample of traditional US lenders surveyed in August 2019 31 T his estimate is based on US$18-20 billion of outstanding loans from private banks (typically lending to UHNWIs) in relation to the estimate of US$1.74 trillion of UHNWI art and collectible wealth.

“Energy of Love” - Series: Noospheres (courtesy Paola Lozano collection NY) © Lina Sinisterra 109 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Survey findings 2019

Art-secured lending ranks among they would like to see better access to the most popular art and wealth acquisition finance. Art dealers currently Art dealers management services in 2019 rely on either retained earnings (59 There seems to be stronger interest in art- percent of dealers) or co-investment from being forced to secured lending among collectors this year, private investors (63 percent of dealers) with 60 percent saying that this was one to finance acquisitions and new business become more of the most relevant wealth management opportunities. services, compared with 46 percent in 2017. 55 percent of art professionals said Access to dealer credit remains transparent and the same (up from 53 percent in 2017). poor, although the new compliance environment may increase professional Growing demand for art-secured opportunities lending among collectors 57 percent of dealers surveyed in 2018 as a result of In this year’s survey, 69 percent of for the TEFAF report said that access to collectors said they would be interested credit for dealers was poor/very poor, in using their art collection (or parts of it) which suggests that there is an opportunity the fifth AML as collateral (versus 57 percent in 2017). to develop the art-secured lending This year, 53 percent of the collectors who market for the art dealer community. directive may said they would be interested in doing so However, high funding costs, combined said they would use the funding to buy with a bureaucratic due diligence and lead to an more art. 41 percent said they would use underwriting process, were cited as it to finance other business opportunities impediments to art dealers pursuing this and 5 percent said they would use it to funding route. Art dealers being forced to increase in the refinance existing loans. This indicates that become more transparent and professional there is significant interest among wealthy as a result of the fifth AML directive (see credit available individuals in extracting the capital value section 6) may lead to an increase in the locked up in artwork. Moreover, this has credit available to support further growth to support been a growing business for private banks of art dealers in the future. 28 percent of in recent years. This was echoed by art dealers33 said that a lack of access to credit further growth professionals, 72 percent of whom said had affected their business growth, with a that their clients would consider using their further 18 percent saying they were unsure art collection as collateral for a loan. Among whether or not this was the case. of art dealers in the art professionals surveyed this year, art dealers, auction houses, and art advisors Fewer wealth managers are offering the future. also see the benefit of art finance, with 69 art-secured lending percent saying that their clients would take In 2017, 67 percent of wealth managers advantage of such a service. said that they offered their clients the opportunity to borrow against their art The art trade is also seeking or art collection. However, this year only alternative ways to finance 50 percent of wealth managers said that acquisitions they offered their clients this service. However, it is not only collectors who Among the wealth managers offering are interested in art-secured finance. A art-secured lending services, 50 percent research report written by ArtTactic in said they would use external providers for 2018 for TEFAF32 showed that 31 percent this type of financing arrangement (versus of the art dealers surveyed said they 42 percent in 2017). However, there were would be interested in art-secured lending. some significant differences between 87 percent of the dealers surveyed said US private banks, 77 percent of which 32-33 T EFAF REPORT – Art Dealer Finance 2018

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said they offered art-secured lending (69 among collectors and art professionals, percent offered this as an in-house service), only 26 percent of wealth managers compared with 50 percent of mostly saw this as a strategic focus area over European private banks who said they the coming 12 months (compared with offered their clients art-secured lending. 34 percent in 2017). However, there is a This difference reflects the significantly significant difference between US and more developed art-secured lending European private banks, with 80 percent of market in the United States. US private banks saying they will focus on art-secured lending services in the coming European private banks reluctant to 12 months, compared with only 16 percent invest in art-secured lending of European banks. Whilst there seems to be significant demand for art-secured lending services

Figure 28. Gap analysis: how relevant is art-secured lending to you and your clients versus what wealth managers are focusing on in the coming 12 months? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

70%

60% 60% 57%

53% 55% 48% 50% 53%

44% 46% 40% 40%

34% 30% 31% 26% 20%

10%

0% 2014 2016 2017 2019

Art Professionals Collectors Wealth Managers

111 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

71 percent of private bankers said that difficulties associated with measuring and assess- ing risk was the key challenge to incorporating art-secured lending in their art and wealth service offering.

112 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Art-secured lending: what are the key challenges when using art as collateral for a loan?

Risk assessment Assessing the value of art works, and therefore feel that they 71 percent of private bankers said that Valuation is another cause for concern will not be able to assess the risks and difficulties associated with measuring and among private bankers when it comes opportunities present in the market. assessing risk was the key challenge to to art-secured lending, with 63 percent incorporating art-secured lending in their saying this was one of the main hurdles Unregulated market art and wealth service offering (the same (down from 73 percent in 2017). 61 percent of private banks felt that the as in 2017). This shows that this remains a unregulated nature of the art market was key area that needs to be addressed if the Lack of knowledge a key challenge when offering art-secured art-secured lending market is to grow. 61 percent of private bankers said that a loans, whereas 71 percent said the same in lack of knowledge about the art market 2017. The lack of a uniform legal framework Lack of liquidity was a key hurdle (compared with 66 across different global art markets (similar Another major concern this year was the percent in 2017. This suggests that the to the UCC code in the United States) may illiquidity of the art market; 66 percent majority of private banks are hesitant be a pivotal factor, but this view is also likely of private banks surveyed said this was a about providing art-secured lending to be linked to the lack of standardization major concern (compared with 73 percent because they do not have sufficient around the issues mentioned above, such in 2017). knowledge about how the art market as valuation and risk assessment.

Figure 29. What do you feel is the 90% main hurdle when providing art 83% 90% lending/art as collateral to the bank’s 83% 83% 78% 81% current clients? 80% 78% 73% 83% 77% 78% 81% Source: Deloitte Luxembourg and ArtTactic Art & Finance 78% 73% 80% 78% 73% 78% 78% 71% 71% 77% Report 2019 77% 78% 73% 70% 71% 78% 78% 71% 71% 70% 77% 71% 70% 67% 70% 67% 69% 66% 70% 71% 67% 63% 64% 71% 6666% 63% 67% 70% 67% 60% 69% 66% 60% 58% 63% 61% 67% 63% 64% 60% 6666% 63% 61% 60% 60% 59% 60% 58% 63% 61% 56% 56% 61% 60% 59% 54% 56% 50% 60% 56% 54% 50% 44% 46% 46% 41% 44% 46% 40% 46% 41% 39% Unregulated market 40% 38% 39% Unregulated market Lack of liquidity 38% 30% Lack of liquidity Lack of knowledge about the art market 28% 29% 29% 30% Lack of knowledge about the art market 24% Valuation – 28% 29% 29% 20% lack of mark-to-market valuation 24% Valuation – Difficult to assess the risk 20% lack of mark-to-market valuation Due diligence Difficult to assess the risk 10% Due diligence Legal aspects 10% Legal aspects Secure storage 0% Secure storage 2011 2012 2014 2016 2017 2019 0% 2011 2012 2014 2016 2017 2019 113 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Size and structure of the art lending market

Based on existing research and interviews market—with the remaining share, on the geographical breakdown of this with art finance providers, we estimate the accounted for by galleries and dealers, market, the lenders that ArtTactic spoke to value of loans underwritten34 to collectors estimated to be worth between US$1.7 for the TEFAF report in 2018 said that over and private individuals to be between billion and US$2.4 billion, or 8-10 percent 90 percent of art-secured finance to art US$18 billion and US$20 billion—around of the global art-secured lending market. galleries/dealers would be underwritten in 90-92 percent of the art-secured lending Although it is difficult to put a precise figure the US.

Funding sources Selected Estimated total Estimated Percentage of Providers loan portfolio loans to dealers/ dealer-related against art 201935 galleries36 art loans

Citi Private Bank Emigrant Bank Deutsche Bank US$18–US$20 US$500–US$700 3-4 Private banks Goldman Sachs billion37 million percent JP Morgan Morgan Stanley US Trust

JP Morgan US$300–US$400 Commercial banks38 - - Citibank million

Yield Tree Artemus Borro US$1.0 Boutique lenders US$500 billion (asset-based lenders, AOI-Advisors – 50–60 – including hedge funds TPC Art Finance US$700 percent US$1.7 and family offices) million Fine Art Group billion Griffin Art Partners WestendArtBank

Sotheby’s US$1.3 US$350 25–30 Auction house finance Heritage Auction – – percent Phillips US$1.9 billion US$600 million

US$21-US$24 US$1.7–US$2.4 8–10 OVERALL SIZE billion billion percent

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34 In 2017 35 S ource: Art & Finance Report 2017 by Deloitte and ArtTactic. All the art secured loan estimates have been adjusted for a average annual growth rate of 10% per annum. This is based on the most conservative growth estimate from a sample of traditional US lenders surveyed in August 2019. Based on existing research 36 B ased on interviews with private banks, commercial banks, and asset-based lenders, these estimates are based on the average percentage share of art loans and interviews with art finance currently underwritten to art dealers and galleries. For private banks, these would typically be art-based providers, we estimate the value recourse loans provided to the owner of the gallery/ dealership, which would be a private wealth client of the bank. of loans underwritten to collectors 37 S ource: Art & Finance Report 2017 by Deloitte and ArtTactic. All the art secured loan estimates have been and private individuals to be adjusted for a average annual growth rate of 10% per annum. This is based on the most conservative growth estimate from a sample of traditional US lenders between US$18 billion surveyed in August 2019. 38 T his estimate is based on interviews with three of the and US$20 billion. biggest US commercial lenders to dealers and galleries. This number is likely to underestimate the value of commercial loans provided to European galleries. Series: Se me Movio el Piso - Museum of Contemporary Art Bogotá © Lina Sinisterra (2014) 115 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Art-secured lending trends 2019

A number of private banks have seen their loan book grow for art-secured lending in recent years, as illustrated by Evan Beard (National Art Services Executive at Bank of America Private Bank), Ramsay Slugg (National Wealth Planning Strategies Advisor at Bank of America Private Bank), and Dana Prussian (Vice President of Art Services at Bank of America Private Bank) in their interview on p.118.

We are starting to see early signs of consolidation among asset-based lenders and in January this year London-based Falcon Fine Art sold its art lending division to the Fine Art Group. The Fine Art Group started its lending business three years ago, charging annual interest rates in the mid-single to high-single digits. The company established a US$300 million credit fund to finance loans with investments from large family offices, institutions, and high-net-worth individuals and can fund loans of as much as US$150 million. Freya Stewart from the Fine Art Group shares her views on the current state of the asset-based art-secured lending market, and the challenges and opportunities the next five years will bring on p.120. Series: Se me Movio el Piso - Museum of Contemporary Art Bogotá © Lina Sinisterra (2014)

In April 2019, another art finance company, Athena Art Finance, was acquired by year track record in non-bank and fine Legal framework and regulations YieldStreet, a rapidly growing digital wealth art lending. Art Rights, the Italian ArtTech Based on interviews with art-secured management platform backed by billionaire company, has announced that it is working lenders for the TEFAF Art Dealer Finance George Soros, for US$170 million. on a new art lending service called Art Report in 2018, it is estimated that more Athena was launched four years ago by a Collateral, which will be the art world’s first than 90 percent of current art-secured consortium of investors led by the private escrow agent dedicated to art lending. lending business takes place in the US. equity group Carlyle and counted Banque The European art lending market may Pictet among its founding investors. Furthermore, the Bank Reyl & Cie and art start to pick up pace if and when the legal advisory firm LINK Management teamed framework becomes more robust as Despite industry consolidation, new up to launch Griffin Art Partners in June regards the issue of perfecting security initiatives are also appearing. In May 2017 in Luxembourg. This securitization interest, or in other words protecting a 2019, LA-based Shinnecock Partners platform structures non-recourse art security interest in an asset (mortgaged as announced39 they had launched an open- loans; an interview with the founders on collateral) from claims by other parties. A ended, standalone dedicated alternative the development of the business appears lien is perfected by registering it with the art lending fund, building on their seven- on p.122. appropriate statutory authority so that it

116 39 https://www.hedgeweek.com/2019/05/31/276162/shinnecock-partners-launches-alternative-fine-art-lending-fund Art & Finance Report 2019 | Section 3 - Art-Secured Lending

is legally enforceable and any subsequent be similar to the UCC system in the US). of the utmost importance to initiate the claim on that asset is given junior status. However, with the advent of Brexit (i.e., best risk management tools. Overstone other priorities) and unconvinced by the enables borrowers, lenders, investors and It is exactly this framework that has given extent of the consumer protections to be insurers to work with art as an asset by the US a lead in the art-secured lending provided by the possible new regime, the scoring and monitoring the risk of works of market, through the Uniform Commercial government announced in June 2018 that art. Within its range of services, their data Code (UCC). The UCC allows the borrower to it would not be introducing the anticipated driven Art Risk Monitor™ & Qualitative Risk retain possession of the artwork while the changes for the moment. However, as Monitor™ aims to generate a rating score loan is still outstanding. This can happen outlined in the Deloitte Art & Finance Report within 48 hours, covering 10,000+ artists. because the lender can register its security 2016, several European countries have Combined with its due-diligence process, interest in the art on a public register introduced a register of charges against the firm aims to enable participants within under the Uniform Commercial Code (UCC), chattels. This fact, coupled with the new the finance, insurance, and art markets thereby putting the world on notice that the insurance products coming to the market, to understand and employ these assets art is subject to a charge (or lien). imply that the European art-secured across an array of transaction structures. lending industry is starting to gradually With several projects contracted by The European art lending market has been catch up with its US counterpart, albeit at a institutional players in both the US adversely affected by two main factors: slow pace. and European markets and a strategic 1) the fact that the notion of art as an asset partnership with Marsh & McLennan, class is less developed in Europe than in the Insurance providers could pave the way Overstone’s international team is seeking US and 2) there fact that there is no uniform for growth in the art-secured lending to secure an established track record with system for registering charges over chattels market the continued expansion of its pool of such as the US Uniform Commercial Code. Another important driver of the partners. Instead, each European country has its own development of the art-secured lending system, many of which are unsuited to the market is the emergence of new insurance The future art-secured lending market as constituted products aimed at reducing and managing With art-secured loans accounting in the 21st century. various risks associated with art-secured for an estimated 1 percent of art and lending. For example, art-secured lenders collectible private wealth41 today (a small According to an article by Tim Maxwell40, now have the option to insure against the figure compared to other industries), the the UK—a jurisdiction with a sophisticated residual value in case of default or to take potential for growth in the art-secured financial and legal system—should account out infidelity insurance that would allow lending market could be significant. There for a significant proportion of the art borrowers taking out an art-secured loans is also scope for cultural institutions to tap lending market. However, the UK art lending to continue to enjoy their art objects in their into the art-secured lending market and market is tiny in comparison to both the homes. use their collection to release resources relative size of the UK art market and its Other forms of lending activities in the for other priorities and projects. We counterpart in the US. There is significant art market are also developing, such as are already starting to see new types of interest in art lending in the UK, but the consumer loans. Art Money, founded innovative financing for art and cultural market appears to have been hampered by by Australian entrepreneur Paul Becker institutions. One such provider is the UK- the current legal framework. in 2015, is a global art FinTech that has based Nesta. Fran Sanderson from Nesta already partnered with over 900 galleries sets out her vision of impact investing in In 2018, the UK’s Law Commission worldwide and is currently offering buyers her article on p.161 in section 4. published a draft bill for a new Goods from , , and the US Mortgages Act. The proposed legislation the opportunity to repay purchases of The art-secured lending business has would have allowed individuals and artworks over 10 months interest free. yet to reach the mainstream, but with unincorporated bodies to use goods the development of regulations and new (tangible moveable property) that they Risk management tools technologies aimed at reducing risk and own as security for a loan, whilst retaining In order to evaluate and prioritize risks standardizing processes, there is potential possession of those goods (this would within the market or project, it is naturally for future growth in this area.

40 A rticle contributed to TEFAF Report – Art Dealer Finance 2018 41 T his estimate is based on US$18-US$20 billion of outstanding loans from private banks (typically lending to UHNWIs) in relation to the estimate of US$1.74 trillion of 117 UHWNI art and collectible wealth estimated in the Deloitte Art & Finance Report 2019 Art & Finance Report 2019 | Section 3 - Art-Secured Lending

Adriano: Why does a global financial institution like Bank of America have a dedicated Art Services Group? Evan: A few years ago, we as an institution noticed that the art market was maturing as a global industry and our clients were demanding a new level of sophistication around art-secured lending, art planning, consignment services, and arts philanthropy so we structured a dedicated business group Expert voices to work closely with collectors and arts institutions.

Adriano: Do collectors view their art any differently than they used to? ART AND FINANCE Evan: The stratification of wealth coupled with cheap money globally has driven significant capital into the OUTLOOK upper reaches of the art market. We’ve also seen a new breed of enterprising collector, still mostly men, who Adriano Picinati di Torcello, Global increasingly manage their art collection Art & Finance Coordinator poses as a capital asset—not necessarily as an investment, but a capital asset from a Q&A to Evan Beard, National which they can unlock and redeploy Art Services Executive at Bank of capital into other investment areas. America Private Bank; Ramsay Slugg, Adriano: What are you seeing from U.S. collectors? National Wealth Planning Strategies Evan: Our client base at Bank of America Advisor at Bank of America Private Private Bank falls into four categories. The enterprising collector I mentioned, Bank; and Dana Prussian, Vice the legacy and status-minded President of Art Services at Bank of trophy hunter, the knowledge-driven , and the visually driven America Private Bank. aesthete. Collectors hailing from the enterprising and trophy hunting tribes tend to be our most active borrowers and consignors. Most are private equity, hedge fund, and real estate executives. We’re also seeing more credit facilities being used to back third-party guarantees at auction.

Adriano: You mentioned how quickly art lending has expanded. What types of clients borrow against their art? Evan: Our art loan book has been growing at about a billion dollars per year over the last few years and now sits in the several billions in terms of loan commitments. Collectors who leverage

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their art tend to fall into four categories: a collection intact. If you determine 01. The interest rate arbitrage play that a gift makes sense for you and whereby the collector (often a your family, talk to the museum about finance or real estate professional), whether your collection is a fit for the unlocks capital to redeploy into other institution. investments 02. The business owner who uses art to Adriano: If we take a step back fund a working capital line for the and consider the art world more private business globally, what do you see, Dana, as 03. The collector who uses the line to buy an international headwind that could art without having to sell other assets affect the art market in the coming 04. The multi-generational family who months? uses art lending in the context of Dana: Recent tariffs implemented estate planning between the U.S. and China won’t affect the art market in the near term but could Adriano: Speaking of planning become sand in the gears down the strategies, Ramsay, what should road if a trade deal is not reached and collectors consider when thinking relations between the world’s two largest about art as part of their overall economies become fraught. We’re paying estate? special attention to the credit cycle, Ramsay: First and foremost, use a global interest rates, and the likelihood of competent advisory team. The team a global slowdown. should include art experts, private Developed economies are slowing down, bankers, an attorney, and an accountant. equity valuation ratios have increased, By communicating with you and with and the credit cycle appears to be in each other, they will be able to help you the early stage of a down-cycle. If these think about your goals and your family’s trends worsen, expect an art market goals as it relates to your collection. slowdown. But, for now, the music You should also think about risk continues. management. Adriano: What about Brexit? Have Adriano: What do you mean by risk you seen changes in the European management? art market as a result of the Evan Beard Ramsay: Engage an insurance expert negotiations? National Art Services Executive at who is experienced with art, prepare an Dana: Like much of the global economy, Bank of America Private Bank inventory of your collection, keep up-to- the art market has given a giant shoulder date appraisals, and maintain records shrug to Brexit. That said, the ongoing Ramsay Slugg of ownership. Staying organized and up negotiations, and the result that may National Wealth Planning Strategies to date as your collection evolves over finally become clear at some point in Advisor at Bank of America Private time will help you and your family make the future, have left European collectors Bank decisions down the road. scratching their heads. While the Arts Council of has published a guide Dana Prussian Adriano: Once you have taken steps on how to deal with no deal, there are Vice President of Art Services at Bank to work with the right people and still question marks on how to handle of America Private Bank keep your collection organized, what (and at what pace) import taxes, VAT, and can you do with a family collection, the shipping and movement of artwork besides just keeping it in your home? within the EU. Ramsay: Art is by nature an illiquid After all, without EU membership, the asset. While it can be sold, it comes with UK no longer retains the advantage of a high tax cost and timing is often an free circulation in its current form. At issue. You should consider whether art least in the short term, we see Brexit as lending may be appropriate for your providing logistical complications and liquidity needs. You can also consider questions for collectors, but do not think gifting your collection to charity. It is it will send shock waves through the often the most tax efficient way to keep market.

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Expert voices

THE CURRENT STATE OF THE ASSET-BASED ART-SECURED LENDING MARKET, AND THE CHALLENGES AND OPPORTUNITIES THE NEXT FIVE YEARS WILL BRING Freya Stewart CEO of Art Lending and General Counsel From a demand-side perspective, the are seeing an increasingly diverse range of The Fine Art Group art-only asset-based lending market is rationales and motivations from borrowers healthy; demand is strong and increasingly using the product. Recent examples sophisticated. The Fine Art Group’s art include supporting long-term collection financing business is busier than ever—Q2 acquisition objectives, auction and of 2019 has been our busiest to date and private sale purchase financing (including we have executed a number of ‘A ’ irrevocable bids), providing capital for loans with important collectors. In its 2017 IPOs, providing liquidity for the collectors’ Art & Finance Report, Deloitte estimated , providing liquidity to that the global value of art-secured loans trustees using trust assets as collateral, in 2017 was US$17-20 billion, which financing to sale, and providing represented growth of 13 percent since capital to plug margin calls on a collector’s 2016. Awareness and understanding of investment portfolio. art-only asset-based financing among the top-end collecting community and, More generally, the growing demand for importantly, their financial advisors and art-backed loans is a natural reflection and family offices, have without doubt risen extension of the increasingly sophisticated in recent years. Increasingly, buying tens nature of the world’s most active and or hundreds of millions of dollars of high- prominent art buyers. This demand is value art with equity alone is, rightly, not also global: we have executed two loans seen as being capital efficient, and advisors with first-time Hong Kong borrowers to UHNWIs are encouraging their clients this quarter and our most recently to look at leverage. In particular, significant executed loan involved no fewer than five younger collectors, and collectors who jurisdictions. are entrepreneurs in other markets, are coming to recognize the diverse utility of We have also seen an increase in art art-secured credit facilities. As such, we trade using art-secured loans, either to

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supplement their traditional sources of working capital from traditional bank facilities, or to replace such traditional sources of financing altogether. The 2019 Art Basel and UBS report cites access to credit and financing as the third-biggest challenge dealers felt they would face in the next five years. It is widely known fact that banks have been more conservative in the provision of credit to businesses in recent years, and specialist art lenders with in-depth knowledge and understanding of how the art trade operates, delivering a more flexible, tailored product, have fueled this higher demand from the art trade.

On the supply side, we are seeing and will continue to see the best art-only art- secured lending products and services being provided by specialist art lenders with in-depth domain expertise. High barriers to entry to delivering first-rate art- focused credit products will remain.

Staying on the supply side, there are some interesting dynamics at play with a number of lenders. With Sotheby’s being taken back into private hands by Patrick Drahi later this year, we will have to wait and see what the new owner’s plans for Series: Se me Movio el Piso - Courtesy Jeyson Campo Colection © Lina Sinisterra (2014) Sotheby’s Financial Services are. Will they follow the path of Christie’s, also privately owned, by focusing on the core auction and private sale business more than financial services? We are yet to see how the new home for Athena Art Finance will play out will an alternative investment platform for retail investors be a good fit for high-end collectors seeking credit?

The long-term challenge and opportunity for the art-secured lending market will remain the long-term commitment to The growing demand for art- increasing awareness and understanding of the product and its diverse utility to backed loans is a natural reflection collectors and traders in all key regions of both the art market and HNWI wealth and extension of the increasingly management markets (namely the USA, Europe, and Asia). Specialist lenders’ ability to robustly underwrite art asset risk will sophisticated nature of the world’s also remain central to the long-term health of any lender in this space, which in itself is most active and prominent art an opportunity for specialist lenders with in-house art experts. buyers.

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Expert voices

IT IS STILL POSSIBLE TO INNOVATE IN THE ART LENDING INDUSTRY

In June 2017, bank REYL & Cie and art wealth management firm LINK Management teamed up to launch Griffin Art Partners (GAP), a securitization platform structuring non-recourse art loans.

Please could you start by introducing launch Griffin Art Partners together. your companies and explain why Griffin XL: Founded in 1973, REYL is an Aymeric Thuault Art Partners was created? independent banking group that manages & Aude Lemogne AT: LINK Management is an art wealth assets in excess of CHF 15 billion (including Co-founders and management company founded in 2009, minority affiliates) and has offices in Managing Directors based in Luxembourg, Germany, and France. Switzerland (Geneva, Zurich, and Lugano), of LINK Management In addition to the classic advisory approach Europe (London, Luxembourg, and Malta) of analyzing a work of art from an aesthetical Singapore, Dubai, and the United States. and historical point of view, we integrate the Having developed an innovative approach notions of in-depth due diligence, market to banking, the group serves a clientele of timing, and risk management as well as asset international entrepreneurs and institutional allocation strategies for those individuals investors through its Wealth Management, eager to consider their art as a means of Entrepreneur & Family Office Services, diversifying their wealth. Corporate Advisory & Structuring, Asset Services, and Asset Management business We first became involved in art financing lines. long before Griffin Art Partners was launched; as LINK Management had been REYL & Cie has been active in the art world providing funding directly to a number of for some time through its Entrepreneur and Xavier Ledru art market professionals in the form of Family Office Services. On the investment Deputy Head of Corporate co-investments in works of art. In light of side, we had identified the need for Advisory & Structuring, various constraints, our ambition was to be innovative services in relation to art as an REYL & Cie able to simultaneously address substantial investment and were therefore keen to financing needs and to design a new finance position ourselves in this market segment. structuring model. We had a long-standing We then looked for a tool with a lower risk relationship with REYL & Cie, and as we profile than art funds. By using the bank’s had both identified an opportunity in the various skills, particularly in terms of legal art lending space in Europe, we decided to and financial structuring, we partnered with

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houses. Art-backed notes are an innovative an existing trend that has already built up Art-backed notes alternative to an art fund, as they provide over a certain period in private dealings. exposure to art with much lower risk, If you rely solely on auction data, you are an innovative through a maximum loan-to-value of 50 run the risk of missing key elements. As percent, while generating a fixed return. LINK Management is active in private art transactions, we leverage the information alternative to AL: One of our aims was to set up highly flow to build up our proprietary price transparent procedures as well as a databases and to track price developments an art fund, as flexible structure that can be adapted, before they crystallize at auction. This when possible, to the borrower’s specific allows us to manage the collateral on our they provide needs. We can operate in all European loans much more efficiently. Regarding jurisdictions and have the ability to permit the documentation accompanying exposure to art some of our clients to keep their art at artworks, we observe a wide spectrum home, thus avoiding dispossession. It is of completeness. Some collectors have with much lower worth noting that there are no conflicts of painstakingly archived all certificates, interest in the event of default as GAP will invoices, insurance documents, and never take possession of the collateral itself literature references related to their risk. at a discounted value. It will sell the asset artworks. This facilitates our due diligence in a public sale and return any amount process and ultimately increases the outstanding after repayment of the loan chances that the works are deemed to the borrower. Furthermore, we will not eligible. But we still come across some proceed with credit due diligence on the collectors who have failed to hold on to borrower and we will not require the latter their full documentation, which negatively LINK to focus on devising a fixed return to provide any personal collateral or assets affects the marketability of the works. And, instrument (5 percent to 10 percent per under management. of course, there is the not-so-unusual case annum), fully backed by the borrower’s of extremely abundant authentication art collection. Such fixed income products XL: I would also add that, as a Luxembourg files that are a compilation of unknown are particularly attractive for investors platform, GAP does not have cumbersome art experts. These have to be rejected looking to diversify their portfolios and documentation processes. Our agreements systematically. de-correlate their asset allocations from are simple and straightforward. Besides other, more traditional asset classes, as a strict due diligence on the collateral itself, What is the demand in terms of complement to more liquid positions. KYC and AML procedures have been borrowing and investing? delegated to REYL & Cie in order to ensure AT: Europe is still a relatively untapped How does GAP differentiate itself from maximum investor protection. territory, especially compared with the other art lending solutions? United States. But leveraging an art XL: Like a traditional art lender, GAP is What do you see as the biggest collection is not for everybody, and there involved in non-recourse loans; however, challenges when providing art-secured are cultural differences that make the our structure is unique because we offer a lending to your clients? appetite for leverage more developed in proprietary securitization setup. GAP issues AL: I would say that the two main certain countries than in others. art-backed notes for each new loan, which is challenges are artwork valuation and thus financed by a limited pool of institutional documentation quality. XL: Nevertheless, the load quantum has and private investors interested in generating In order to establish an accurate valuation, increased since our launch two years a high return over a short- to medium-term you need to pick suitable points of ago and, as an example, we are currently horizon. Each loan is structured by issuing comparison from auction data, but that looking at various transactions presenting a notes with an international ISIN code is not sufficient to identify price trends collateral value of between €25 million and and cleared through the leading clearing early on. Too often auction data confirms €40 million.

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Art & Finance Report 2019 | Section 4 - Art & Investment

Section 4

Art & Investment

"Feeling Blue" - Series: Noospheres - Courtesy Paola Lozano Collection NY © Lina Sinisterra (2019) 125 Art & Finance Report 2019 | Section 4 - Art & Investment

Highlights

PERFORMANCE Historical collecting categories Tokenization has the potential PERFORMANCE show lower correlation with to affect the financial world in other asset classes the same way as email affected European Old Masters and Global the postal system Positive returns in the art Impressionist Art display the lowest While the existence of tokens market between 2000 and 2018: correlation with the S&P 500, real in general, and digital tokens in artnet’s Index for the Top 100 Artists estate, and gold compared with particular, is not new, the speed produced an 8 percent Compound other collecting categories, such as with which these cryptographic Annual Growth Rate (CAGR) between Global Post-War and Contemporary tokens are being deployed and 2000 and 2018, compared with 3 Art, which show a higher correlation issued is an indicator they might percent for the S&P 500. Between with the S&P 500. Across the board, just be the killer blockchain January 2000 and October 2018, for all collecting categories, art application many people have been artnet art market indices showed a as an asset class has a stronger waiting for. positive CAGR of between 2 percent positive correlation with the price of and 9 percent across the varying gold than with other asset classes Token contracts are essentially collecting categories. reviewed in this study, indicating rights management tools that investors perceive art as an Tokens can represent any existing Returns on European Old asset that retains its value rather digital or physical asset or access Masters and Impressionist and than an investment vehicle. right to assets someone else owns. Modern Art level out, whilst Tokens can represent anything Post-War & Contemporary Long-term holding periods from a store of value to a set of outperform Repeat auction sale data analyzed permissions in the physical, digital, According to artnet indices, returns from Sotheby’s Mei Moses suggests or legal worlds. on Old Masters have stabilized at that works of art held off the a level below the S&P 500, with no auction market for at least ten years Fractional ownership of art significant growth or decline since benefitted from the “holding period In the future, low-net-worth 2017. The Global Impressionist effect”, whereby works with long individuals who would usually and Modern Art markets show holding periods were more likely be excluded from this type of comparable trends and have been to be sold for a profit and had less investment opportunity may unable to regain the momentum volatile compound annual returns be able to own a fraction of an seen a decade ago. (CARs). expensive work of art. This could prove particularly valuable and The artnet Index for Global interesting for small investors who Impressionist Art today is have not been able to meaningfully comparable to the S&P 500 level. invest in fine art in the past. However, Post-War & Contemporary FRACTIONAL OWNERSHIP Art has significantly outperformed IN ART Crowdfunding/investing other art markets as well as the S&P Tokens can also be used to 500, particularly since the financial crowdfund future art projects that crisis in 2009. With the global art fund investors can own fully or partially. industry in decline, new Anyone who contributes to the Declining performance in the art investment models are funding of an art project could Chinese art market emerging receive a proportional share of the The artnet indices for both 20th Fractional art ownership models tokenized value of that project, Century & Contemporary Art have emerged in recent years according to the terms laid out in a and Fine Chinese Paintings and aimed at democratizing an art smart contract. Calligraphy have shown recent investment market worth billions of declines, with the latter category dollars. steeply dropping in 2018.

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Derivative artworks investment models that combine revenue funding from regional The emergence of new derivative fractional ownership with social government to support great artworks is another potential impact investment. museum programming, an application of tokenized art. understanding of the market It would be possible to create Millennials want to do things catchment area, investment in complex smart contracts that differently hotels and airports, etc. grant access rights to derivative Despite only holding a small art works with the purchase of a proportion of total UHNWI wealth, The surge in private museums fraction of a painting. Art tokens millennials are having an impact As in the last gilded age, the also open up new forms of artistic on philanthropy by combining increase in new private museums expression and value creation, such charitable giving with profit-making is the outcome of wealth as gamification, and could lead to endeavors and social enterprises. accumulation, which is fueled by the the fusion of art, virtual reality, and This is the generation that is benign tax framework in place in gaming. likely to develop the social impact many countries. investment and philanthropic models for art and culture that will Impact investment in art and prevail in the 21st century. culture is gaining momentum SOCIAL IMPACT INVESTING internationally IN ART AND CULTURE Investment in art and cultural Organizations such as Nesta and infrastructure its Arts Impact Fund have attracted According to AEA Consulting, significant international attention, Shift towards impact investing the past three years have seen with funders, policymakers, and as the world faces even greater annual investment in art and national agencies across many challenges cultural infrastructure projects countries looking at how to An increasing number of investors hovering between US$8 billion replicate the fund in their own are keen to ensure that their money and US$9 billion based on an jurisdictions. has a positive impact on society average of 115 completed projects and the world at large, and there is per year. One of the three main Private-public partnerships a global shift in investment trends motivations for developers to can promote new social impact towards focusing on more than invest in cultural projects is that investment models in the just the financial returns on a given cultural infrastructure can define cultural sector investment. and redefine the character of a Public-private partnerships could place, and the cost of investment be considered to unlock the value Socially responsible investment in cultural infrastructure is offset of public collections in order to products in art and culture are by the enhancement of adjacent support the cultural sector and ranked highly by private banks residential or commercial property ensure that public institutions In this year’s survey, 28 percent of values. receive the funding they need to wealth managers said that socially fulfil their social role. responsible investment products Most investments are being in art and culture would be most driven by variations on the relevant to their clients. Bilbao/Guggenheim success story Technology is driving change in Most investments in art the world of impact investing infrastructure reflect sophisticated The advent of blockchain strategies and are built on an technology and tokenization looks interpretation of the many set to usher in the next generation dimensions of Bilbao’s success: of art and cultural impact architecture, tourist strategy,

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Introduction

The financial aspect This section is divided into three parts: edge technology to invest in music copyrights, which is due to be launched of art ownership has 01. Firstly, we take a closer look at in the near future. become even more the past performance of art as an asset class. This part includes an 03. Finally, we introduce a different important since our last art market performance analysis by investment perspective by focusing survey in 2017. More of artnet of the 2000-2018 period and a on the rising interest in social impact study by Sotheby’s on the benefits of and infrastructure investing, and today’s collectors are holding art for a long time. Peter Man explore what this may mean for the motivated by investment Kit Lee, a Partner from Deloitte Hong art and culture industry in years to Kong, also reports on the growing come. We are delighted to have Fran returns and portfolio expertise of Asian investors and rising Sanderson presenting her views on diversification, as well as demand for art as an alternative form impact investment, through her work of investment. at Nesta, we are also very grateful to a desire to hedge against have Adrian Ellis discussing investment inflation and store wealth 02. Secondly, we look at the developing in cultural infrastructure and its market for fractional art impact on real estate values and we in a safe haven asset. ownership. We are delighted to be are very proud to have an interview able to share Dr. Shermin Voshmgir’s with Manoelle Lepoutre, Senior Vice view on tokenization and fractional President Civil and Society Engagement art ownership. Matteo Cernuschi, at Total and Managing Director of COO & Co-Founder of ANote Music, the Fondation Total discussing their 487 Horas Pensando © Lina Sinisterra (2009) also presents the company’s cutting- involvement with Culture.

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Part 01 Performance: Art as an asset class

Ning Lu Michaela Ben Yehuda Robert Cacharani Vice President of Operations Junior Art Market Analyst Senior Data Analyst artnet artnet artnet

The first half of 2019 saw a decline in The global power houses—the United S&P 500. Although the Index for the Top the total sales value for Fine Art and States, China, and the United Kingdom— 100 Artists has remained bullish since Decorative Art at auctions year-on- continued to lead the market despite 2016, art prices and the S&P alike faced a year, despite a 13 percent increase in their individual losses in sales year-on- decline in 2018. works consigned. The Fine Art auction year. The countries experienced declines market decreased in value to US$6.9 of 18 percent, 11 percent and 24 percent, billion, compared to US$8.2 billion in the respectively. first half of 2018. Decorative Art sales also took a hit in the first half of 2019, Germany, however, gained some The artnet Index although more lots were transacted than momentum in the first half of 2019, with in 2018 within the same time period. The positive Fine Art trends from 2018 to for the Top 100 average price of Fine Art lots decreased 2019. It’s also worth noting that countries from US$61.6 thousand to US$46.5 facing political and social unrest, such Artists displays thousand from the first half of 2018 to as Iran, Turkey, and , experienced 2019. Decorative art lots experienced particularly high market contractions by similar declines in the first six months of total sales value. a considerable 2019, although the sell-through rate for the category increased to 66 percent in Evaluating the performance of art as an positive return 2019, compared to 64 percent in 2018. asset class over the last two decades, the artnet Index for the Top 100 Artists over time for The decline in the total sales value was displays a considerable positive return felt across collecting categories, despite over time for art. The index has outpaced art. an increase in lots offered and sold year- the S&P 500 in growth consistently, even on-year. The Ultra-Contemporary art considering the 35 percent hit the art sector was the exception to the rule, with index took between 2008 and mid-2009. 51 percent growth in total sales value and artnet’s Index for the Top 100 Artists 30 percent growth in average sale price produced an 8 percent compound annual in the first half of 2019 year-on-year as growth rate (CAGR) between 2000 and supply and demand surged. 2018, compared to 3 percent for the

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Figure 30. artnet Price Indices: Top 100 Artists Source: 2019 © artnet Worldwide Corporation

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artnet Index for Top 100 Artists S&P 500 Gold Fixing Price S&P/Case-Shiller US National Home Price Index artnet Index for Top 10 Artists

Over the last few years, prices for European Old Masters have stabilized at a level below the S&P 500.

While the artnet Index for the Top 100 in the run-up to the 2008 financial crisis. Artists is testament to the strength of Over the last few years, prices for European the market at a given time, the art market Old Masters have stabilized at a level consists of varying segments that often below the S&P 500, with no significant perform independently of each other. A growth or decline since 2017. The Global closer look at particular market sectors Impressionist and Modern Art markets provides investors with additional insight on show comparable trends, unable to regain the strengths and weaknesses of specific the momentum reached a decade ago. The collecting categories. According to artnet’s artnet Index for Global Impressionist Art Indices, the European Old Masters market today is comparable to the S&P 500 level. showed steady growth up until 2008. Since Artists from Europe, however, continue to then, this particular market has stagnated, outperform American artists in the Modern unable to reach the peak numbers seen Art category.

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Figure 31. artnet Price Indices: European Old Masters Source: 2019 © artnet Worldwide Corporation

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Figure 32. artnet Price Indices: Global Impressionist Art Source: 2019 © artnet Worldwide Corporation

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Figure 33. artnet Price Indices: Modern Art Source: 2019 © artnet Worldwide Corporation

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Figure 34. artnet Price Indices: Post-War Art Source: 2019 © artnet Worldwide Corporation

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Figure 35. artnet Price Indices: Contemporary Art Source: 2019 © artnet Worldwide Corporation

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Americ an Contemporary Art S&P/Case-Shiller US National Home Price Index Gold Fixing Price

The artnet Indices for Post-War and Looking at the market for Chinese art, typically more stable and reflective of the Contemporary Art tell a different story, as the artnet Indices for both 20th Century overall Chinese economy. In contrast, 20th the two movements underwent significant & Contemporary Art and Fine Chinese Century & Contemporary works from China growth after 2009. With American artists Paintings and Calligraphy have shown were initially supported by interest from an leading the push for both collecting recent declines, with the latter category international collector base. In more recent categories, Post-War and Contemporary steeply dropping in 2018. Led by the years, after a period of volatility between prices took a dive from 2008 to 2009 but Fine Chinese Paintings and Calligraphy 2008 and 2010, the genre garnered have aggressively outpaced the financial sector, both categories for Chinese works increasing local interest and continued index over the last decade. Interestingly grew bullish starting in 2005, significantly support from a new class of Chinese enough, European artists only outperform outpacing the S&P 500. The success of buyers. American artists in the Modern Art Fine Chinese Paintings and Calligraphy category, where returns for European works can be attributed to the large artists have been consistently higher than Chinese collector base they attract. Vastly American artists’ returns over the last two supported by growth in the buying power decades. of Chinese collectors, the category is

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Figure 36. artnet Price Indices: Fine Chinese Paintings & Caligraphy and 20th C. & Contemporary Art Source: 2019 © artnet Worldwide Corporation

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Fine Chinese Paintings and Calligraphy S&P/Case-Shiller US National Home Price Index

Chinese 20th Century & Contemporary S&P 500 Gold Fixing Price

According to data from the Global Chinese Contemporary Art, followed by Global Post- Art Auction Market Report, the volume War Art, and Global Contemporary Art. of Chinese works sold has dropped significantly since 2012. Both artnet Indices Among the various Fine Art collecting for Chinese artworks, however, suggest a segments, Global Post-War and much milder decline in value for blue- Contemporary Art have generated the artists, indicating a shift from quantity most consistent returns over the past towards quality in this market. 15 years, with positive CAGR across all investment cycles. Moreover, the Chinese If we go one step further to look at the Indices for Fine Paintings and Calligraphy return on art investments over varying time and 20th Century & Contemporary have periods, we observe a positive compound showed negative returns in the short run annual growth rate (CAGR) in the long run over the last 12 months, but the strongest across all art price indices in this report. positive CAGR over a 15-year period. In Between January 2000 and October 2018, contrast, as the market for the European artnet art market indices show positive Old Masters stagnates, this category CAGR of between 2 percent and 9 percent shows much less variance in CAGR across across the varying collecting categories. different investment cycles, but it also saw The best-performing art categories for this a relatively smaller CAGR over a longer period were Fine Chinese Paintings and investment cycle than other categories that Calligraphy, and Chinese 20th Century & are on the rise.

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Last 12-month 5-year 10-year 15-year return CAGR CAGR CAGR

European Old Masters 1.99% -2.82% -1.63% 2.38%

Global Impressionist Art -13.69% -3.92% -0.48% 1.33%

Global Modern Art -1.43% 2.87% 2.10% 4.15%

Global Post War Art 4.42% 7.92% 6.69% 7.81%

Global Contemporary 1.27% 5.70% 4.58% 7.12%

Fine Chinese Paintings and Calligraphy -16.41% -5.06% 7.45% 9.43%

Chinese 20th Century & Contemporary -4.21% -1.15% 5.13% 9.31%

Source: 2019 © artnet Worldwide Corporation

It is worth noting that while indices are helpful tools to use as reference points for To elaborate, evaluating the various risks particular to works of art is crucial for the performance of top-selling artists over investors interested in allocating capital in the sector. The risks associated with time in particular sectors, investors should traditional assets differ from those associated with investing in artworks. consider their limitations and restrictions. Unlike bonds and the stock market, for example, the art industry lacks market Art particularly attracts investors as work resurfaced in London 12 years transparency. Stock performance and it is regarded as a value-preserving later at Christie’s, the same oil on canvas bond prices are monitored consistently asset class. Like gold, artworks are less earned almost five times its original sale and adjusted constantly to reflect shifts in susceptible to risks associated with price, selling for more than US$2 million the industry. Additionally, prices are public, financial market crashes than and with a premium. Bonnat’s profitable and transactions are regulated. In contrast, bonds. Because of the intrinsic value of art painting is one of thousands of works to the art market is more nascent, uncertain, as luxury item, art is able to rebound and soar in value upon returning to auction. and obscure. Market transparency is even grow faster than traditional asset an obstacle in the field: dealers keep classes in response to financial turmoil. It is worth noting that while indices are details of sales private, galleries do not This pattern is evident following the 2008 helpful tools to use as reference points publicize artwork pricing, and buyer financial crisis. While the artnet Index for for the performance of top-selling artists information is often undisclosed. Although the Top 100 Artists was able to recoup its over time in particular sectors, investors auction records are accessible through peak value by 2011, the S&P 500 took five should consider their limitations and subscription services such as artnet’s years to recover. restrictions. As a lack of transparency and Price Database, buyers are still reliant illiquidity have always been unfavorable on appraisers’ knowledge and analysis. Additionally, art is particularly attractive characteristics associated with investment Auction houses also cater to clients who to investors owing to astounding resale in art, we recommend that readers prefer to sell their works through private success stories such as Leon Bonnat’s consider the methodology behind the transactions rather than public bidding 1891 painting. Samson’s Youth first sold at indices in order to leverage the data in the processes, so the whole market is never auction in 2006 for US$408,000. When the most advantageous way. fully accessible.

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Figure 37. Total sales value ($US) by country, 2013-2018 Source: 2019 © artnet Worldwide Corporation

$900,000,000 By placing

$800,000,000 unprecedented requirements on $700,000,000 art exports of a

$600,000,000 certain value, art owners are now $500,000,000 required to have

$400,000,000 licenses in order to legally trade art $300,000,000 assets.

$200,000,000

$100,000,000

$0 2013 2014 2015 2016 2017 2018

France Germany Italy

Government regulations also pose risks to legally trade art assets. Similar controls to investors. Although many regional were also implemented in Italy a couple of art markets typically do not have strong years earlier. It comes to no surprise, then, restrictions on pricing, commission rates that the Italian and industries and trading policies as compared to saw a decline of total sales value in the financial markets, the risk of governmental years preceding the ratifications of their policy changes is mounting as the industry respective . Neighboring European grows in size. This issue has come to the countries such as France, in comparison, fore over the last few years in Germany, as saw a spike in their market during the same the government passed a law in 2016 in time period, likely absorbing works sold by favor of regulating the country’s art market. German and Italian collectors attempting By placing unprecedented requirements on to liquidate their assets in anticipation of art exports of a certain value, art owners the regulatory changes. are now required to have licenses in order

136 Art & Finance Report 2019 | Section 4 - Art & Investment

In contrast, the Chinese art market faces Looking ahead, as we are entering a late were able to lead the market comeback issues due to the lack of government stage of an economic cycle, it’s worth taking following the 2015 and 2016 slump. While control over its auction sales, as payment a look at how the art market has performed works of art below the price threshold default or delay continues to plague the in past recessions and slowdowns in the never achieved volumes comparable to the secondary market. On average since financial markets, so as to outline the 2014 peak, blue-chip works were able to 2011, only about 54 percent of total sales correlation between various categories in stand the test of time. values each year are successfully paid to the art market and other asset classes for auction houses based on data collected by investors looking to diversify their asset the China Association of Auctioneers the allocations. following year; the percentage drastically drops further amongst top-selling lots. This Following the 2008 financial crisis, markets demonstrates that there is no guarantee for virtually all assets experienced a steep that works will change hands in the region decline. While the S&P 500 was only able even after an auction occurs. to regain its strengths by 2013, the index for the top 100 artists bounced back and Between 2008 and 2011, the Chinese even outperformed its 2008 peak within art market experienced an exceptional two years of the drop. This suggests that growth rate of 500 percent, outpacing artworks by blue-chip artists are able to any other region in the world. However, retain value during economic crises. The as the government launched an anti-graft same cannot be said for specific collecting campaign against corruption in 2012, the categories such as Impressionist and market volume in mainland China was Modern art, for example, which to this almost cut in half and never regained day have been unable to recover from the its momentum. The current trade war recession. between the U.S. and China casts further uncertainty on the Chinese art market and Similar trends are showcased in the latest the art trade between the two countries. stock market selloff in 2015 and 2016. At any given time, each regional art market As the S&P 500 flat-lined, the index for can undergo changes due to sociopolitical the top 100 artists reflected the financial and regulatory influences that cannot be slow-down, also taking a hit during the easily predicted by investors, especially time period. Yet, a breakdown of total sales considering the longer investment cycle for value by price bracket suggests that high- art as compared to financial assets. end works worth US$1 million and above

Along with a lack of market transparency and unpredictable regional market regulations, low liquidity and the heterogeneity of art pieces are additional risks associated with art as an asset class. Works of art are illiquid, as they are hard to exchange for cash in comparison to bonds and stocks. Additionally, artworks’ authenticity, provenance, attributions, and the potential for forgery are risks that Between 2008 and 2011, the investors are aware of when investing in art. The quality of a work, craftsmanship, technical skill, and physical durability, can Chinese art market experienced also be a concern, as the price of a work is largely affected by such details. Due to the an exceptional growth rate of nature of the asset class, works of art are heterogeneous and one of a kind, rather than exchangeable. Ultimately, the financial 500 percent, outpacing any other rate of return is hard to calculate due to the uniqueness of each object of exchange. region in the world.

137 Art & Finance Report 2019 | Section 4 - Art & Investment

Looking at the correlation between art 500. Across the board for all collecting and other asset classes over a longer categories and led by the Fine Chinese time span, European Old Masters and Paintings and Calligraphy genre, art as Global Impressionist Art display the lowest an asset class has a stronger positive correlation with the S&P 500 as well as with correlation with the price of gold than with the price of houses and gold compared other asset classes reviewed in this study, to other collecting categories. In contrast, indicating investors’ perception towards art Global Post-War and Contemporary Art more as a value-preserving asset class than show the highest correlation with the S&P as an investment vehicle.

Figure 38. Global total sales value by price band, 2013-2018 Source: 2019 © artnet Worldwide Corporation

$20,000,000,000

$15,000,000,000

$10,000,000,000

$5,000,000,000

0-10K

10K-100K

100K-1M

1M-10M

10M+ $0 20132014 2015201620172018

138 Art & Finance Report 2019 | Section 4 - Art & Investment

Correlation based Correlation with Correlation with Case-Shiller Correlation with on artnet Indices S&P 500 between U.S. National Home Price Gold Fixing Price between 2000 and 2018 Index between 2000 and 2018 2000 and 2018

European Old Masters 29.96% 59.28% 51.14%

Global Impressionist Art 27.45% 51.85% 74.19%

Global Modern Art 54.20% 71.61% 81.94%

Global Post-War Art 74.45% 76.93% 84.30%

Global Contemporary 73.63% 80.53% 81.97%

Fine Chinese Paintings 65.84% 48.91% 92.65% and Calligraphy

Chinese 20th Century 65.84% 56.61% 92.14% & Contemporary

Source: 2019 © artnet Worldwide Corporation

Given the various risks associated with the art market, there is an added benefit that is unique to this asset class and not shared by Looking at the correlation between any other luxury item. Although capitalizing on the art market always involves a word of caution for investors, artworks can be art and other asset classes over enjoyed by owners who are passionate of a work regardless of its monetary value. a longer time span, European Old Whether a painting hangs in a living room, or a sculpture greets visitors in a public Masters and Global Impressionist space, the non-financial worth of a piece of art is unparalleled by any other asset class. Art display the lowest correlation.

139 Art & Finance Report 2019 | Section 4 - Art & Investment

Notes

Data sources for artnet and financial Data scope for artnet indices indices •• The top 100 artists for each category were selected based on their aggregate total sales •• All data used to calculate artnet indices value for paintings and works on paper sold between 2016 and 2018. is based on information reported to •• The art categories are defined as follows: the artnet Price Database Fine Art and Design as of: ––Year(s): 2019 ––Data extracted on: 26/6/2019 Art Category Index Description •• All prices are converted from their original currency to USD, based on the exchange rate on the day of the sale. All Top 100 Artists All artists were considered for this category. prices are adjusted to include the buyer's premium.

Works created by European artists born between 1250 European Old Masters •• The artnet price index employs a hedonic and 1820. regression framework explicitly based on an underlying stochastic process, allowing the volatility parameter of fine Works created by artists born between 1821 and 1874, Global Impressionist art to be treated as the object of interest. excluding Chinese artists. The model can be estimated using maximum likelihood in combination with Works created by artists born between 1875 and 1910, the Kalman filter. More about the artnet Modern Art indices methodology can be found in this excluding Chinese artists. paper.

Works created by artists born between 1911 and 1944, Post-War •• S&P 500 data is sourced from GSPC on excluding Chinese artists. Yahoo Finance (link).

Works created by artists born after 1944, excluding Contemporary •• S&P/Case-Shiller US National Home Chinese artists. Price Index data is sourced from DJI (Dow Jones Indices) from the Federal Works created by Chinese artists including classical, Reserve Bank of St. Louis (link). Fine Chinese Paintings modern, and contemporary Chinese traditional- & Calligraphy paintings. •• Gold Fixing Price data is sourced from IBA (ICE Benchmark Administration Chinese 20th Century Works created by Chinese artists including , Limited) from the Federal Reserve Bank & Contemporary sculpture, installation, photography, etc. of St. Louis (link).

artnet reports do not include appraisals, opinions, or Any images included in artnet reports are intended for on analysis of historical auction catalogs, artnet applies a legal, tax, accounting, investment, or other expert advice. identification purposes only. We do not own the right to formula to all records with hammer prices only, to estimate Users of artnet reports are advised to consult with art and these images, and do not recommend their use for appraisal the effect of a buyer's premium. All prices in artnet reports financial experts about the interpretation and usefulness of purposes. We cannot confirm that these images are of high are therefore either reported as, or equated to, the hammer information contained therein. resolution, or that they represent the exact work in question. price plus the buyer’s premium. Unless otherwise agreed upon, each product is non- While we try to ensure that the information included in artnet accepts no responsibility whatsoever for investigating transferable and is intended for the purchaser’s use only. each artnet report is correctly calculated based on reported the authenticity or condition of the artworks aggregated in Permission to use the report does not extend to any other data, we rely on the information made available to us by all the reports. We do not warrant or represent that the sales person, employer, subsidiary, or parent organizations, or to auction houses covered by the artnet Price Database. We data used in these reports is complete, accurate, up to date, any other related or affiliated organizations. Users do not cannot be held responsible for any mistakes, inaccuracies, verified, or inclusive of all available auction market data. own any information in this report. Users shall use their best or omissions in the data provided to us, or for the integrity efforts to safeguard the intellectual property, confidential of each auction house itself. Although most auction houses information, and proprietary rights of the Artnet Worldwide report transactions prices that include a buyer's premium, Corporation. some auction houses report only the hammer price. Based

140 Art & Finance Report 2019 | Section 4 - Art & Investment

The Holding Period Effect: benefits for holding art long-term

Repeat auction sale data analyzed from in market value and does not factor in Sotheby’s Mei Moses indices suggests transaction costs. Transaction costs, that works of art held off the auction which vary between works, typically market for at least ten years benefitted have a larger effect on annual returns from the “holding period effect”, in for works with shorter holding periods. which works were more likely to be This leads to an additional benefit in sold for a profit, had substantially aggregate terms for works held for ten lower compound annual return (CAR) years or more. volatility, and had much higher risk- Michael L. Klein adjusted returns. The study analyzes Sotheby’s, Head of Sotheby’s Mei Moses over 10,500 Impressionist & Modern and Contemporary works resold at auction between 2014 and 2018.

Consignors realized outsized Collectors who resold within three years gains and losses when they resold artworks within three years of purchasing were more likely to realize From 2014 to 2018, collectors holding art for at least ten years were much outsized gains than losses between less likely to lose money than those reselling within three years (the red 2014 and 2018. sections below). A total of 88 percent of Contemporary works and 80 percent of Impressionist & Modern works held for over ten years had a resale price higher Figure 39. Global Total Sales Value by Price Band, 2014-2018 Source: Sotheby’s Mei Moses indices than their purchase price, while only 65 percent of Contemporary works and 57 percent of Impressionist & Modern Contemporary Art 2014-2018 Impressionist & Modern Art 2014-2018 works resold within three years sold for 100% 100% a higher price.

However, consignors were more likely to 75% 75% realize outsized gains and losses (i.e., +/- 20 percent CARs) when reselling a work at auction within three years than when 50% 50% holding a work of art for longer time periods. This contrasts with consignors who held works for over ten years— 25% 25% none suffered outsized losses for either Contemporary or Impressionist & Modern pieces. 0% 0% ≤ 3 years >3 - ≤ 10 > 10 years ≤ 3 years >3 - ≤ 10 > 10 years years years While the median CARs were similar for works with different holding periods, Realized Compound >20% 0% - 20 % (20%) – <0% <(20%) this calculation looks at the change Annual Returns

141 Art & Finance Report 2019 | Section 4 - Art & Investment

Source: Sotheby’s Mei Moses indices Contemporary Art ≤ 3 years 3–10 years > 10 years

Number of repeat sales 681 2,423 2,453

Median CAR 7.0% 3.8% 7.5%

% resold for higher price 65% 64% 88%

Source: Sotheby’s Mei Moses indices Impressionist & Modern Art ≤ 3 years 3–10 years > 10 years

Number of repeat sales 373 1,359 3,280

Median CAR 5.4% 1.4% 3.7%

% resold for higher price 57% 59% 80%

Higher risk-adjusted returns for of 8 percent for Contemporary Art and works kept off the auction market for 4 percent for Impressionist & Modern Art works held longer Art for works held for at least ten years. The scatterplot graphs show works of art However, on a risk-adjusted basis, works for longer were resold at auction between 2014 and 2018, resold within three years incurred more with the holding period on the horizontal than three times as much risk per unit more likely to axis and the CAR on the vertical axis. of reward compared to works held for at The realized CARs for works held for least ten years for Contemporary Art, and achieve the under three years were highly volatile, over twice as much risk per unit of reward with a standard deviation of 43 percent for Impressionist & Modern Art. category average, for Contemporary Art and 51 percent for Impressionist & Modern Art. The realized Interestingly, the average returns as the volatility of CARs for works held for at least ten years and volatility of works were relatively had a standard deviation of 8 percent consistent for works held for for Contemporary Art and 5 percent for approximately 20 years or more. This realized returns Impressionist & Modern art, which were means that once a work had been off the both substantially lower. market for a substantial period, there decreased with was no additional penalty or reward for Due to the large number of outsized holding it longer. Thus, most auction longer holding winners for works held for three years consignors who held works of art for or less, the average CAR was 15 percent at least ten years benefitted from the periods. for Contemporary Art and 19 percent “holding period effect” as their art grew in for Impressionist & Modern Art; these value. figures were higher than the average CARs

142 Art & Finance Report 2019 | Section 4 - Art & Investment

Figure 40. Contemporary Art: realized compound annual returns 2014–2018 Source: Sotheby’s Mei Moses indices

100%

80%

60% s 40%

20%

- 15 30 45

(20%) Holding Period (Years) (40%) ealized Compound Annual Return R

(60%)

(80%)

(100%)

Figure 41. Impressionist & Modern Art: realized compound annual returns 2014–2018 Source: Sotheby’s Mei Moses indices

100%

80%

60% s 40%

20%

- 15 30 45

(20%) Holding Period (Years) (40%) ealized Compound Annual Return R

(60%)

(80%)

(100%)

143 Art & Finance Report 2019 | Section 4 - Art & Investment

Notes

Methodology Sotheby’s Mei Moses index uses the purchase prices of the same painting at two distinct moments in time (i.e., repeat sales) to measure the change in the value of unique works of art. Based on approximately 50,000 repeat sales from 1810 to the present, Sotheby’s Mei Moses index is the financial industry’s preferred instrument to compare the investment performance of art as an asset class, identify trends and internal dynamics on the market, and understand the market’s relationship with broader economic and societal factors.

Founders Developed in 2002 by Stern School of Business professors Jianping Mei, PhD, and Michael Moses, PhD, Sotheby’s Mei Moses index is used by wealth management firms such as JP Morgan and Morgan Stanley and has been cited in publications such as , The Journal, and The FT.

Disclaimer Please note that the prior performance of the indices and realized returns contained herein do not guarantee future results. In addition, there is no guarantee that random collections of individual works of art or stocks will yield returns in line with the index. We are not financial advisors and we are not in the business of recommending art as an investment. We also have no comparative advantage in forecasting the future direction of the art market. Investment decisions should be based on the risk tolerance and time horizon of the investor with, if desired, the support of a licensed financial advisor. This information is provided “as is” and with no representations or warranties, either express or implied, of accuracy, merchantability, fitness for a particular purpose or of any other nature are made with respect to this information or to any expressed views presented.

From the series: Comer del Arte Quiero © Lina Sinisterra (2011) 144 Art & Finance Report 2019 | Section 4 - Art & Investment

Expert voices

GROWING DEMAND AND SOPHISTICATION IN ASIA

"I agree that art and collectibles are a fast-growing alternative investment in Asia in Peter Lee general and China in particular. As an alternative asset class, art and collectibles are Leader, Family Office and Family growing in importance as a way to hedge exposure to the public markets. Allocation to Enterprise Consulting Services this asset class in Asia is accelerating rapidly but still negligible compared with the level Partner, Deloitte China seen in developed markets. A rising number of art funds are being set up in HK and SEA.”

Asian families have seen art and antique Asia that are increasingly inclined to view a person invests in art partly for the collections as an important tool for the art as an important asset class in the purposes of amassing familial wealth and preservation of wealth and familial assets asset allocation strategy creating a family legacy, combined wealth for centuries. They collect items such planning solutions can fulfil both wealth •• Art investment helps to diversify tradi- as centuries-old bridal chests, wooden protection and estate planning objectives. tional investment portfolios, which are furniture, jewelry, and paintings. Many typically composed of stocks and bonds Asian families collect art and antiques However, the market in Asia faces a with the intention of passing on the •• The track record of art investment has number of challenges, including the collection as a gift to future generations. gained recognition in Asia as the level of limited amount of public information in In the olden days, there was no way investment activities increase and there relation to art and the illiquid nature of to determine the future value of the is more empirical data showing the art. Another area that requires further collection. As more auction houses have benefits of investing in art development in Asia is the availability of entered the Asian market and secondary art investment management expertise. •• Millennials are a new class of emerging market activities have grown rapidly, This is an issue because the industry in active investors in Asia. They are typi- art and collectibles can now be priced Asia is still young compared with that cally more receptive than older gener- and traded in an open and transparent of other markets, which may be due to ations to investing in alternative assets market, hence generating liquidity. a lack of experienced art investment such as art as the majority of them professionals and the fact that most Asian have lived and studied abroad where Chinese art and antique investors and investors prefer to be more hands-on they have been exposed to foreign art collectors have fueled the growth of with their personal investments. culture the auction market domestically and abroad in the past decade as discussed •• Wealthy Chinese collectors are eager According to our research, there are elsewhere in this report. Based on to retrieve national treasures that were about 16 art investment funds operating our observations, we believe that this sold off in the past. For instance, a in China with total AUM of US$300 million increasing appetite is mainly driven by the 900-year-old Northern Song dynasty (the largest fund has AUM in excess of following factors: dish was sold at an auction for US$38 US$100 million and the smallest has million, which set a record for Chinese less than US$2 million). However, this •• Chinese investors are becoming more ceramics. data does not include international art familiar with the value proposition of art There is a growing trend for new products investment funds that invest in Chinese as an alternative asset class aimed at UHNWIs offering art investment art or private funds set up by private •• Over recent decades, more sophisticated coupled with wealth planning solutions individuals or family offices to invest in family offices have been established in such as trusts and foundations. When art.

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Part 02 Fractional ownership The new age of art investment?

The fact that collectors are expressing a Fractional ownership of art has been Fractional investment models have yet to greater focus on investment when buying tried and tested over the last 10 years convince the art market: only 19 percent of art, coupled with a decline in the global with limited success, from early European collectors and art professionals said that art investment fund market in recent initiatives such as SplitArt and A&F Markets they were interested or very interested years42, suggests that new models for art to the Chinese art exchanges43 that in fractional investment. In contrast, investment may be needed. One of the emerged between 2009 and 2011 and were 33 percent of collectors and 38 percent models that have emerged in the last 10 subsequently shut down or consolidated of art professionals said the same about years is the notion of fractional ownership. by the Chinese government towards the traditional art funds. Whilst art funds This model has gained traction in the end of 2011. Despite this patchy history, have been around for several decades, last two years on the back of rapid could we see the current generation of it seems that established collectors and developments in blockchain technology fractional art ownership platforms succeed art professionals alike have yet to be and a willingness among investors to invest where past generations have failed? Could convinced of the viability of other fractional in a wide range of assets from real estate to fractional ownership be a way of attracting investment models (some linked to intellectual property and art. new audiences to the art market, or will blockchain technology). Wealth managers history repeat itself? are equally skeptical as regards fractional investment models, with only 10 percent saying that fractional investment in art would be relevant/very relevant to their clients.

Fractional investment models have However, the Hiscox Art Online Report 2019 found that 46 percent of millennial yet to convince the art market: only art buyers (aged 35 and below) said they would consider fractional ownership of art 19 percent of collectors and art as a form of investment. An even higher share (51 percent) of younger buyers professionals said that they were (those aged under 30) said they would consider it. interested or very interested. New art buyers (defined as having been collecting art for less than three years) also showed an appetite for fractional

42 T his is based on trends observed by the research findings 43 T his art trading model was introduced to the Chinese art of the Art & Finance Reports between 2011 and 2017. This market after the Cultural Assets and Equity year, we have decided to look at art investment from a Exchange opened for business on 15 June 2009. The different perspective, as only limited public information is exchange was the country's first comprehensive artwork now available on art funds. This does not, however, mean exchange. This was followed by a number of similar that there is no art investment fund market, but rather that exchanges and, by June 2011, 20 art stock exchanges were we have experienced a decrease in transparency in this reported to be operating in China. market, as it seems that art investment funds have been moving out of the public eye.

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Figure 42. Generation Gap: In terms of investing in art, which of the following art investment products would be more of interest to you? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Social Responsible Investment 49% products in Culture (as already exists for 31% environment and education) 28%

16% Derivative products 13% (hedging products) 12%

19% Fractional investments 19% (i.e.Security tokens linked to an artwork) 10%

38% Art investment funds 33% 17%

0% 10% 20% 30% 40% 50% 60%

Wealth Managers Collectors Art Professionals

ownership of art, with 43 percent saying 25,000 people purchased a piece of the they would consider it. This suggests artwork through the platform. that there is a clear generational gap when it comes to the topic of fractional In her article entitled “Tokenizing Art investment, as only 29 percent of art & Fractional Ownership” on p.150, Dr. buyers above the age of 50 said they Shermin Voshmgir presents several would consider investing in art through tangible applications for crypto-token fractional ownership models. technology in the art market. Tokenizing art has considerable potential when The Qoqa case in Switzerland is a very it comes to resolving many of the interesting case study in terms of the inefficiencies of the current art market: interest in fractional ownership. Qoqa, (1) fractional ownership, (2) provenance, a Swiss bargain commerce site, put (3) digital rights management and Picasso’s Buste de mousquetaire up settlement, and (4) crowdfunding. for sale last December, offering 40,000 Moreover, tokens may also pave the shares in the painting at a cost of US$51 way for the creation of new derivative each. Over the course of just three days, artworks.

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MASTERWORKS Examples of Founded in 2017 by Scott Lynn, Masterworks was the first company to allow investors to buy shares of great masterpieces. Their first offering, Andy fractional art Warhol’s Marilyn painting, was qualified by the SEC in late May and they began selling ownership platforms shares in June. OTIS Launched in July 2019, Otis positions itself ARTFINTECH.ONE FERAL HORSES as “a culturally relevant, community-owned Artfintech.one is a technology company Founded in 2017, Feral Horses enables museum, powered by the people in the that grew out of Artplus Inc., which was individuals to purchase shares of works of community,” according to founder Michael founded in 2012 by David Dehaeck and art by contemporary artists. Shareholders Karnjanaprakorn. Otis’s first offering will Nathalie Haveman. The company has may own as little as 0.1 percent and are be Kehinde Wiley’s St. Jerome Hearing developed Patron Protocol, a blockchain- free to trade as they please. The platform the Trumpet of Last Judgement (2018), based technology that facilitates fractional positions itself as a part-investment, part- purchased by the platform for US$237,500 ownership of digital artwork. Recent patronage space. “We’re in the market to earlier this year. developments include WUNDER, a offer a different value proposition; we want decentralized blockchain-based digital to allow people to connect, own, and invest This will be followed by co-investment that partners with the most in art more than they are today,” said one of opportunities in Supreme skateboard promising young and emerging artists, the co-founders. decks, a Hermès Birkin bag and a Rolex commercial galleries, and seasoned 6265 Daytona watch. A KAWS tondo curators from around the world. WUNDER LOOK LATERAL painting will also be part of the initial suite announced in August 2019 that they had Look Lateral was founded in 2018 and aims of offerings; given the recent market fervor completed the first digital art-backed asset to use blockchain technology to enable around the artist, it seems likely to spark transaction using Patron Protocol. The ING anyone to invest in the global art market interest. Collection in Amsterdam purchased one by buying and selling fractions (shares) of the first fractional ownership shares, of works of art. The company recently ANOTE MUSIC representing 12.5 percent ownership in announced a security token offering (STO) Other cultural and creative sectors are also a master copy from the work by called The LOOK. They plan to launch a looking at fractional investment. Matteo the Romanian artist, Dragos Alexandrescu. fractional investment marketplace for art Cernuschi, COO & Co-Founder of ANote WUNDER is preparing for a security token (FIMART) to the public in Q1 2020. Music, a company based in Luxembourg, offering (STO) with artfintech.one later this intends to promote fractional investment year. MAECENAS in music copyrights. The company fully Founded in 2017, Maecenas enables users intends to finish the offline phase in ARTOPOLIE to purchase up to 49 percent of valuable art December and to then start with the official A new fractional ownership platform collectibles using Bitcoin (BTC), online launch in the course of 2020. More aimed at enabling everyone to invest as (ETH), or the platform’s native ART token. can be learnt about this interesting case little as US$50 in works by Maecenas used its blockchain platform to study on p.152. and similar artists. It was launched in early auction a 31.5 percent share of an Andy January 2019 and founded by Bruno Costa Warhol painting (14 Small Electric Chairs) for and Victor Costa. US$1.7 million in the autumn of 2017.

148 Example of a non- fractional art ownership platform

MALEVICH Malevich, a new art investment platform built on blockchain, was launched on 5 July 2019. As an alternative to fractional art ownership models, Malevich gives investors 100 percent ownership of an art work, although it will not be physically delivered to the investor unless requested.

The idea is that the art work remains in the possession of the consigning gallery. In collaboration with galleries and museums, Malevich aims to promote the art work and build its provenance and value. The platform uses blockchain technology to create an alternative market place with lower commissions and increased transparency. It aims to resolve issues around provenance, authenticity, and valuation, as well as ensuring compliance with the new anti-money laundering regulations.

Noospheres © Lina Sinisterra (2019) 149 Art & Finance Report 2019 | Section 4 - Art & Investment

Expert voices

TOKENIZING ART AND FRACTIONAL OWNERSHIP This is a modified chapter from the book Token Economy, Shermin Voshmgir, 2019

Cryptographic tokens represent transparent, efficient, and fair interactions programmable assets or access rights and between market participants, at low are managed by a smart contract and an costs. Tokenizing art has a lot of potential underlying distributed ledger. They may benefits in relation to resolving many of the only be accessed by the person who has inefficiencies of the current art market: (1) the private key for that address and can fractional ownership, (2) provenance, (3) only be signed using this private key. Tokens digital rights management and settlement, Dr. Shermin Voshmgir might may affect the financial world in the and (4) crowdfunding. Tokens may also Director of the Institute for same way as email affected the postal enable (5) new derivative artworks. Cryptoeconomics, Vienna, system. While the existence of tokens in University of Economics and general, and digital tokens in particular, Fractional ownership founder of blockchainhub.net is nothing new, the speed with which Low-net-worth individuals, who would Author of “Token Economy” cryptographic tokens are being deployed usually be excluded from this investment and issued is an indicator that they opportunity, could now own a fraction of may prove to be the killer application of an expensive work of art. This is particularly blockchain many people have been waiting valuable for small investors who have so for. As of April 2019, less than a decade far been unable to meaningfully invest in after the Bitcoin Whitepaper, an ecosystem fine art. Fractional ownership could lead of over 2,200 publicly traded crypto assets to increased demand for art investments, were listed on Coinmarketcap, and over potentially increasing overall art prices, and 175,000 Ethereum token contracts were to by extension, the subsequent production be found on the Ethereum main network. of new types of art. The main question Cryptographic tokens are often issued that arises is how collective ownership of a with just a few lines of code, using a simple piece of art can be managed. The artwork smart contract running on a blockchain. itself could, for example, be maintained by They define a bundle of conditional a custodian, who has been agreed upon rights assigned to the token holder. and has the resources and experience Token contracts are essentially rights to maintain a collection. The cost of this management tools that can represent maintenance would be distributed across any existing digital or physical asset or all token holders and payments managed access right to assets someone else owns. by the smart contract. An example of such Tokens can represent anything from a fractional ownership is Andy Warhol’s store of value to a set of permissions in painting, “14 Small Electric Chairs” which the physical, digital, and legal world. They was tokenized and sold on the Maecenas facilitate collaboration across markets platform in 2018. Both the sale and and jurisdictions and allow for more subsequent trading of these tokenized

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certificates could be tracked through the Crowdfunding/investing Derivative artworks use of blockchain technology. Owners Tokens can also be used to crowdfund The emergence of new derivative artworks of the tokenized and fractionalized future art projects, with investors owning could be another application of tokenized artworks could sell their certificates to the resulting work fully or partially. Anyone art. One could create convoluted smart other buyers at any time via the Maecenas who contributes to the funding of an art contracts that give access rights to marketplace. The final price for the piece project could receive a proportional share derivative artworks with the purchase of was determined by a smart contract run of the tokenized value of that project, a fraction of a painting. Alternatively, one on the Ethereum Blockchain, in a fair and accepting the terms laid out in a smart could add extra features, for example, by transparent manner. contract. The artist could define the smart integrating a digital media counterpart contract in such a way that the artist into the physical art, like integrating Provenance maintains a share of the artwork produced, augmented reality features into the token, Tokenizing art could pave the way for a while other token holders are free to such as a video documenting the process more transparent market, where a larger sell their tokens on the open market, or of producing the piece. Since tokens pool of participants have access to a alternatively cash out, should the piece be permanently connect the artwork to its more diverse range of verified artworks. collectively sold. In such a setup, an artist digital media counterpart, so that the Assigning provenance using tokens can receive funding before production, digital media becomes part of the artwork, managed via a public blockchain can while still maintaining at least partial this adds to its value. Art tokens also open resolve the challenges of conventional ownership of the art. Tokens also enable up new forms of artistic expression and systems, like corruption, counterfeiting, galleries to pre-fund purchases of artworks. value creation, like gamification, and could and hacking. The current system relies An artist could make a proposal for a piece lead to the fusion of art, virtual reality, and on trusted third parties managing a of art that should be tokenized and the gaming. fragmented patchwork of databases tokens pre-sold. where these digital certificates are stored. Tokenized systems can use hashes and cryptography to ensure documents are not tampered with by providing a publicly verifiable provenance for artworks, enabling real-time digital settlement of tokenized transactions. The underlying blockchain infrastructure can thereby eliminate the need for many intermediaries, while at the same time guaranteeing the publicly verifiable provenance of artworks. Management of asset transfers is ensured via smart contracts, at drastically lower costs.

Rights management Tokens also allow for inbuilt rights management and settlement options, which means that they offer artists better protection of intellectual property rights and more market transparency about who has used their art. Tokenization allows for more transparent and disintermediated management of intellectual property rights and subsequent real-time settlement of royalties. This would allow for mechanisms whereby artwork can be rented out to a gallery. The royalty fees can be settled directly, and sent in the form of tokens to the artist in real time, based on the number of people who view the art. Noospheres © Lina Sinisterra (2019)

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Matteo Cernuschi Chief Operating Officer - Founding Director ANote Music Expert voices media and the prevalence of online music have unquestionably weakened the foundations of the traditionally capital- intensive music business model (centered ANOTE MUSIC CUTTING EDGE around record labels); this means that there is scope for innovative business TECHNOLOGY TO INVEST IN models to set a new standard.

MUSIC COPYRIGHTS As well as actively contributing to the growth of the music industry, ANote The views expressed in this article are the personal views of the author and not those of Deloitte. is at the forefront of efforts to secure a favorable political and economic framework. It is clear that the EU regulator’s goal is to integrate the EU’s online marketplace. This was explicitly What is ANote Music? or sampled (e.g., in commercials). Music stated when the Digital Single Market policy ANote is the first stock exchange for catalogues often rise (or fall) in value based was launched by the European Commission music royalties. Based in Luxembourg, on profit forecasts, just as the financial under Jean-Claude Juncker in 2015. we empower music fans and private markets fluctuate on a daily basis. While investors to own shares in songs and music the environment is restricted at present, What collective efforts can be made to catalogues, while simultaneously facilitating we aspire to enable everyone to invest improve on the status quo? music development. Totally secure and directly in music royalties—an innovative ANote is the integrated solution to three fair, ANote represents a paradigm shift in asset class uncorrelated with traditional crucial problems adversely affecting the how music is funded and places blockchain financial instruments. music industry at present: technology center stage. 01. Artists, publishers, and record labels Please could you summarize the status receive royalties on a deferred Please could you summarize the status quo for the music industry? basis. The resulting time lag quo for music investment? The last 20 years have been tough for between performance and revenue At present, artists, record labels, and a everyone in the music industry. Margins collection means that re-investment series of industry middlemen own music and turnover have collapsed, and there opportunities are restricted for all royalties. Transactions involving these is still a significant gap between the value players in the music industry. rights are negotiated privately; there are created by content producers and their barely any entry points for private investors earnings potential. However, since 2014, 02. The music industry is capital intensive. at this time. We believe that this opaque the music business has witnessed a sea Continuous investments are necessary and often inefficient process is now ready change. After a “lost” decade of negative for an artist’s career to blossom, but to be opened up to the public, permanently growth, the business has been enjoying the traditional financial markets lack changing how music rights are funded. Our a decisive upturn, mainly driven by digital the know-how to provide funding. An value proposition stems from spotting the and streaming channels. And yet there is injection of liquidity is highly desirable strong similarity between IP music rights plenty of room to grow: revenues are still for all industry players. and stocks; namely, that they both generate far from the level reached in 1999, and the 03. Music rights are negotiated behind income (royalties vs. dividends). While penetration of streaming services is on a closed doors, mainly in private companies generate income by selling steadily ascending trajectory. Moreover, transactions between industry players, products or services, music catalogues there is a growing dislike among younger resulting in opaque and often mispriced receive royalties when their music is played generations for piracy, as well as awareness transactions. The process is ready to be (e.g., via streaming services), performed, of and concern over the value gap. Social opened up to the public.

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What can you buy through ANote Finally, music listening habits are not How can blockchain help make Music? correlated with either the traditional transactions more secure? ANote offers investments in shares of economy, or the financial markets, Any transaction in the financial markets music catalogues—collections of songs— making investing in music an appealing requires trust between the parties involved. that have been paying out royalties steadily diversification opportunity. We have been placing our trust in banks for a number of years. Investors may visit for a long time; it is much harder for young anotemusic.com at any time for further Why should people sell shares in music businesses to earn the same level of trust. details. catalogues? Blockchain technology is a way of ensuring People are often unaware of the that each party to a transaction has a Why should people buy shares in music importance of funding in developing an good reason to trust the other without catalogues? artist or a music project. From recording extensive two-way having to take Music is an alternative asset class. a song to marketing it through airtime on place beforehand. When a user sets up Investors are always on the lookout for the radio and concerts, achieving the right a transaction on ANote (e.g., a bid on returns, diversification, and certainty, funding is a key element for a successful the primary market, a secondary market which is why music could become the music catalogue. Still, many stakeholders order, or a statement of intent to import or next focus of attention. Since payments in the music industry complain that it is export fiat money), the platform asks for are received every time someone uses extremely difficult to receive funding for the password. That allows ANote to sign music from a catalogue, anywhere in the new music projects from regular financial the request, register it on the blockchain, world, the music market provides sources firms. and execute it immediately, thereby of income that are uncorrelated with the creating a chain of secure transactions. traditional economy. When compared with The reasons for selling royalty flows are both liquid and alternative asset classes, numerous. Artists may want to become What else does ANote focus on? the music business stands out in terms financially independent, whereas labels ANote’s mission is to facilitate investment of recent performance: as the growth of and publishers may need funds to invest in illiquid asset classes, since there streaming continues to outpace the decline in new projects. Other players may want to are often appealing diversification in digital downloads and physical sales, benefit from ANote’s network and visibility. opportunities in assets that are analysts from Goldman Sachs predict that Plus, some artists may want to generate disregarded by the broader financial the sector will double by 2030 from 2016 an opportunity to give something back to markets. From a technical point of view, levels. By the same token, according to their fans, who will feel even more involved the ANote platform could be expanded music industry valuation standards, royalty if they own a stake in the music rights. Or to include different assets besides music, contracts trade at multiples ranging from they may simply want to cash out. including art, photography, and rights between 6 and 17 times past earnings, thus connected with the film industry: i.e., implying potential net yields in the range of anything that generates a revenue stream 6 percent to 16 percent. or is perceived as a safe haven asset.

Figure 43. Global Recorded Music Industry Revenues 2001-2018 (US$ Billions) Source: IFPI – Global Music Report 2019

0.6 25 0.7 0.8 1.0 1.0 1.0 0.4 20 1.2 0.4 2.7 1.3 0.4 1.3 0.3 0.3 0.3 0.3 0.4 2.4 0.3 2.3 15 1.4 1.5 1.6 1.8 1.9 2.0 4.7 23.3 5.2 21.7 18.1 16.4 5.6 20.0 19.4 14.2 12.0 5.8 2.3 10 10.5 9.0 8.3 7.7 6.8 6.0 2.6 3.2 3.8 5 4.3 4.0 8.9 4.3 4.4 3.7 3.9 6.7 2.0 3.4 4.7 1.0 2.7 2.9 0.4 0.1 0.2 0.2 0.3 0.4 0.4 0.7 1.0 1.4 1.9 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total revenue 23.9 22.4 20.8 20.8 20.2 19.6 18.4 17.1 16.0 15.1 15.0 15.1 14.8 14.3 14.8 16.2 17.4 19.1 $US billions

Physical Digital (excluding streaming) Streaming Performance rights Synchronisation revenues

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INTRODUCTION The relationship between arts, culture, and sustainability

Series: El Silencio del Color © Lina Sinisterra (2016) Over recent years, the relationship between sustainability, arts, and culture has attracted growing interest. According to diverse sources, culture brings added value to societies and local communities in both monetary and non-monetary terms, for example by promoting cultural diversity44, improving the tourism and eno-gastronomic sectors45, and boosting the use of arts as a medium for urban regeneration46. Moreover, culture has the power to create decent jobs and economic Part 03 growth, reduce inequalities, and build more peaceful and inclusive societies47.

Social investment The international community has also recognized the role of culture as a driver of sustainable development. In fact, the models in art and Agenda for Sustainable Development unanimously adopted by UN Member States in September 2015, comprising 17 culture Sustainable Development Goals (SDGs) and 169 specific targets, includes several explicit references to cultural topics. In particular, SDG 11 aims to ensure that the cities of tomorrow are “inclusive, safe, resilient and sustainable” and target 11.4 focuses on protecting and safeguarding “the world’s cultural and

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natural heritage”. Moreover, the Agenda for the benefit of the community. Cultures, aims to ensure “inclusive and equitable and the tangible and intangible elements of quality education and promote lifelong culture, are undoubtedly a resource for the learning opportunities for all”, highlighting construction of the identities of people and the importance of culture for sustainable communities, and must be preserved for development. In this way, the international future generations53. community is drawing attention to the fact that the support and development of The arts and the wider cultural sector culture requires strong commitment from are, therefore, strongly connected with Monica Palumbo Roberta Ghilardi all stakeholders, including governments; sustainability. On the one hand, companies Partner Sustainability private, public, and nonprofit organizations; have an increasing tendency to include arts Sustainability Services Services and every single individual. and culture in their sustainability strategies. Deloitte Italy Deloitte Italy On the other hand, cultural institutions are Fortunately, an increasing number of showing a growing interest in sustainability companies have already chosen to set and in their impact on the environment, up initiatives to support and promote society, and local communities. Moreover, arts and culture. These initiatives can the international community and various have an impact both inside the business other actors recognize the essential role (on the company’s value creation)48 and of culture as an enabler of development. outside the business (across the social and In this context, SDG 17 represents an economic landscape)49. This is why arts opportunity to enhance the support and culture are often included in corporate and development of arts and culture: social responsibility and sustainability “Strengthen the means of implementation 44 C ommittee on Culture of UCLG, Culture in the Sustainable strategies. The private sector may thus take and revitalize the global partnership for Development Goals: a Guide for Local Action, 2018. on a key role in sustaining the cultural and sustainable development”. 45 O ECD, The Impact of Culture on Tourism, 2009. heritage sector, largely as a result of a lack Coherent and collaborative efforts 46 R izzi, P., Dioli, I., Graziano, P., Bradbee, C., “Urban of government investment in its support are required if we are to implement regeneration through arts and culture: The case of a and promotion50. Moreover, the increasing appropriate protection and valorization multicultural neighbourhood in a medium-sized Italian city”, in Journal of Urban Regeneration & Renewal, Volume number of private museums, foundations, strategies for arts and culture, 10/Number 3/Spring 2017. and corporate collections at international complemented by “multi-stakeholder 47 U NESCO, Culture for the 2030 Agenda, 2018. 51 level underlines the potential benefits partnerships that mobilize and share 48 S chiuma, G., The value of arts for business, Cambridge, created by companies or individuals with knowledge, expertise, technology and Cambridge University Press, 2011. philanthropic purposes. In fact, such financial resources”54. Effective public, 49 A rts Council England, Great Art and Culture for Everyone, organizations help to expand the audience public-private, and civil society partnerships 2nd edition, 2013. engaging with arts and culture, especially are thus a common target for preserving 50 M assi, M., Piancatelli, C., Ghilardi, R., “Preserving Memory Through Branding: Museums Brands as Vectors for in developing countries, and also support and promoting arts and culture. “Culture Advocacy, Promotion and Public Programming” in P. the local cultural landscape through grants, is who we are, where we have been, and Ngulube, Handbook of Research on Advocacy, Promotion, scholarships, education programs, and where we are going. Development cannot and Public Programming for Memory Institutions, IGI Global, 2019. exhibitions. be sustainable without it.”55 51 Z orloni, A., Musei privati. La passione per l’arte contemporanea nelle collezioni di famiglia e d’impresa, At the same time, cultural institutions, and In summary, preserving ancient, modern, Egea, Milan, 2019. especially museums, are showing a growing and contemporary art is a key task for the 52 R elevant recent initiatives include ICOM’s creation of a interest in sustainability and in their present generation. In doing so, we will be Working Group on Sustainability, aimed at helping ICOM to consider how to bring the Sustainable Development Goals impact on the environment, society, and fostering cultural heritage and enabling and the Paris Agreement into the mainstream across its local communities. In particular, various future generations to make the present range of activities, and to help its members and member initiatives52 focus on raising awareness of a part of the past to be handed down. museums to contribute constructively to upholding the Sustainable Development Goals, fostering climate change how cultural institutions can help to create In following their passions or economic adaptation, and mitigating the impact of climate change. a more sustainable world, communicate interests, investors and collectors have The theme of the Museums Association Conference & challenges such as poverty and climate an equally prominent role to play in Exhibition is “Sustainable and Ethical Museums in a Globalised World”. It will look at how the sector can help to change to audiences, and support relation to sustainability that is absolutely create a more sustainable world, how it can communicate campaigns that are working for a fairer and comparable in intrinsic future value to challenges such as poverty and climate change to more sustainable society. In this context, present returns in terms of visibility and audiences, and how museums can support campaigns that are working for a fairer and more sustainable society. cultural organizations and museums are wealth. Furthermore, impact investing 53 U NESCO, Declaration on the Responsibilities of the Present contributing to sustainable development; and philanthropy in arts and culture are Generations Towards Future Generations, 1997. in fact, many already play a central role in invaluable tools to turn the benefactor’s 54 O NU, target 17.16. this regard as they are traditionally aimed current social standing into a gift for the 55 U NESCO, Culture for Sustainable Cities, https://en.unesco. at preserving and promoting their heritage future of society and the wider world. org/node/281458.

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A paradigm shift: From shareholders’ value to stakeholders’ value

On 19 August 2019, a business roundtable important cause in 201657, with the sector’s group, comprising of 181 US companies share increasing from 9.1 percent in 2014 agreed that corporate America is to 10 percent in 2015. responsible for providing economic benefits to all, not just its investors. The main challenge facing art and cultural Large corporations have been under organizations when it comes to impact increasing scrutiny to balance shareholder investing is that although many cultural responsibility with social responsibility, projects and organizations deliver on social and the key message from this roundtable, impact, they struggle to provide financial was that corporations have obligations returns in the way that investors expect. to all its stakeholders. This sentiment is also reflected in the increasing number of The question is how much financial investors who are looking for opportunities return is required for these investments Large corporations to ensure that their money has a positive to become attractive, and could social impact on society and the world at large. impact investments compensate the have been We are seeing a global shift in investment individuals involved by offering “alternative” trends towards a greater focus on more returns, such as emotional and social under increasing than just the financial returns of a given returns instead? In this regard, there is investment. This worldwide impact potential for a close relationship with art scrutiny to balance investing trend, which accounted for more and philanthropy models, where financial than US$1 out of every US$4 in assets returns are replaced by an emotional shareholder under management in the US in 201856 component, in the spirit of art patronage. (over US$12 trillion in annual AUM), also has The article entitled “Reimagine: Supporting responsibility immense potential for investment models the arts” by Fran Sanderson from Nesta in the art and cultural sectors. In terms of (p.161) looks at how finance and loans are with social global philanthropic giving among UHNWIs, examples of new social impact investment art and culture ranked as the third-most- models applicable to the cultural sector. responsibility. Definitions

ESG SRI Impact (environmental, social, (socially responsible investing and governance) criteria investment) involves seeks to help businesses are used to measure a actively removing or or organizations complete company's environmental, choosing investments projects and develop social, and governance based on specific ethical programs that will have practices, alongside guidelines. a positive impact on more traditional financial society. 56 A ccording to a 2018 survey by the U.S. Forum for measures. Sustainable and Responsible Investment. 57 W ealthXArton Changing Philanthropy Trend shifts in ultra- wealthy giving report, third edition (2016)

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Survey findings 2019

Socially responsible investment Figure 44. Social impact vs financial investment in art: in terms of investing in art, products are ranked highly by private which of the following art investment products would be of most interest to you? banks Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 In this year’s survey, we broadened the spectrum of art investment products to Social Responsible Investment 49% include fractional investment products, products in Culture (as already exists 31% derivative products, and socially for environment and education) 28% responsible investment products, which was the highest-ranking service among 38% private banks. 28 percent of private banks Art investment funds 33% said that socially responsible investment 17% products in art and culture would be most relevant to their clients. For comparison, 0% 10% 20% 30% 40% 50% 60% 17 percent said that art investment fund products would be attractive to their clients Wealth Managers Collectors Art Professionals this year (this was down from 43 percent in 2017). This could imply that the right model for art investment products going •• More than 600,000 people have backed Private-public partnerships are forward is effectively combining social at least one successful art project, and promoting new social impact impact with sound financial investments. over 90,000 have supported two or more investment models in the cultural This trend has been growing rapidly in the •• The largest art project, by the Amplifier sector investment industry in recent years. These Foundation, raised over US$1.3 million One potentially provocative idea to tackle findings were in line with the from more than 20,000 backers across a widespread lack of finance in the culture and interest expressed by collectors and the globe to distribute art at the Women’s sector is to turn existing public collections art professionals. Socially responsible March on Washington and beyond into yield-generating assets to ensure investment products in culture would be public institutions have enough funding to •• Over 700 creators have launched multiple of most interest to art professionals: 49 fulfill their social mission. The cultural sector successful art projects. The Invisible Dog, an percent said they were interested/very faces numerous challenges: the reduction arts space in Brooklyn, has launched five, interested and a further 31 percent of art in public budgets; increasing competition while artist Jose Pulido has launched 30 collectors said the same. with other cultural institutions; competition •• Today, more than 600 pledges are made to find donors, patrons, and sponsors; the Art patronage, crowdfunding, and to art projects on Kickstarter each day, increasing development of private museum fractional ownership compared with just 17 pledges per day in infrastructure; the pressure to continue to Despite the fact that most recent Kickstarter’s first year develop customer and visitor experiences fractional art ownership models focus on •• Of the 10,000+ successful art projects, with the support of digital technologies, “democratizing” art investment (see part over 1,400 have been public art and so on. Would it be inconceivable to 2 of this section), it may be the case that Source: Kickstarter explore and leverage the economic value fractional ownership is a more suitable of collections owned by public institutions model or vehicle for democratizing art The advent of blockchain technology with a view to supporting the institutions’ patronage. and tokenization could usher in the next future strategies and development? generation of art and cultural impact Could the private sector become a valid Could fractional ownership be the funding investment models. Potentially, these could partner in a new type of public-private model of the future for public art projects be models that enable art and cultural partnership in which the private sector and museum fundraising? What can we institutions to raise finance for specific becomes a co-owner of and partner in learn from crowdfunding58 platforms projects or maybe even to acquire works national heritage projects with a strong such as Kickstarter, which has already of art for their collections, and that enable social impact investment objective? demonstrated the impact of crowdfunding investors to enjoy the benefits of fractional on funding art and cultural projects? Over investment through the emotional, social, On p.158, Adrian Ellis shares his thoughts US$70 million had been pledged to support and (maybe) financial benefits of being a on the rationale behind investment in art projects on Kickstarter by May 201759. patron. cultural infrastructure.

58 A ccording to Market Wired, in 2014, global crowdfunding for films and performing arts received funding of US$1.97 billion; music and recording arts received US$736 million in donations. 59 Source: Kickstarter - https://www.kickstarter.com/blog/10000-art-projects-funded-on-kickstarter

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Expert voices

THE LONG BOOM: INVESTMENT IN CULTURAL INFRASTRUCTURE

The views expressed in this article are the personal views of the author and not those of Deloitte.

Adrian Ellis founded AEA years, we have published the results, breaking down the level and character Consulting (aeaconsulting. of investments by type, size, and com) in 1990. With offices geographical distribution. The reports for 2016, 2017, and 2018, with a complete in London and New York, list of projects, can be found here60. Each AEA works around the year we refine our methodology and expand our analysis. These exercises world on strategic and become richer as longitudinal datasets operational planning for the are created, but even three years in, it is interesting. cultural sector and cultural planning for cities. He is also Perhaps the most striking single takeaway is the continued level of the chairman of the Global investment in arts buildings globally Adrian Ellis Cultural Districts Network despite major changes in cultural and social priorities, in geopolitical and Director (gcdn.net). AEA Consulting economic fortunes, and the general gravitation of people’s social lives from the physical to the virtual. The past three AEA Consulting has worked on the years have seen annual investment planning of cultural facilities around the hovering between US$8 billion and US$9 world for 30 years. We have always kept billion for an average of 115 completed an envious weather eye on projects with projects. Two thirds of this money has which, through some inexplicable error been invested in new institutions, and of judgement on the part of the client, the balance is split between extensions we were not actually involved. Five years and renovations. Museums dominate, ago, we replaced envy with analysis and followed by performing arts spaces, began to track more formally the level with multifunctional arts centers in third and character of investment in cultural place but growing. We do not have a infrastructure globally, seeking to log good handle on projects below US$10 the inception and completion of projects million, but a crude extrapolation of the with an estimated out-turn capital cost distribution by project size suggests that above US$10 million. For the past three a picture that included all projects above

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and below US$10 million would broadly Results have been mixed for all but double the investment total to a little the premiere league. Culture tends Perhaps the most under US$20 billion per year. to be a “winner takes all” market, in which high-profile institutions like the striking single Headlines from this year’s analysis , Sydney Opera House, include: Washington DC’s Kennedy Center or takeaway is the the —i.e. strong brands in great •• US$8.0 billion-worth of new physical locations—are in a virtuous circle of continued level assets were completed globally growing programs, buzz, acquisitions, in 2018 across 148 projects and a visitors, and donors, while the lower of investment further US$8.7 billion investment was leagues struggle to escape the opposite announced for 122 new projects downward spiral. in arts buildings •• The volume of investment in completed projects was focused in So, the long boom in arts building globally despite North America (36 percent), Asia (27 does not appear, for the most part, to percent) and Europe (21 percent) be demand-led. We therefore need to major changes in look at the supply side to understand •• The median size of completed projects what is happening. The most obvious cultural and social was 6,252 square meters driver is globalization: deregulation •• The median budget was US$34.5 and technological innovation create priorities. million. mobile capital, knowledge workers, and high-end tourists (cultural tourists stay This long boom in arts buildings is, longer, spend more, and return more in some ways, unexpected. These often). Globalization also generates things are expensive to create and also rapid urbanization. But in the process expensive to run—definitely cost centers globalization “commodifies” cities, not profit centers. They are axiomatically making them undistinguished and fixed assets andhighly specified in their indistinct, offering the same hotels, design, so there is not much by way of the same shops, the same brands, a secondary market. And the general and same ennui. If they are to attract government to support great museum trajectory of the art forms for which mobile resources, they need to thrive programming, an understanding they are designed—opera, , by becoming attractive “brand” of the market catchment area, and classical music, dance, visual art, as well destinations. How? Public safety, investment in hotels and airports. This as science and history museums—is education, and transport will only get is not to mention Bilbao’s first-mover that audiences globally are declining at you so far in these “livability” contests. advantage: Frank Gehry’s architecture worst and level at best, particularly in You also need a well-expressed took advantage of advances in material the West. Arts organizations have, in cultural identity, or at least that’s what science, CAD, and structural engineering response, scrambled to try to ensure many cities have come to believe. to be the first of a generation of that demand and supply remain in some Cultural institutions, housed in iconic strikingly expressive architecture. There sort of equilibrium as the sector’s basic architecture, are part of the formula. are now strangely torqued buildings all infrastructure grows. This has involved round the world and that is perhaps why changing gears from sales, to marketing, Much of this investment is driven by the race to be the biggest (e.g., the new to audience development, to complex variations on the Bilbao/Guggenheim Grand Museum in Cairo) has replaced (and expensive) multiyear audience theme, some organized around highly the race to be the first. Many strategies engagement strategies, all with the sophisticated strategies, built on an are less well-thought-through than ambition of sustaining visitation levels understanding of the many dimensions Bilbao’s, leading to a naïve “build and and broadening their demographic base of Bilbao’s success: architectural they will come” approach that creates so as to maintain political and public bravura, of course, but also a broader problems of visitation and programmatic support and funding. tourist strategy, funding from regional quality down the line61.

60 T he 2018 index can be found athttps://aeaconsulting.com/uploads/900009/1566502763351/AEA_-_Cultural_Infrastructure_Index_2018_-_FINAL_-_web_copy.pdf The 2017 index is at https://aeaconsulting.com/uploads/800008/1536717435612/AEA_-_Cultural_Infrastructure_Index_2017_-_web.pdf The 2016 index is at https://aeaconsulting.com/uploads/700007/1497384740281/AEA_-_Cultural_Infrastructure_Index_-_web.pdf 61 T his arts sector “build and they will come” trope never actually appears in Field of Dreams, the 1989 film to which it is attributed, or indeed in W.R. Kinsella’s book Shoeless Joe, on which it is based. The quote is “Build and he will come”—“he” being the Kevin Costner character Terence Mann’s father, or Shoeless Joe Jackson, or possibly God, depending on how you read the (let’s be honest) very strange book and film. 159 Art & Finance Report 2019 | Section 4 - Art & Investment

Whether more or less sophisticated, and ultimately more or less successful, Developers are looking for culture and cultural infrastructure have become the policy tools of strategic “experiential” alternatives to define place-making, led by the public sector and happily supported by non-profits, developments at street level, animate with promises of urban regeneration, inward investment, animation of the public areas, and drive footfall. night-time economy, and the creation of social capital. The arts—or at least arts buildings—have a seat at the policy table, from Beijing to Riyadh, and from New York to Moscow.

The private sector is a significant Historically, developers have invested street retail—chased out by the growth player in this growth too. The surge in in cultural projects for, broadly, three of online retail—means that branded private museums is relatively easily reasons. First, because they can: they retail makes less and less sense as explained. As with the last gilded age, it have the maneuverability to pursue other definitional street level usage. Developers is the outcome of wealth accumulation, goals alongside profit maximization, and are looking for “experiential” alternatives assisted in many countries by a benign culture and its housing can loom large. to define developments at street level, tax framework. Someone should This can be motivated by altruism, or love animate public areas, and drive footfall. analyze the relationship between the of art but also because culture is a well- Some of this is not well-thought-through Gini coefficient and the formation documented mechanism for converting and there is a spate of museums of ice rate of private museums. Some of money into social standing, and many cream and similar. But, phenomena these museums will fizzle out when developers need just that. Second, cities like MeowWolf, the Santa Fe-based arts their benefactors tire of the on-going with density and development pressures, collective developing visitor experiences operating costs but many will become like New York, often use zoning in Las Vegas and Denver, appear to stem significant institutions, supported incentives, relaxing FAR (floor-area ratio) directly from this dynamic. by generous legacies. Before one requirements for developers in return for dismisses them as “vanity museums”, it the developer providing space (usually We are now in a period in which populism is worth remembering that many great “core and shell”) for a cultural non-profit. as a political response to globalism is on institutions began in exactly this way, New York’s Jazz at Lincoln Center, a the rise. It will be interesting to see how including America’s Met, Frick, Morgan, 100,000 sq. ft building tucked into the this affects trends in cultural investment. and Gardner to name the most resonant, Times Warner Center, is a great example Early indications are that it is affecting never mind the royal collections that of this win-win strategy. (Declaration of the nature of cultural investment, but are at the heart of many European interest: I ran it for five years.) not the volume. But the paradox—and museums. long-term challenge—at the heart of the The third motive is that cultural cultural infrastructure boom remains: the But there are also other drivers behind infrastructure can define the character infrastructure only pays off if it works its private-sector investment in cultural of a place, and the cost of investment in strategic magic, and its strategic magic infrastructure that are perhaps less cultural infrastructure is offset by the requires not just drop-dead gorgeous predictable but of growing significance. enhancement of adjacent residential architecture, but vibrant institutions Interestingly, real estate developers or commercial property values. It generating programming—exhibitions, are increasingly significant players in is a strategic play. This third type of concerts, experiential events, etc.—that cultural investment around the world: developer-led cultural investment engages audiences and commands we need only look at Emaar's Opera appears to be growing for two reasons. attention. House in Dubai, the recently completed The larger the development, the greater Tadao Ando museum funded by Genesis the value of the impact of investment in As countries, cities, developers, and in central Beijing, and New York’s cultural branding, so the global increase philanthropists continue to invest in Shed, which has received substantial in mega developments means this kind infrastructure, they will need to devote support from Related. These represent of definitional investment in culture increasing attention to the challenge significant additions to the world’s becomes more financially attractive. of dynamic, engaging, and viable cultural capital. Second, the global softening of high- programming.

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Expert voices

REIMAGINE: SUPPORTING THE ARTS

The views expressed in this article are the personal views of the author and not those of Deloitte.

The backdrop is the sun, drifting gently Taking a break from their tireless work down through the few clouds dotting the across a range of projects from grant sky above the roof terrace. Nesta’s office programs to challenge prizes, in areas sits on the north bank of the Thames, from health to innovation policy, our Nesta and is owned by the trust that governs colleagues make up the other audience Fran Sanderson the innovation foundation, which was set members grooving, applauding, and Director up in 1998 as the National Endowment whooping as three of InHouse’s artists Arts & Culture Programmes for Science, Technology and the Arts, and perform an intimate set of their own and Investments established as an independent charity in material. It’s hard not to believe, as I cycle Nesta 2012. A mesmerized crowd listens, drinks home afterwards, that I have the best job, in hands, as Judah Armani tells us all about the best team, and the best employer in how our unsecured impact loan to InHouse the world. Records will help them use the power of music within prisons to bring people from Arts and Culture Finance by Nesta— the outside of society to the inside. Most repayable impact funding of the people listening are representing It was our annual Arts and Culture Finance other organizations that we’ve invested portfolio day, where we bring together the in through our Arts and Culture Finance organizations we’ve invested in to meet impact funds. each other and hear about work going on elsewhere in Nesta that might be of interest There’s Geoff from the National Holocaust or support to them. This year, this included Centre and Museum, who we’ve supported our work on the Royal Shakespeare to develop and scale a pioneering Company’s Audience of the Future project, technology venture that preserves the our Experimental Culture future scoping experience of interacting directly with a report, and our Amplified program, which Holocaust survivor for future generations, provides grants and support to cultural and Rachel from South East Dance—we and creative organizations using digital to funded her organization to complete a generate positive social outcomes. The aim transformative creative and performance is also to crowdsource solutions (or at least hub in one of Hove’s most deprived wards. empathy!) for common challenges and to We’re also supporting their ongoing work learn more, as a team, about how we can around dance as a rehabilitation tool, adapt and amend what we do to meet the both for elderly people at risk of falls, and needs of the community we’re trying to recovering victims of domestic abuse. serve.

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The impact fund story began in between £150,000 and £600,000 to 2015, when, with a coalition of public, arts organizations delivering positive philanthropic, and private arts funders outcomes for individuals, communities (Arts Council England, Esmée Fairbairn or society. Interest rates range from 3-8 Foundation, and Bank of America, with percent, repayment terms are determined additional support from the Calouste according to cashflow modelling, and Gulbenkian Foundation) who were all we lend for up to seven years. In the looking to do things a bit differently, we four years since 2015, we’ve made launched the Arts Impact Fund. This is nearly £10 million available to 29 diverse a £7 million blended organizations in England, representing capital fund set a wide range of local geographies, art up to lend forms, and target social outcomes. As another example, we funded Village Underground to open a new live music venue (EvolutionaryArtsHackney, or EartH) in Dalston, which not only boosts local performance capacity just as many grassroots venues are being forced to close, but has also, as a condition of our loan, formalized its relationship with the youth charity Community Music, committing to opening up their space and facilities to young people not in education, employment, or training.

Three organizations have repaid in full, well ahead of schedule; we’ve had write-offs of just £224,000, and aside from these we’ve received over 99 percent of scheduled capital and over 95 percent of scheduled interest payments. The arts organizations we support see investment in the generation of long-term, unrestricted earned income as an opportunity to reduce their reliance on shorter-term funding cycles and threatened public subsidies.

“The Kiss” - Series: Comer del Arte Quiero” © Lina Sinisterra (2011) In 2017, we commissioned research to explore our observation that there was demand for smaller loans than this. The study not only verified this observation, but also demonstrated huge demand The positive impact of arts, culture, for the range we were offering: £309 million in total over the next five years. and creativity on individuals, In 2018 we launched the Cultural Impact Development Fund after a successful communities, and society is application to Access - The Foundation for Social Investment’s Growth Fund understood and enjoyed by as program, with finance being provided by its partners The National Lottery many people as possible. Community Fund and Big Society Capital.

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We are currently fundraising with institutional investors to scale up the In an increasingly inward- pilot to a £30 million fund: the Arts & Culture Impact Fund. All of our original investors have committed to invest, and looking world, let’s decide two additional investors take our indicated interest to over £20 million, with £12 million in hard commitments. We hope to to look out together at our be able to open this up to individuals in a second phase and are looking into the possibility of these investments qualifying shared human experience, for social investment tax relief. We believe that there is a huge opportunity for patient, flexible, affordable loans through the prism of from specialist lenders to build powerful enterprises with growing asset bases imagination. in the sector, and that demand will only increase as we build awareness. Investors can of course make loans directly to arts organizations, sometimes attracting the tax relief mentioned above, and we are aware of several instances of this, usually from long-term supporters who understand the business model (often Board members). focused on, and ultimately bring about •• There are new funding and business Nesta systemic change. models underpinning the sector, These projects are typical of how Nesta allowing it to thrive and make the most thinks differently about capital. Originally Our work with the Arts Impact Fund, of continued public and philanthropic endowed with £250m from the national for example, has garnered significant funding lottery, our focus is on bringing ‘bold international attention, and we have met •• Organizations are enabled to ideas to life to change the world for with funders, policymakers, and national experiment, allowing brilliant and good’. The organization brings together agencies from over 30 countries to talk economically productive new cultural proprietary and third-party capital with about our experience and how they might experiences to emerge and proliferate a view to making positive change, and be able to replicate the fund in their own deploys it, informed by its own research, jurisdictions. Triodos Bank ran a related analysis and policy function, through a product, Cultuurfonds, between 2006 and We are passionate not only about the variety of innovation methods, including 2018, investing in secured loans in large power of arts and culture to transform but not limited to accelerator programs, organizations listed on the stock market. lives, but also about ensuring that access challenge prizes, experimentation, futures, Nesta Italia is in discussions with local to the positive benefits is as wide as impact investment, innovation mapping, partners to launch the first international possible, particularly as global trends prototyping, and social innovation labs. replica of AIF later this year. in wealth concentration threaten to bring down average quality of life. In our All of our national and international Our broader work in arts and culture vision, arts organizations are thriving work is intended to generate meaningful All of our creative-economy-focused enterprises, bringing people together positive impact, whether through depth, activity is shaped by a three-pronged in shared experiences, and providing scale, primary innovation or imaginative vision of the arts and culture sector, inspiring centerpieces for communities application of established methods in new helping it benefit from, and drive, the everywhere. We believe that measuring areas. Our current strategy focuses on five dual prevailing trends towards the the value of art using a linear financial strategic priorities: education, government experience economy and more conscious metric vastly underrepresents it—like innovation, innovation policy, health, consumerism: looking at a photo of a Barbara Hepworth. and the creative economy. We believe In an increasingly inward-looking world, •• The positive impact of arts, culture, and passionately that strategic consideration let’s decide to look out together at our creativity on individuals, communities, and structured experimentation can shared human experience, through the and society is understood and enjoyed multiply the impact of philanthropic and prism of imagination, wit, awe, beauty, and by as many people as possible impact capital, whatever field you’re challenge that only the arts can provide.

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Expert voices

SUPPORTING CULTURE An interview with Manoelle Lepoutre, Senior Vice President Civil and Society Engagement at Total and Managing Director of the Fondation Total, Manoelle Lepoutre Senior Vice President Civil and by Amandine Roggeman Society Engagement at Total and Managing Director of the The views expressed in this article are the personal views of the author and not those of Deloitte. Fondation Total © Alexandre Surre

How is the Total Group’s societal policy How does supporting culture fit into organized today? your community work? And why is a In 2017, we decided to review our company like Total investing in this philanthropic orientations to develop field? a new strategy, in accordance with the We focus on culture in its own right (our Group’s ambition to become the leading work encompasses also road safety, provider of responsible energy. Our forests, and climate, as well as educating objective was to turn the company into a young people and helping them to find their genuine driver of transformation for the place in society). This commitment reflects communities that welcome us by leveraging the Group’s history and values: present collective intelligence to provide concrete in 130 countries and with more than 150 and effective solutions to societal and nationalities, Total knows the importance environmental issues at the scale of each of dialogue between different cultures to territory. promote peaceful coexistence, intellectual openness, and development. In the context Amandine Roggeman To this end, we have created the Total of globalization and the need for mutual Project Manager Cultural Foundation international program, which understanding, it is essential to ensure that Dialogue and Heritage, oversees the community work carried out the specific characteristics of each territory Civil and Society Engagement, every day by our sites, our subsidiaries, are safeguarded and given space to shine. Total and our Corporate Foundation in France. © Philippe Schaff This work now has two main focal points: As such, Total Foundation works to developing the Group’s anchor territories preserve and transmit heritage through and supporting young people. restoration projects and exhibitions,

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supports the creation and emergence of and we are committed to cultivating it in if we are to carry out high-quality impact innovative and inclusive artistic projects, both our industrial activities and citizenship assessments. and promotes artistic education for initiatives.It should be noted that our vulnerable young people. support is not exclusively financial. With the Firstly, we consult with our partners: we launch of the Action program at the end of propose a list of results, achievements, The key point to understand here is that, 2018, which allows each Group employee and impact indicators, which we hope unlike other companies, we have not to devote up to three days a year of their they will complete, depending on their chosen to compile a collection of works; working time to community aid, Total also ability to recover the data. At the end of instead, we exclusively finance projects that provides human support to its partners. this phase, we select the most relevant use culture as a vector for the development Recently, for example, we decided to indicators by area of intervention. Secondly, of territories and young people. This contribute to efforts to repair the damage collection tools are developed to support prism allows us to forge bridges between to Notre-Dame de Paris, an iconic symbol of all of our partners in France and abroad. different worlds, such as between French national heritage, with a donation of Finally, we propose a more targeted impact contemporary art and professional €100 million; our employees also mobilized assessment protocol to our strategic integration. For example, next September, through Action by donating their time partners to help project leaders develop we will be supporting the Biennale d’art to the Fondation du Patrimoine to help their activities and promote even greater contemporain de event, which aims manage the influx of donations and process impact for beneficiaries. to produce the majority of works on the cheques from individuals. spot, with the help of the key groups The cultural sector has long been a pioneer within the region. As regards the artistic How do you measure the impact of the in this field and has tirelessly advocated the production of the event, we collaborated work that you do in the cultural sector pedagogical virtues of an artistic education, with the French Fédération Nationale (and other sectors)? which makes it possible to develop not only des Écoles de Production, which trains Good intentions are not enough, and artistic skills (creativity, expressiveness, etc.) young school dropouts to work in sectors philanthropy must not be limited to an but also cognitive (learning) and behavioral experiencing skills shortages, particularly ideology. That is why we pride ourselves skills (listening, respect for others, in the industrial sector. Students from on ensuring that the positive impact collaboration, etc.). the woodwork and metalwork streams of of our activities is always measurable, certain Lyon establishments were thus able tangible, and sustainable for communities. The OECD has identified three key to contribute to the creation of works by It is essential to evaluate the scope of our behaviors that underpin all human and international artists. Culture is what permits activities in order to objectively observe collective development: trust, solidarity, these interconnections, and that’s what we changes, adjust our programs effectively, and cooperation. The organization has want to promote at Total. and develop partnerships to constantly found that engaging in a cultural practice improve on what has been done in the over time (at least several months) was one In your view, what role should private past. With each new project, we help our of the most effective ways to achieve this funding play in the cultural sector? partners to think about the viability of their development, especially among the most The share of culture funding coming from efforts over time and how they might be vulnerable young people. These were also the private sector has increased steadily in scaled up in the future. the conclusions of a study we funded in recent years, as it has in other fields. We see 2019 to research the Paris Opera’s flagship this development as a great opportunity for In order to enhance the social contribution educational program “Dix Mois d’Ecole all players in the sector as long as we are all of the activities supported by Total, we have et d’Opéra”, of which we have been a on the same page. engaged in a collective approach based on patron since 2004: the behavior of young As a private actor, we are aware that our a social impact assessment.This approach people who learn about opera and related support sometimes makes a difference aims to include our partners as much as professions, particularly dance and music, to a project leader who would like to possible in order to reflect the diversity is greatly improved, and this is reflected embark on an experimentation phase. The of the projects we support. It is part of a by clear improvements in academic pioneering spirit is one of Total’s values, long process: a process that is essential attainment.

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Section 5

Art & Technology

El Silencio del Color © Lina Sinisterra (2016) 167 Art & Finance Report 2019 | Section 5 - Art & Technology

Highlights

ArtTech startups raised US$600 Provenance and traceability million over the last eight years 84 percent of collectors surveyed The first generation of ArtTech (up from 45 percent in 2017) and startups have received nearly 76 percent of art professionals (up US$600 million in investment, with from 54 percent in 2017) believe 50 percent of this investment going technology will improve provenance into transaction-related businesses, tracking and the traceability of 25 percent into discovery and artwork. This view was shared by social, 15 percent into logistics and wealth managers, with 79 percent collection management, and 10 agreeing. percent into data-related ArtTech startups. Establishing authenticity 80 percent of collectors surveyed NextGen ArtTech startups are (up from 29 percent in 2017) and 75 focusing more on peripheral percent of art professionals (up from business segments 31 percent in 2017), as well as 69 The next generation of startups are percent of wealth managers believe likely to focus on several key areas: technology will improve the process logistics, insurance, contracts, legal, of authenticating artwork. storage, data, standardization, education and new artist discovery. Improving valuation In this year’s survey, 64 percent Online sales growth slowing of collectors (up from 51 percent down in 2017), 73 percent of art According to the Hiscox Online Art professionals (up from 51 percent Trade Report 2019, the online art in 2017), and 58 percent of wealth market grew by 9.8 percent overall managers said that they believe in 2018 to US$4.64 billion. This was technology will improve the a slower pace of growth than the 12 artwork valuation process. With percent experienced in 2017. improvements in data availability in the art market (different data sets in Industry consolidation likely to addition to auction data), a number continue of ArtTech companies have been set 71 percent of the online platforms up in the last two years to address surveyed for the Hiscox Online this area, such CollectorIQ, ArtBnk, Art Trade Report 2019, said they Wondeur, Art World Insight, and expected more consolidation among ArtForecaster. online art platforms in the coming 12 months. Technology will lead to a more regulated market Technology will drive change in 56 percent of the collectors the art market surveyed (up from 35 percent Collectors and art professionals in 2017) and 51 percent of art believe technology could have a professionals (up from 35 percent in profound impact on a number of 2017) believe technology will drive aspects of the art market, including change and lead to a more regulated transparency and regulation. market. This sentiment was echoed by 53 percent of wealth managers.

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Collectors and Introduction art professionals For this year’s report, we have divided the art and technology section into the believe following five parts:

01. Survey findings 2019 to focus on the user experience technology This part looks at how Art & and benefits to the customer Finance stakeholders (wealth journey rather than the technology could have a managers, art professionals, and in isolation. We consider Deloitte’s collectors) view the impact of innovation lab, D.Lab—a new profound impact technology on the art and wealth prototype that combines the space now and in the future. different platforms and has an on a number of innovative user-centric approach. 02. ArtTech trends and case studies aspects of the art In this section, we look at how the 04. Snapshot from the Hiscox ArtTech landscape is changing, Online Art Trade Report 2019 and what types of business and This section presents some of the market, including technology are being funded key online art sales trends from and by whom. This section also the Hiscox Online Art Trade Report transparency and provides an overview and short 2019. case studies of some of the regulation. companies and initiatives at the 05. Digital art and its market forefront of the ArtTech paradigm This part provides an overview shift. of how digital art is increasingly becoming one of the key focal 03. Blockchain versus user points on the international experience art market scene, thanks to This section discusses blockchain rapid advancement in terms of El Silencio del Color © Lina Sinisterra (2016) technology and why it is important technology such as blockchain.

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Part 01 Survey findings 2019

El Silencio del Color © Lina Sinisterra (2016)

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Wealth management: Survey findings 2019

Transparency and technological Are big data, analytics and AI the holy advancement grail? 77 percent 77 percent of wealth managers said that a Like many other industries, the art lack of transparency in the art market was market is starting to feel the impact of big of wealth the greatest threat to its reputation and data and AI. 41 percent of private banks credibility. However, 76 percent of the believe this could also start to affect managers said wealth managers surveyed said that they the art and wealth management space. believed that technology would increase However, responses from the family transparency in the art market and help office community were more reserved, that a lack of the art and finance industry to grow. with only 13 percent saying that they What is not yet evident from the surveys thought this would have a significant transparency in is which technologies wealth managers impact on art and wealth-related see as most useful in terms of increasing services. the art market transparency. Advances in DNA technologies was the greatest Increasing trust in the art market Just over half of private banks (53 One of the key sources of concern among percent) said that they believed advances threat to its wealth managers are issues linked to in DNA related technology, which authenticity, lack of provenance, forgery, could facilitate provenance tracking reputation and and attribution difficulties (84 percent and authentication, are likely to have expressed this view in 2019). However, a major impact on the art and wealth there seems to be great hope placed in management space in the future. In credibility. the ability of technological advancement contrast, only 25 percent of family offices to start to address these issues said the same. effectively. 79 percent of the private banks surveyed said that technology Blockchain and art would be able to improve provenance The jury is still out as regards the actual and traceability problems, and a further impact of blockchain for art and wealth- 69 percent said that technology would related services. 23 percent of private also help deal with authenticity issues banks said it could have a significant more effectively. impact, whilst only 6 percent of the family offices surveyed said they thought it Education would be important for the development 68 percent wealth managers surveyed of art-related services. This could said that technology would increase reflect the fact that there is still a lack of access to information and help to educate understanding of the appropriate use the market and its participants (67 cases for art and blockchain, rather than percent private banks and 71 percent of a lack of confidence in the technology family offices held this view). 49 percent itself. However, as blockchain evolves of private banks and 50 percent of family and become more mainstream, we would offices believed that this would help expect the blockchain infrastructure broaden the collector base for art. to play an important role in promoting transparency and increasing trust in the art market.

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Collectors and art professionals survey findings 2019

Collectors and art that have emerged in the last two years, many of which are focused on building art professionals believe registries and providing mechanisms for technology could have tracking works of art and their provenance (profiles of some of these companies are a profound impact on provided on pages 180-187). Research by a number of aspects of Fuelarts shows that 80 percent of ArtTech companies that emerged after 2017 were the art market, including using blockchain as their core technology. transparency Improving authenticity 80 percent of the collectors surveyed There has been a significant shift in (up from 29 percent in 2017) and 75 perception among collectors and art percent of art professionals (up from 31 professionals about the impact of percent in 2017) believe technology will technology since our last survey in 2017. improve the process of authenticating This is particularly true in relation to works of art. Again, this demonstrates technologies that seek to facilitate the a shift in perception in relation to what dissemination of information and would science and technology could be capable help to educate the market (79 percent achieving of in terms of addressing issues of collectors and 84 percent of art around authenticity. Technologies centred professionals believed this would be an around material science and optical 84 percent of area where technology is playing and will science combined with big data and continue to play an important role, versus artificial intelligence (AI) could make the the collectors 75 percent and 76 percent respectively authentication process more scalable and in 2017). A large majority (75 percent) of cost-effective, and help the art industry surveyed and 76 collectors (up from 60 percent in 2017), reduce the amount of fakes and forgeries also believed technology would lead to that have entered the art market. percent of art more transparency, and 76 percent of art professionals said the same (up from 55 Improving valuation percent in 2017). 64 percent of the collectors surveyed (up professionals said However, there are four areas in which from 51 percent in 2017) and 73 percent collectors and art professionals believe of art professionals (up from 51 percent that they believed ArtTech businesses could have a real in 2017) believe technology will improve impact: the artwork valuation process. As more technology data is now available in the art market Provenance and traceability (different data sets in addition to auction would improve 84 percent of the collectors surveyed (up data), a number of ArtTech companies from 45 percent in 2017) and 76 percent have been set up in the last two years to provenance of art professionals (up from 54 percent in address this question, such as ArtVenture, 2017) said that they believed technology ArtBnk, CollectorIQ, Art World Insights, tracking and the would improve provenance tracking ArtForecaster, and Wondeur (see article and the traceability of artwork. This is a p.184). One issue related to artificial traceability of significant jump and a response to the high intelligence and its application to valuation number of blockchain-based companies is associated with trust in the data used to artwork.

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Figure 45. How important do you believe online art businesses and new technology will be in the following? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

68% Information and educating 79% 84%

49% Broadening the investor/collector 60% base for art 58%

76% Creating more transparency 75% 76%

51% Creating more market liquidity 47% 48%

52% Reduce transaction cost 48% 49%

58% Improving valuation 64% 73%

35% Increasing demand for art investments 43% 48%

79% Improving provenance and traceability 84% 76%

53% Leading to a more regulated market 56% 51%

69% Improving authenticity 80% 75%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Wealth Managers - 2019 Collectors - 2019 Art Professionals - 2019

feed the models. This year’s survey showed Technology will lead to a more market, and expected to help improve that only 27 percent of the private banks regulated market methods and processes for establishing surveyed said they had a high level of trust 56 percent of the collectors surveyed (up authenticity, provenance, and valuation, in art market data; 30 percent of collectors from 35 percent in 2017) and 51 percent it is likely that many of the current threats and 31 percent of art professionals said the of art professionals (up from 35 percent in to the reputation of the art market can be same. This suggest we need to increase the 2017) believe technology will drive change addressed. trust around the art market data that exists and lead to a more regulated market. (this is discussed further in the section With technological progress predicted entitled “Priorities”). to create more transparency in the art

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Figure 46. Collectors: how important do you believe online art businesses and new technology will be in the following? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

79% Information and educating 75%

60% Broadening the investor/collector base for art 73%

75% Creating more transparency 70%

47% Creating more market liquidity 60%

48% Reduce transaction cost 53%

64% Improving valuation 51%

43% Increasing demand for art investments 48%

84% Improving provenance and traceability 45%

56% Leading to a more regulated market 35%

80% Improving authenticity 29%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Collectors - 2019 Collectors - 2017

Todos los destinos © Lina Sinisterra (2015)

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Figure 47. Art professionals: how important do you believe online art businesses and new technology will be in the following? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

84% Information and educating 76%

58% Broadening the investor/collector base for art 70%

76% Creating more transparency 55%

48% Creating more market liquidity 54%

49% Reduce transaction cost 54%

73% Improving valuation 51%

48% Increasing demand for art investments 52%

76% Improving provenance and traceability 54%

51% Leading to a more regulated market 35%

75% Improving authenticity 31%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Art Professionals - 2019 Art Professionals - 2017

Figure 48. Which of the following technologies do you think could have the most impact on the development of art and wealth management services? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

34% Virtual Reality / Augmented Reality 23% 18%

42% DNA technology for artwork 53% 45%

Big data, Analytics 54% 41% and Artificial Intelligence 34%

36% Blockchain technology 23% 18%

0% 10% 20% 30% 40% 50% 60%

Art Professionals Collectors Wealth Managers

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Part 02 ArtTech trends and case studies

El Silencio del Color © Lina Sinisterra (2016)

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The future of the art world ecosystem: a study of technology, education and growth

The views expressed in this article are the personal views of the author and not those of Deloitte.

Transactions 50%

ArtTech L ogistics & Collection startups Management funding by %, 15% 2000-2018 Denis Belkevich Roxanna Zarnegar Data Source: Fuelarts Co-founder Co-founder of Fuelarts 10% of Fuelarts Director of Operations, D iscovery & Social Training and Development 25% ARCIS Art Storage

How have technology startups performed in the art world ecosystem? In the last eight years, the first generation of ArtTech startups have received nearly Transactions US$600 million in investments. As a $438,900,000 result, ArtTech Gen I has successfully L ogistics & Collection pushed through the barriers to entry ArtTech Management blocking access to the 200-year-old fine art startups funding by numbers, $15,200,000 ecosystem. We now find ourselves entering 2000-2018 the next phase of art and technology. Gen I Data Source: Fuelarts focused on the segments of the ecosystem $107,000,000 that “directly sell art (transactions)”. D iscovery & Social $25,800,000 What is your prediction for Gen II ArtTech startups? New ArtTech (beyond 2018) startups are out a niche for themselves in relation to art business segments. “Peripheral Business Segments” Transactions consist of several key areas: logistics, 64% insurance, contracts, legal, storage, data, L ogistics & Collection standardization, education, and new artist ArtTech startups Management discovery. emerged 12% after 2017

What is the greatest challenge facing Data Source: Fuelarts 12% Gen II ArtTech startups? We have seen a 72 percent increase in D iscovery & Social ArtTech startup investment since 2013 and 12% over 30 ArtTech startups have emerged since 2017. The 2018-2020 period will

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The art world ecosystem map Discovery

be characterized by increased momentum; however, existing startups still operate in an isolated manner with very little Transactions Logistics collaboration between them. This is because the tech community is young and fragmented. In order to keep innovation consistent and robust, ArtTech startups need community-based access to use cases and training, as well as education on customer segments, collectors, investors, end users, and mentors. There Data are a number of technology startups that overlap, offer similar products, or replicate existing brick and mortar processes without innovating or solving problems.

What types of technology have been the primary focus of ArtTech players? Primarily, we see a focus on blockchain technology. This reflects a genuine need to capture and share the same data. Data standardization and democratization should be seen as prerequisites for ArtTech Without blockchain transactions. startups 20% emerged Using blockchain after 2017 What types of investors do ArtTech technology startups attract and how much has Source: Fuelarts 80% been invested? We have identified four groups of investors that have invested in ArtTech startups so far: institutional investors, tech companies, art collectors/dealers, and finally crowd- investing campaigns such as ICOs. The level of each group’s involvement may be seen in our infographics.

What difficulties are ArtTech startups and investors addressing at present? Unfortunately, most ArtTech startups Institutional Investors are supply-focused rather than demand- 38% focused. In other words, they create Tech Companies solutions that are not needed by the Investors of ArtTech startups, 24% art market. The second main problem by category is that ArtTech startups lack access to Art Collectors the collectors-as-investors community, Source: Fuelarts 33% which would offer an alternative source of C rowd-Investing (ICO) funding. Meanwhile, investors are reluctant 5% to trust startups until they see evidence of growth.

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ArtTech startups ArtTech startups funding by funding by number number of of investors investors (%) (numbers)

Source: Fuelarts Source: Fuelarts

1 Investor 11-20 Investors 1 Investor 11-20 Investors 10% 20% $10,000,000 $192,700,000 2-5 Investors 21-50 Investors 2-5 Investors 21-50 Investors 30% 10% $23,330,000 $104,800,000 6-10 Investors M ultiply Investors (ICO) 6-10 Investors M ultiply Investors (ICO) 25% 5% $35,200,000 $17,500,000

What is an accelerator and why How does Fuelarts enhance the art •• Economic viability should the art market care about market? •• Working tools and services that exceed acceleration? It is the first dedicated ArtTech growth existing standards Accelerators are fixed-term, selective, accelerator designed to support ArtTech •• Problem-solving through creativity group-based programs that cover founders through an intensive mentorship viability, product testing, mentorship, and program and a pitch night event in front of •• Innovation structure educational content. Particular programs a curated group of investors. •• Solutions-driven value propositions may offer a pitch night to boost support via It operates as a neutral umbrella financial investments and offerings. encompassing investors, ArtTech founders, According to recent statistics, 90 percent and a mentorship community. We strive to What is the business model of Fuelarts of all startups fail. Successful startups have give investors confidence that they have and what value does it add to the art well-defined customer segments within a invested in useful products and services world ecosystem? specific industry, are constantly pivoting to with integrity that will have a positive Fuelarts’ business model fosters growth solutions-based Minimal Viable Products impact on the entire art world ecosystem. and relationships between two main (MVP), and take advantage of mentors and customer segments: investors and industry-specific communities. Who can join? ArtTech founders. The standard for In Q4 2019, Fuelarts will be accepting most accelerators is an equity stake and Accelerator communities generally applications from ArtTech founders with admission fees payable to the program. enhance a startup’s chances of survival prototypes of tech-based products and by 25 percent through education, services within its four art world innovation For Fuelarts, these amounts vary based networking, and prototype testing. The pillars: discovery, logistics, data and on our assessment of the extent to two most successful tech accelerators collection management, and transactions. which the founders’ project is innovative are Y Combinator and Tech Stars. They Based in , Fuelarts’ founders and likely to have a positive impact on have accumulated nearly US$200 billion possess combined experience of 25+ years the art market. The bespoke Fuelarts in valuation and have supported 8,000 in art education, art markets, technology, program harnesses entrepreneurship in startups. The number of ArtTech startups and events. Our program runs twice per a competitive environment. Successful represented in these figures is less than 1 year and is re-designed each season to fit applicants become long-term members of percent. An industry-focused accelerator the needs of each qualified applicant. our community, which provides resources, community could increase business model feedback, knowledge through industry sustainability and boost positive growth by How will Fuelarts measure success? figures, temporary working spaces, 7x62. Success will be measured in terms of trust networking, and an opportunity to present in our due diligence process. We define products at events with investor-centric 62 2 3 percent (survival rate of accelerated startups)/ trust as: audiences. 3 percent (startups before acceleration) = 7x

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PROFILES OF ARTTECH STARTUPS: Authentication, art registry and provenance tracking

Founded in: 2017 Niko Kipouros and raised US$27 million Case Study 1 Management: The Rolf Maier were to support the growth company is headed the first to invest in of 4ARTechnologies by founder and 4ARTechnologies. and enable the CEO Niko Kipouros. Crowdfunding efforts company to launch its 4ARTechnologies Investors: Founders in 2018 and 2019 first services.

4ARTechnologies sets a new standard for What are the biggest challenges Where do you see your business in the global art world. Combining patented facing your business today? five years’ time? and cutting-edge technologies, 4ART Despite many technical innovations, Our vision is to equip every work of art sold serves all art market stakeholders. Its especially in the areas of digitization and around the world with a digital fingerprint Augmented-Authentication-Technology data management, the art world is one and passport. By doing so, 4ARTechnologies allows users to create a unique digital of the few industries that has so far been can not only reduce the obscene amount of fingerprint of virtually any artwork using unaffected by the rapid developments we forgeries and questionable pieces circulating their smartphone and to secure the see all around us. This is not a result of in the market, but also enable every piece fingerprint and provenance for future chance; instead, it indicates a persistent to benefit from modern tracking and generations via blockchain technology. reluctance to address the challenges all tracing solutions, more secure handling and participants in the art world face on a daily shipping, less costly insurance, and easier The foundation for future use cases, basis. transfers around the globe. We envision a blockchain permanently links the digital time when the art buyer can be absolutely information to the physical object and A few key players hold a large amount of certain about the authenticity and history allows for digital condition reports to be power, both in financial and structural of a work of art. When every artist can easily created, certificates to be transferred, terms, while many others are struggling secure their copyright, monitor their pieces, and many other vital art trade procedures to work in the field that is their passion. and benefit from the increasing value of to take place. 4ARTechnologies brings In today’s borderless global market, their art over their lifetimes. When every the digital revolution to the arts, making the established way of doing things has collector, large or small, can manage their everybody’s work easier, faster, more become obsolete—it is no longer able collection and its condition with a few clicks, secure, and more cost-efficient. to meet the demands of our time. With and share it with the world just as easily. a product as innovative and a team as When every gallerist can securely deal with Milestones forward-thinking as ours, 4ARTechnologies buyers they have never met, offering better •• The first major milestone was the launch is bound to encounter pockets of services at a lower cost. of MVP in August 2018 resistance. But we are ready to lead When insuring a work, no matter the value, the way and finally break through these is easy and inexpensive, for both the owner •• The next milestone was the launch and barriers. and the insurer. The art world has always testing of the beta version in October Everyone is welcome to join us in bringing been based on trust; we want to underpin 2019 about a genuine art market revolution. that trust with certainty and security while •• The public product launch and most Many partners of ours have already reducing the costs for all participants. There important milestone will take place in recognized the changes on the horizon, is so much to come that we cannot divulge the first quarter 2020 and we are always looking for more to do just yet, but we are very excited for the the same. future that 4ARTechnologies is helping to build.

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Founded in: August 2016 Investors: Hugues and majority of whom are avid Case Study 2 Management: Philippe Marie Taittinger, and collectors themselves, like Gellman (Co-founder and Olivier Marian were the the Marian family (founders CEO), Marek Żabicki (Co- co-founding investors. Since of Orpéa group in France). founder and CTO), and 2016, Arteïa has raised more Arteïa SA Olivier Marian (Co-founder than €3 million in total from and CSO) 21 private investors, the

experienced art market player and Arteïa brings together a diverse team There is no silver bullet: input is required will help us win the trust of artists of art-loving collectors, IT professionals from key actors across the art ecosystem and art foundations. We are currently (management and development team and solutions must be firmly anchored in digitizing the Catalogue Raisonné of of 22 people in Krakow, Poland), and the realities of the business. Adel Abdessemd, which will be the first technology enthusiasts, whose singular on the Raisonline platform, by the end mission is to revolutionize the art Where do you see your business in of this year. market. We believe that every art lover five years’ time? should have the freedom to focus on •• We also made a partnership with In five years, technology companies will their art and their personal relationship Eeckman, the biggest art insurer in have become significant players in the with it. As a result, the process of buying, Belgium, who will use our technology art market. Technologies like blockchain managing, and sharing artworks should to digitize its relationship with his and AI embedded in so-called “edge be seamless, secure, and as private customers. devices” will be operational and no as possible. We aim to achieve this longer be novelties because they will by employing modern tools such as What are the biggest challenges have become almost seamlessly woven distributed ledgers, cryptography, and facing your business today? into the fabric of our daily lives. machine learning. Our first product is The art market suffers from three main Arteïa Collect: a SaaS platform that art problems: a lack of transparency, a The result for large sectors of the collectors, artists, and art professionals highly insufficient level of liquidity, and art market will be an increase in can use when cataloguing and managing difficulties tracking provenance. In other transparency, efficiency, and liquidity their artwork (available since October words, data is centralized and hard to as regards art-based assets. This will be 2018). obtain, and reselling works of art is a beneficial for artists, art collectors, and difficult process further complicated all other actors within the ecosystem Milestones by the scarcity of information about who are prepared for this new reality. •• We launched Arteïa Collect in October authenticity, history, and condition. At this stage, Arteïa, with the products it 2018. You can subscribe online at has already developed and launched, or www.arteia.com and also test our This, in particular, increases the barriers is in the process of developing, will have smartphone app. for new participants entering the market established a firm position in the art •• We are now on a mission to build and in turn diminishes the overall market as a supplier of smart solutions an open art provenance protocol, potential of the market. Having built for cataloguing, buying, selling, and anchored on blockchain, creating a a diverse team of professionals with investing in art. The companies that standard for the industry. For this expert knowledge of art, IT security, succeed in this new environment will be project to be successful, a coalition data science, and blockchain technology, those that have the ability to access and of diverse art market players needs we firmly believe that we can tackle the leverage the vast amounts of data thus to be formed. One of the strategic challenge of information asymmetry in generated for the benefit of their clients. alliances we have already secured the market. We are also currently hard is Raisonline, with Cahiers d’Art, at work at Arteïa solving the problem of We deeply believe that combining the renowned French publisher of reliably linking physical assets (artworks) our network and our knowledge of catalogues raisonnés, including those to their digital representation within the art market with our mastering of of Pablo Picasso and Ellsworth Kelly. the distributed ledger. In our view, technology, we will be one of the major This is a major milestone, as it allows this complex task calls for a holistic actors of these changes. us to tap into the resources of an approach.

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Artory exists to protect those who buy, art changes hands, and this information is Case Study 3 own, and sell art and collectibles and typically lost again after the sale. Through to increase the financial and personal our Registry, that information will stay with value they derive from these activities. the object on a public site so that many Artory The company’s core product, the Artory more people can see the opinion that Registry, is a registry comprising millions of was formed, who it was formed by, and records, in which verified information about what information they based this opinion artworks, collectibles, and their history are on. The owners of the work of art remain Founded in: secured using blockchain technology. This completely unknown to Artory and to the 2016 gives buyers and collectors confidence and public, which ensures absolute privacy peace of mind because they can be sure Management: throughout the process. In addition to this, that they are making decisions based on Nanne Dekking (Founder & we are exploring how our unparalleled the most accurate, up-to-date information CEO), Lindsay Moroney (COO), database can provide collectors with available. and Paul Stabe (CPO & MD, customized analyses and content targeted

Berlin) to their interests. Milestones Investors: •• November 2018: The Artory Registry was An exciting feature of the Registry is the Hasso Plattner Capital, 2020 launched in collaboration with Christie’s encrypted messaging system that will Ventures, and Private Capital to register each piece of art sold as part enable millions of collectors who have of the US$300 million Barney A. Ebsworth kept detailed records to communicate Collection. This collection, which is with trusted players in the art market as considered one of the most important well as ancillary services providers such as collections of US artwork, has broken shipping, storage, insurance, and valuation several auction records. It includes companies. By working with the leaders in Lots of valuable Edward Hopper’s Chop Suey, which sold the art industry and offering them services for over US$90 million. information is they want, we can overcome the challenges •• March 2019: Acquisition of Auction Club to blockchain adoption. gathered before a (a comprehensive database of fine art auction records), which will serve as a Where do you see your business in five work of art changes baseline for the validated data on the years’ time? registry from our partners. Our main priority in the near term will be to increase the number of validated hands, and this •• April 2019: Secured US$7.3 million in the records in the Registry. We are doing this Series A funding round, with investors information is including Hasso Plattner Capital and by empowering collectors to confidentially California-based VC firm 2020 Ventures, register their artworks for digital signature typically lost again which holds stakes in companies such as by vetted institutions through our website Spotify, Postmates, and The RealReal. and by onboarding more auction houses after the sale. and dealers, as well as working with art What are the biggest challenges facing data providers. your business today? Blockchain is presented by most blockchain In the longer term, it is our expectation art companies as a disrupter—an that an increasing number of buyers will alternative to a broken system. Plus, ask for their purchases to be registered blockchain is often perceived as being the on the Artory Registry, making it a matter same as cryptocurrency. of standard practice. By offering peace of In reality, the art industry is not broken; mind, especially to new buyers who are at least, not at the level at which serious more risk averse, we are optimistic that market players operate. Instead, it is new collectors will be embraced. This will heavily reliant on thorough due diligence mean that Artory has been successful, but processes and research. Lots of valuable it will also be hugely beneficial for the art information is gathered before a work of market more broadly.

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Verisart provides an optimized blockchain Case Study 4 certification and verification platform for As with any tech artworks and collectibles. The platform is aimed at artists, collectors, galleries, startup, access to auction houses, and ecommerce Verisart businesses and is designed to foster the best engineers trust and liquidity in the art market. By creating digital certificates using remains one of the Founded in: blockchain technology, Verisart offers 2015 immutable identities to physical works biggest challenges and helps to reduce fraudulent activity Management: and unauthorized reproductions. Verisart to scaling the Robert Norton, CEO combines certification, provenance and Investors: registry services on one easy-to-use platform. Sinai Ventures, platform based around the Bitcoin Galaxy Digital, blockchain. We also offer museum-grade and Rhodium classification, Bitcoin timestamps, and image verification and provide users with a customizable certificate that can be easily integrate their data, trust the records, and updated and transferred. tie these records more closely to physical objects. We are evaluating the different Milestones technologies available to help us do this In 2015, we started with a free mobile iOS and the choices we make will define us. So, app for artists. For the first year we were in a nutshell, our biggest challenges are to mobile only and then, towards the end of hire well, to listen to our customers, and to 2016, we released a web app. In 2017, we introduce new technology that truly fits the started to open up the web app to partners purpose of our product and platform. to use via an API. We have worked with eBay, Paddle 8, Avant Arte, Vast Photos, Where do you see your business in five and DACS and have product integrations in years’ time? the works with Art Systems. We are also the Five years ago I heard the word blockchain first blockchain app to launch on . for the first time and wondered how this Since 2015 we have also completed three could be applied to the art market. I spent funding rounds with angel investors and the first two years after this evangelizing institutional investors. about distributed ledger technologies as much as Verisart. I feel the conversation What are the biggest challenges facing has now evolved and it’s very clear that your business today? the current ways of recording provenance As with any tech startup, access to are unsuited to our digital age. We are the best engineers remains one of the on a trajectory that started with building biggest challenges to scaling the platform. an evidentiary infrastructure for digital Disruptive companies need to build an certification and will take us towards engineering culture and ensure they can artist rights management and value- on-board new developers quickly in order based participation to mark both cultural to iterate the product in line with the participation and fractional ownership. changing feedback of users. There is no We want to win trust and set the standard silver bullet for market fit and adoption—it when it comes to registering claims of just takes time. We have to listen to our creation and ownership for cherished and customers and ensure we provide a service valued objects across many categories. they truly value. As we prepare to launch We will use the best of blockchain, AI, and consumer and business subscription computer vision to provide powerful new plans, we have to make it easy for users to tools to register, discover, and trade art.

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two years developing an engine that plagues it, whether they are based on Case Study 5 could automatically collect and verify gender, cultural background, content, data from 50,000 sources globally. We ideas, or medium. This is currently one constantly research, reconstruct and of the key aspects of our research, since verify the careers of 250,000 artists born bias analysis generates tremendous Wondeur after 1900. Our engine also scans and opportunities for arbitrage and impact tracks hundreds of museum collections, investing for collectors. We’re also Founded in: as well as six more layers of data (from hopeful that it will power the necessary 2018 contextual information to historical adjustments within private and public Management: information) sourced from large private collections. Olivier Berger and Sophie Perceval, collections. Today, we have the largest Co-founders of Wondeur art data repository for artists born after What are the applications of your 1900. technology? Main investors: Based on a data-driven analysis of - Globalive What did you discover during the an artist’s career, Wondeur is able to - N49P Ventures process? provide benchmark values for their - Two Small Fish Ventures As Cathy O’Neil points out in Weapons works. Museums and curators use - Kima Ventures of Math Destruction, scientists have a this data to understand bias in the art - BoxOne Ventures responsibility to choose which data to pay world, research overlooked artists, - Relay Ventures attention to—and which to leave out. At and strategize acquisitions. Certified - Dennis Smith Wondeur, we made a conscious decision appraisers use Wondeur to access - William Tunstall-Pedoe to ignore auction data. Instead, we historical information and understand Website: embraced the art historian’s perspective the growth profiles of a vast quantity of www.wondeur.ai on the art world, which is more focused artists that don’t have auction records. on cultural validation than sales numbers. Insurers use the technology to filter Wondeur is an AI platform that can through auto-renewals and automatically analyze and compare the careers of all Whereas the best art historians are able identify which artists have most likely contemporary artists based on non- to develop in-depth knowledge on a few changed in value since their last valuation transactional metrics. This approach hundred artists, our models can analyze update. Risk teams in the art lending allows our technology to cover 90 percent several hundreds of thousands of artists business use our data as an alternative of all Post-War and Contemporary artists, and several thousands of galleries and assessment method that allows them to most of whom do not have auction art organizations at any given time. The accept artworks by a wide diversity of market records. Wondeur is currently massive scale of the data we were able to artists as collateral, beyond the handful used by insurers, appraisers, museum gather had a huge impact on the type of of marquee names that show repeat sales professionals, and financial institutions models we built. We developed a series of at auction. Wealth management firms use as an alternative assessment method for AI models that help us understand the art our platform to initiate conversations, Post-War and Contemporary art. world at a global scale, by measuring the foster deeper relationships with their Our Toronto-based team includes 17 relative importance and impact of 27,000 clients, and help their clients to manage art historians, developers, and PhDs in museums and galleries worldwide. The the growth potential of their art assets. artificial intelligence and biology from result is a mapping of the art ecosystem the University of Toronto and the MIT that sheds light on artists’ trajectories, What are your challenges and & MIT Media Lab, working under the growth, evolution of value, institutional limitations today? supervision of Richard Zemel, co-founder influence, systemic bias, and global While we can forecast how an artist’s of world-renowned Vector Institute trends in the art world. career is likely to progress, it’s hard alongside the “godfather” of deep to predict what the impact of our learning, Geoffrey Hinton. What we found in the process is that technology will be on the market. Helping the art world functions like a living more people understand how the value How did it start? organism, in which every institution, of art is defined, how prices are formed We started Wondeur in the summer gallery or , no matter how big and how artists’ careers develop is of 2017, with the objective of analyzing or small, heavily depends on other the way in which AI can power the art the historical drivers of art value. Our institutions to complete their tasks. This market. Our belief is that more access to belief was that price transparency alone highly structured ecosystem is acting as knowledge will break down barriers and would not make the art market efficient a complex filtering system that defines bring about a positive change in the art and achieve faster growth. We started the value of art. It also comes as no world. Interestingly, museums, collectors, by compiling data manually and spent surprise that a wide range of biases gallerists, and artists seem to agree.

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Nurturing ecosystems vs market makers

Comparative impact of local ecosystems on artists’ career development:

Although the United States' domination European countries perform better of the global art market is exemplified when it comes to nurturing the careers by the country’s ability to produce of artists at the mid-career stage, high-growth63 star artists (1.80 percent allowing them to achieve high growth of all artists active in the US market for 3.26 percent of all artists active in vs 1.06 percent in France and the UK), Austria for example, vs 2.32 percent in local ecosystems in the UK and several the US.

Figure 49. Nurturing ecosystems vs market makers Source: Wondeur

Austria

France

United Kingdom

Belgium

Netherlands

Germany

United States

0% 0,50% 1,00% 1,50% 2,00% 2,50% 3,00% 3,50%

% of High Growth Star Artists % of High Growth Mid-career Artists

63 Wondeur’s Artist growth measurement reflects the momentum in an artist’s career, which is indicative of changes in market value.

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Expert voices

creative work (or its digital version), data related to the work, and the rightsholder. More broadly, it will create a verified registry of creative works that anyone, UNLOCKING BLOCKCHAIN’S including digital services, can audit.

POTENTIAL FOR CREATORS While there has been extensive discussion surrounding blockchain’s application AND RIGHTSHOLDERS in the financial sector, its potential for creative industries is now emerging.

In time, the Attribution Ledger, along with the P2P eBook sales and visual arts digital passport platforms, will provide benefits across the creative ecosystem. For example: Artists will have the necessary tools to verify their work and manage copyright; they will be able to build new ways to assert their rights, share and monetize their work.

Canada has emerged as a blockchain hub, recognized as such around the world. Michael Rose Vikas Singla There is an increase in organizations, Partner, Blockchain Senior Manager, Blockchain such as Prescient, implementing Deloitte Canada Deloitte Canada blockchain in new and compelling ways and is an example of Canada’s position as an innovation leader in emerging Access Copyright and With expertise spanning ideation to technologies. commercialization, Deloitte Canada’s Prescient Innovations Blockchain team works with Prescient, a For more than 30 years, Access Copyright are on a mission to build creator-focused innovation lab, to assist in has been a strong voice for creators its development of its Attribution Ledger and publishers, building relationships a global digital footprint and other digital services: a tool to track with more than 12,000 creators and 650 for ownership in creative and trace art provenance and ownership publishers in Canada, as well as rights as well as a peer-to-peer (P2P) eBook sales management organizations internationally. works by bringing platform. Prescient Innovations, as a wholly-owned blockchain-powered subsidiary of Access Copyright, shares The Attribution Ledger is a blockchain- the same DNA and is one of the few tools to creators and powered public, transparent, and open organizations globally dedicated to publishers. ledger that will establish a reliable and exploring creator-centred blockchain authoritative connection between a applications.

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The deep rights management experience shared by both companies, provides a unique perspective on the developing blockchain economy. By developing products to specifically serve creators and publishers, they are leveraging this new technology’s power to benefit Access Copyright members and the international creative economy.

The first version of the Attribution Ledger, the P2P eBook sales and art provenance platforms will be available to select creators in late 2019.

There is an increase in organizations, such as Prescient, implementing blockchain in new and compelling ways and is an example of Canada’s position as an innovation leader in emerging technologies.

El Silencio del Color © Lina Sinisterra (2016) 187 Art & Finance Report 2019 | Section 5 - Art & Technology

Expert voices

ART & TECH ASSOCIATION

Motivation jewelry, fashion), media, blockchain, cars, and We were inspired by our previous real estate. Art also plays an important role interactions with other companies at in branding, advertising, investment, and a number of art shows, including the architecture. blockchain “Perfect and Priceless”, which took place at the Kate Vass Please could you provide further details Galerie in November 2018. At this event, of what you are looking to achieve and Kate Vasilieva we hosted a number of education panels how? Co-founder/president and talks and brought different participants The Art & Tech Association Switzerland is F.A.R.E. Consulting GmbH, Kate together around one table. This experience a non-profit organization founded by two Vass Galerie GmbH (founder, showed us that the art and technology companies in 2019. Our work entails hosting creative director) worlds are closely connected through new regular conferences, promoting art and forms of artistic expression and convinced technology exhibitions and international us of the value of bringing in additional art fairs, and hosting panel discussions As owner and creative director of Kate market players from other industries who are and lectures on topics ranging from art, Vass Galerie, Ms. Vasilieva has excellent contacts with museums, private collectors, interested in learning more about blockchain, blockchain and AI to legal aspects. We and artists’ estates all over the world AI, the opportunities they open up and predominantly have corporate members and has organized many art exhibitions how to implement them. The Art & Tech although we also have some private (photography, contemporary, generative, Association was founded to create a space in members from various industries around the and blockchain art). She has been an which these two worlds could come together. globe. The mission is to forge links between advisor and provided collection concepts for many Swiss and international companies, as members and find new synergies, build well as international private collectors. How do you define art and technology future initiatives, and unite sectors including As a freelance exhibition curator and companies? finance, legal, IT, art, and many others to experienced specialist in the art market, Kate At the Art & Tech Association, we explore the create the eco-system in which new projects Vasilieva, the owner of Kate Vass Galerie, possibilities offered by the fusion of art and can prosper. has experience advising private collectors technology in various fields: and companies since 2013. She is a certified Curator (Sotheby’s Institute of Art) and has •• Art creation: new technologies, software, How can a person or company become a a master’s degree in Arts Studies from the AI, blockchain member of the association? University of Zurich, as well as Business We have both corporate and individual •• Art collection: conservation, display, Management at the European Business members to whom differing terms and blockchain, fractural ownership, etc. School London (EBS) and Swiss Business conditions apply. Members usually join by School (MA in Wealth Management). She •• Art exhibiting: screen, signage, AR, VR has built up her own private contemporary invitation or recommendation, but we also art collection as well as an extensive •• Art in business: art in digital spaces, art in receive applications through our website, library, with a particular emphasis in the events meet in person, and then decide after talking field of photography and . Therefore, we mainly focus on companies to each member whether their application Ms. Vasilieva worked for UBS with private from the art, creative, and technology can be accepted. collectors and offered wealth planning advice for many years before opening her sectors, as well as those that work in For more information on becoming a own advisory firm, concentrating on art and profit from digital implementation/ member, please go to: consulting. transformation in related industries, such www.artandtechassociation.org or email as finance, legal, luxury brands (watches, [email protected]

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PROGRAM DATE CONTINGENCY

Panel discussion: Tokenization of assets, art coin JAN 2019 1 Unity Investment, Sean Prescott CEO as a speaker

4ArtTechnology, new technology presentation, 28 FEB 2019 1 “Blockchain against forgeries” Zurich, CH

Art Exhibition: “Pixels and Crypto” by Mark Bern, 18 MAR 2019 1 Zurich, CH

CADAF NY, First Contemporary and Digital Art Fair, 3-5 MAY 2019 3 NY USA Tom Rieder Co-founder and vice president CEO dloop, founder NOOW.ART “Automat und Mensch” AI and generative art 29 MAY 2019 1 exhibition opening @KateVassGalerie Zurich

Panel discussion: “Art&Tech” AI impact on industries Tom Rieder is the co-founder and CEO Artory, HEK Basel, Deloitte, NOOW, VR all ART, 13 JUNE 2019 3 of dloop.dloop provides the gateway to 4ArtTechnologies and many more. Basel, Zurich experience art in the connected world. It offers artists, collectors, and art lovers easy Bitpolis AG company launch (cryptofunds) 18 SEP 2019 1 ways to discover, trade, and exhibit art. Tom has built the company and developed the platform for digital art NOOW since May NZZ - guided art tour 8 OCT 2019 1 2018. NOOW provides a blockchain-based art registry and a marketplace for digital art. It has 45 artists under contract and Opening of solo show “Alternatives” by Espen Kluge. diverse partnerships to distribute art on Digital vs prints, collectors will be able to buy digital screen. 31 OCT 2019 1 and physical works, Jason Bailey as a speaker and Tom is a business developer and marketing Espen Kluge will be present. professional, who has worked in several marketing positions in internet and telecoms companies. He has broad experience in the Art Basel Miami, Panel Discussion: Collecting digital technology field, , art. Legal and copyright issues in the art sector 7 DEC 2019 2 culture, sports, and media rights. (new media art) Miami, USA

Frieze LA Art&Tech panel. Los Angeles, USA FEB 2020 3

Art exhibition: digital and generative art. FEB 2020 1 Los Angeles/San Francisco, USA

CADAF NY Contemporary and Digital Art Fair, NY USA 3-5 MAY 2020 3

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Part 03 Blockchain versus user experience: Deloitte Luxembourg

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New prototype to connect all aspects of the art ecosystem

Mixing art and technology is not a new damage to or the disappearance of a concept anymore. Today, the art world is piece can have dramatic and irreversible bringing a lot of innovative experiences consequences. to connoisseurs and even expanding the notion of what constitutes art. New Since 2016, the technology and York’s Metropolitan Museum of Art has the market have evolved. Different offered virtual reality visits of some of its trading, certification, and tracking collections since 2016, the Mosul Museum platforms have emerged and 2018 in Iraq is now showing 3D models of saw the first traditional art pieces sold Nadia Andersen previously destroyed exhibits, and in cryptocurrency shares, digital art Manager – Innovation Christie’s has sold the first AI-generated specifically created to trade through Deloitte Luxembourg works of art. cryptocurrencies, and sales and auctions carried out via blockchain-secure Blockchain is a very promising technology registries. for the art world too, as its characteristics offer solutions for problems that the Deloitte’s innovation lab, D.Lab, has art world has struggled with in the past: developed a new prototype that transparency for buyers and sellers, combines the various platforms and the traceability of artworks, and the provides a new user-centric approach. security of transactions. While these This prototype highlights the feasibility solutions can bring real added value, their of connecting all members of the art adoption remains low in the art market ecosystem from investors to sellers, Daniel Brunner and in other industries. A 2018 survey artists, and certifying bodies on one Assistant Manager Head of D.Lab by predicted that blockchain network. This prototype demonstrates Deloitte Luxembourg adoption rates would not rise by more the opportunity to combine an end- than 8 percent globally in the short term. to-end tracking system, a transparent One of the reasons for this may be the marketplace, and an investment complexity of the technology. By focusing platform. on the user experience and benefits to the customer journey, and taking a Thanks to this new blockchain prototype, step back from the technology used, the user can: blockchain platforms stand a chance of •• Have art certified by a recognized body becoming more attractive and accessible. To showcase the potential for a •• Register all important details and user-centric solution based on this characteristics of the art technology, Deloitte developed a •• Buy or sell certified art pieces prototype to solve traceability issues in art in 2016: ArtTracktive. The goal was to •• Invest in a fraction of an asset that demonstrate how blockchain technology has been split into multiple parts with can be used to provide a reliable and designated values unchangeable trace of where an artwork •• Have an overview of all art pieces and is at any point in time, which is of fractions they hold particular importance in a sector where

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Blockchain technology may offer immense benefits to users certifying, buying or selling assets on one platform.

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All prototype functionalities are accessible via Web Services connections to the blockchain behind, allowing instant feedback and a smooth user experience for art enthusiasts.

On the home page, users see three zones:

Their balance, in both Ether (ETH) and euro

Their portfolio, containing all asset fractions owned by the user

The marketplace, presenting all artworks available for sale

For each artwork, a detail window allows all platform users to see useful information about the piece. All important information to certify a work of art can be stored and linked to the art token.

Blockchain technology may offer immense benefits to users certifying, buying or selling assets on one platform, but this does not necessarily need to be pointed out to the user. This concept of a “UI shield” allows people to enjoy the benefits of technology without necessarily understanding the technical details of how it works. The platform prototype developed by Deloitte Luxembourg and its D.Lab gets this balance right and constitutes a solution that could work in practice.

Innovations, enabled by different technologies, will change the world as we know it today. Whilst it is difficult to predict to what extent, we can be certain that the art market will continue evolving, since artists have been pushing the boundaries of what is possible for all of human history. This is a great opportunity for Deloitte Luxembourg to highlight its capabilities for increasing adoption of these innovations on the market.

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Part 04 Snapshot from the Hiscox Online Art Trade Report 2019

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Online art market sales growth slows in 2018

The online art market grew by 9.8 percent gallery, auction, or art fair) prior to buying antiques, and art community, has overall in 2018 to US$4.64 billion. This art online, up from 18 percent last year. acquired CollectorsWeekly.com, Simple is a slower pace of growth than the 12 This indicates that the online art market Auction Site, and the valuation service percent experienced in 2017. Whilst the plays an important role in educating and ValueMyStuff in the last 18 months. online art market has been riding on introducing new generations of buyers to the back of an overall art market boom art collecting. Meanwhile, Sotheby’s moved deeper since the financial crisis in 2009, global into the online decorative arts business, economic and political uncertainty is Industry consolidation likely to acquiring Viyet.com—an online expected to test the resilience of online continue marketplace for vintage and antique art buyers in 2019. Although 77 percent 71 percent of online platforms said they furniture and decorative objects. of the online platforms surveyed for expected more consolidation among the Hiscox report feel positively about online art platforms in the coming 12 According to the Hiscox research, 41 the outlook for the online art market months. Among those that believed percent of online platforms believe the in the coming 12 months, this is down consolidation would take place, 63 online art market will converge towards significantly from 96 percent in 2018. percent anticipated horizontal mergers one or a few global platforms (this view (companies operating in the same has not changed since 2018); however, More millennials bought art online in the space), whereas 37 percent expected the low level of merger and acquisition last 12 months, and 79 percent said they vertical mergers (companies operating activity over the last 12 months might had bought more than once (up from in different parts of the value chain). suggest that this scenario is some 64 percent last year). New art buyers This signals that larger online art distance away. are also more engaged, with 36 percent platforms will continue to absorb smaller saying they have bought online in the niche players to either broaden their Another 41 percent of online platforms last year, up from 31 percent previously, geographical reach and/or to access new believe the online art market will remain and 70 percent said they had bought collecting segments. category-specific (up from 32 percent in art online more than once, up from 64 2018), with certain platforms dominating percent last year. Among millennials, It was a relatively quiet year in terms specific collecting segments (such as 23 percent said they had never bought of mergers and acquisitions. Barnebys, photography, prints, furniture, design, a work of art in a physical space (e.g., a the search engine serving the design, and contemporary art).

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Part 05 Digital Art and its market

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Part 05 Digital Art and its market

Powered by rapid enhancements in new technology and supported by adoption within mainstream cultural institutions, digital art is increasingly becoming one of the key focal points on the international art market scene.

Elena Zavelev over time, or specifically, use timing and information, supporting authenticity, Founder, New Art Academy the duration of the piece as an important and ensuring the scarcity of digital and CADAF (Contemporary And dimension of the work. This can be editions66. The ability to produce and Digital Art Fair) compared to “static digital imagery” verify the number of limited editions, which refers to any still image generated in particular, has become crucial to the through the use of digital technology. adoption of digital art collecting ensuring “Digital art installations” involve physical, protection of the value of digital art often interactive pieces requiring pieces that are easy to copy. audience participation and using digital The past five years have seen significant technology. “XR”, also referred to as Interest in the sharing economy and the market growth. In 2013, Philips hosted “cross reality”, art includes works that opportunity to own or lease the fraction the world’s first auction dedicated consist entirely of virtual reality (VR), of the work of art supported by the entirely to digital art. The project augmented reality (AR) and mixed reality records in the blockchain database offer succeeded in selling 16 of the 20 works (MR) experiences. another exciting catalyst for the growth offered, achieving a total of US$90,60064. of digital art as an investment class. The market has grown exponentially Digital art as an investment since, highlighted through the infamous Digitalization of the traditional art sale of an AI artwork for US$432,500 at marketplace has produced a new Christie’s in October 201865. generation of collectors accustomed to sourcing pieces and artists online What is digital art? through the likes of Artsy and Instagram

The term “digital art” can be used to as well as having access to transparent 64 h ttps://www.forbes.com/sites/katherynthayer/2013/10/22/ refer to any artwork created using pricing data. going-once-going-twice-phillips-puts-gifs-on- digital technology. This art is known to auction/#30ed122f2c97 evolve alongside new developments in Blockchain technology has been a game- 65 h ttps://www.christies.com/features/A-collaboration- between-two-artists-one-human-one-a-machine-9332-1. emerging technology and loosely falls changer for the proliferation of the aspx into four main categories. “Time-based digital art market, creating opportunities 66 h ttps://www.forbes.com/sites/elenazavelev/2018/11/07/ media” involves artworks that unfold to register copyright and provenance how-blockchain-empowers-the-digital-art-market

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fractional ownership of high-quality digital interaction with the museum’s most Potential for art, subscription services for digital art famous painting, circumventing the usually growth and leasing, digital art insurance, and so on. overcrowded viewing experience. What are the benefits for art collectors As for the liquidity of digital art, in many and why should collectors buy digital cases, especially with crypto-collectibles, opportunities art now? it is significantly higher than that of the There are also myriad benefits for art traditional art as digital art is easier to for the trade collectors. First of all, the current prices trade, own, and maintain. There are also even for established artists are low relative unique social and transactional aspects to traditional art. The novelty factor to owning digital art as often there is plays an important role as contemporary an existing global community of artists, What do art market professionals digital art provides unprecedented new buyers, and sellers behind the marketplace stand to gain? experiences for the audience. it trades on. For art market professionals, this creates many opportunities in the area of digital A strong public example is the Louvre’s Finally, the pricing models for digital art, art acquisition, display, digital collection recent foray into VR in their collaboration especially for emerging artists, are still in management, and conservation. As the with HTC Vive Arts to create “Mona Lisa: development and are hugely driven by the digital art market is relatively new, the Beyond the Glass”. The partnership has community of artists and early collectors. business development potential is almost resulted in a VR experience where visitors This may result in a more dynamic market unlimited. This includes new platforms for to the Louvre have a more personal in future.

2001 Launch of Artport: April 2018 Whitney Museum’s October 2013 Artists and Robots show portal to internet First auction dedicated focusing on art produced February 2019 art and an online exclusively to digital with the help of robots Phillips announced a gallery space for art held by Phillips in premiered at Grand collaboration with Daata commissions of net collaboration with Tumblr. Palais in Paris Editions to commission art and new media Project succeeded in First digital art center two works from digital art selling 16 of the 20 works L’Atelier des Lumières artists offered, achieving a total opened in Paris First mixed-reality art of US$90,600 experience “The Life” June 2018 by Marina Abromovic Digital Art Museum by exhibited at The 2011 March 2016 teamLab opened in Tokyo Serpentine Galleries Launch of A group of 29 paintings Sedition Art: the made by Google’s September 2018 March 2019 online platform Artificial Intelligence CryptoKitty Dragon sells AI work “Memories of for selling algorithms sold at a for US$170,000 Passersby I” by Mario and collecting in San Klingemann sells at editioned digital Francisco. October 2018 Sotheby’s Contemporary art AI artwork sold at an Art Day Auction May 2016 auction at Christie’s New Pace Gallery opened York with “Portrait of May 2019 a permanent gallery Edmond Belamy” by GAN CADAF launched its first space in Palo Alto, (Generative Adversarial digital art fair following an inaugural Network) achieving 45 Art + Technology times its high estimate at exhibition with teamLab US$432,500

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US$90,600 Phillips hosted the world’s first auction dedicated entirely to digital art in 2013: 16 of the 20 works offered were sold, achieving a total of US$90,600 (averages to Major institutions US$5,662.2 per work) US$118,750 in support of digital In 2015, Rafael Lozano- Hemmer sold a software- and new media art based sculpture for US$118,750 at Phillips •• Ars Electronica •• CADAF (Contemporary And US$240,000 Digital Art Fair) A digital work by TeamLab •• Christie’s Art+Tech Summit made by custom-built software sold for •• DIGITAL ART MUSEUM: $240,000 at Phillips in teamLab Borderless 201767 US$240,000 •• Eyebeam In 2017, a digital work by •• Gray Area Foundation teamLab complete with for the Arts custom software sold for •• HeK - House of Electronic US$240,000 at Phillips Arts Basel

•• iDAF (International Digital US$600,000 Art Festival) In 2018, “In private sales”, algorithmic art by Philippe •• MoMA - Digital Art and Parreno was priced at Culture Symposium around US$600,000 by •• New Art Academy his London dealer Pilar Corrias68 US$432,500 •• New Museum/Rhizome/Net Art Anthology “Portrait of Edmond Belamy” by GAN •• Whitney Museum, Artport (Generative Adversarial •• ZKM Center for Art and Media Network). The piece went ( Karlsruhe, Germany) to auction in October 2018 at Christie’s New York in a £40,000 Prints and Multiples sale, March 2019, Sotheby’s achieving 45 times its high Contemporary Art Day estimate at US$432,50069 Auction with “Memories of Passersby I” by Mario Klingemann. The work

achieved its high estimate 67 h ttps://www.theartnewspaper.com/analysis/ of £40,000 will-the-market-for-ai-art-take-off 68 h ttps://www.theartnewspaper.com/analysis/ will-the-market-for-ai-art-take-off 69 h ttps://www.christies.com/features/A- collaboration-between-two-artists-one-human- one-a-machine-9332-1.aspx

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Art & Finance Report 2019 | Section 6 - Risk Management & Regulation

Section 6

Risk Management & Regulation

Pervivencias © Lina Sinisterra (2011) 201 Art & Finance Report 2019 | Section 6 - Risk Management & Regulation

Highlights

managers (up from 73 percent in RISK MANAGEMENT 76 percent 2017) expressing this opinion. The entry into force of the EU’s fifth AML of wealth directive in January 2020 may be a Perception of risk heightened motivation and catalyst for much- across all aspects of the art managers said needed change. market The fight against money Authenticity, provenance, that money laundering broadens to include forgery and attribution remain the art trade key concerns laundering was The scope of EU anti-money 84 percent of wealth managers said laundering regulations is being that this was the greatest area of risk extended to include the art trade and posed a threat to the reputation a key concern. as of January 2020. The global trend of the art market (up from 83 has been to increase the number percent in 2017). of industries required to help in the fight against financial crime Price manipulation and other in response to the emergence anti-competitive behavior of innovative money laundering 79 percent of wealth managers said REGULATION schemes and a mounting threat of that the risk of price manipulation terrorism. This means that under and anti-competitive behavior was the new regulation, dealers, auction the main risk to the reputation of houses, and other art traders fall are the art market (up from 76 percent More wealth managers in Europe covered by the rules that apply to in 2017). believe the art market needs other “gatekeepers”, such as banks, government regulation accountants, and lawyers. Lack of title register/unique In 2017, 60 percent of wealth identifier for objects managers said that they thought The low threshold means that a The lack of infrastructure (e.g., a self-regulation would be the best large proportion of the current title register) enabling stakeholders way to regulate the art market. art trade will be covered by the to track and uniquely identify the However, among European wealth new regulation ownership and provenance of works managers this has changed: 54 The new AML directive extends its of art is seen as a key problem by percent of those surveyed stated scope to “persons trading or acting 72 percent of wealth managers (up that they thought the art market as intermediaries in the trade of from 69 percent in 2017). should be facing more government works of art, including when this regulation and only 46 percent said is carried out by art galleries and Undisclosed conflicts of interest that self-regulation would be the auction houses, where the value of 76 percent of wealth managers felt right approach. the transactions amounts to EUR that conflicts of interest were the 10,000 or more”. greatest threat to the reputation of Increasing calls to modernize the art market (up from 65 percent business practices in the art Implementation of a financial in 2017). market crime risk program In this year’s survey, all stakeholders The new AML regulation compels Money laundering concerns call for the modernization of current the art trade to implement a 76 percent of wealth managers business practices, with 80 percent financial crime risk program. said that money laundering was a of art professionals (up from 74 However, there is no one-size-fits-all key concern (up from 65 percent in percent in 2017), 81 percent of approach, and this program will 2017). collectors (up from 64 percent in differ depending on the inherent 2017), and 76 percent of wealth

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risks posed by various products and new EU anti-money laundering Responsible Art Market (RAM) services, customers, geographies, regulation. However, transactions initiative and sales channels. The new in the art market typically involve The objective of the RAM initiative requirements will oblige dealers one or several intermediaries, and is to raise awareness among art and intermediaries to adopt a risk- this makes it difficult to distinguish businesses of the risks facing the based approach to transactions and the intermediary from the actual art industry and to provide practical customer relationships and establish beneficiary of the transaction. guidance and a platform for sharing policies and procedures relating It is clear that it is important to best practice as regards addressing to: i) customer risk assessments; ii) establish whether the client is acting such risks. RAM’s founding members customer due diligence; iii) ongoing on its own behalf or as an agent. span the entire spectrum of the art monitoring; iv) implementing However, the legal framework has market to include art businesses, adequate governance; and v) not provided a clear definition of academic institutions, and attorneys. cooperating with the authorities. the term “intermediaries”, which is a significant legal omission. To date, RAM has published two sets of practical guidelines and Art professionals have a duty to Museums need to know their checklists that are increasingly used file suspicious activity reports patrons and referred to: the Guidelines on Art professionals that fall under the In light of the controversy around Combatting Money Laundering new AML regulation must cooperate the Sackler family and their support and Terrorist Financing and the Art fully with authorities, which means for the art world, there is likely to be Transaction Due Diligence Toolkit. not only reacting to requests, but enhanced scrutiny around corporate RAM holds an annual conference in also, on their own initiative, filing and private financial support Geneva during the art genève art suspicious activity or transaction and donations to museums. The fair. This provides an opportunity reports to the practical implications of this for the for art market professionals to meet Unit (FIU) when they suspect or cultural sector could be significant, and exchange ideas on market have reasonable grounds to suspect as the cost and resources required practices, challenges, and new that money laundering or terrorist to pre-emptively assess the risk initiatives. financing has been committed or is associated with external donors or being committed. supporters could be excessive. Lessons to be learned from the diamond industry Panama Papers shine a Again, the fifth AML directive may Antwerp World Diamond Centre spotlight on the challenges result in the creation of a common (AWDC) invested substantially around establishing beneficial tool for the art industry to share in in raising awareness of AML and ownership terms of carrying out due diligence. providing guidance and support to Whilst few art-related money diamond dealers on how to apply laundering lawsuits have been Challenges posed by the online AML principles in practice. It did brought as a result of the Panama art market and non-face-to-face so through helplines, courses, and Papers, the documents reveal how transactions seminars as well as tools, such the true owner of works of art can With an estimated US$4.64 billion as a software tool through which hide behind a veil of offshore shell in online art transactions in 201870, diamond traders could screen their companies. it is clear that the art industry faces clients and assess the potential immense challenges in terms of risks. Since these tools were too Identifying beneficial owners identifying beneficial owners prior expensive for a sole trader, AWDC, Art professionals (including auction to transactions. Furthermore, this as the sector body, funds this and houses, dealers, and galleries) could hinder the application of provides free access to traders. must perform due diligence checks anti-money laundering regulations, and identify the beneficial owner especially as regards transactions of each transaction under the between private individuals.

70 H iscox Online Art Trade Report 2019

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EU regulation on importing non- financial assets as substitute assets EU cultural goods for the storage and transfer of COUNTRY PERSPECTIVES On 7 June 2019, a new EU regulation wealth, particularly with the end aimed at controlling the trade and of banking secrecy, which they introduction of cultural goods into claimed contributed to the rapid the EU was published and passed growth of the art market in recent France by the European Parliament for the years. However, art storage and The fifth anti-money laundering purposes of fighting the illicit trade logistics providers are not required directive represents an evolution in cultural goods. The regulation will to participate in any automatic rather than a revolution for art be fully operational by mid-2025 at data exchanges under the OECD’s market professionals in France, as the latest. Antiques dealers have common reporting standard (CRS) art market professionals in France expressed concern about the added or the EU’s reporting agreements have been subject to AML regulation administrative burden, which they between tax authorities. since 2001. Art professionals feel could harm their legitimate in France have expressed business activities. See p.226 for concerns about the complexity more information on the compliance of the regulation and the cost of requirements set out in the new compliance. regulation. United Kingdom The fifth AML directive includes The fifth Despite Brexit, all indications free ports but not customs suggest that the UK government warehouses will implement AMLD 5. The UK The fifth AML directive formally anti-money government’s consultation paper includes “persons storing, trading or names HMRC as the preferred acting as intermediaries in the trade laundering supervisor for art intermediaries. of works of art when this is carried Although the regulator’s out by free ports, where the value of enforcement approach is not the transaction or a series of linked directive yet known, data shows that fines transactions amounts to EUR 10 000 imposed on high-value dealers have or more” as new obliged entities. represents increased in recent years. However, operators of customs warehouses or other storage an evolution Switzerland provides are not included. Art dealers already fall under the scope of existing money laundering The final report of the TAX3 rather than regulations in Switzerland, such as committee did note this oversight by the Swiss Anti-Money Laundering recommending that at least customs a revolution Act (AMLA). The latter also covers warehouses “be put on an equal persons and legal entities that footing with free ports under legal deal in goods commercially and in measures aimed at mitigating money for art market doing so accept cash. The current laundering and tax evasion risks threshold is 100,000 Swiss francs, therein, such as AMLD5”. professionals however, certain dealers (in precious metals and stones) will have to carry Money laundering and tax in France. out due diligence for transactions evasion risk in free zones above 15,000 Swiss francs. The A study by the European threshold for all other dealers Parliamentary Research Service covered by the AMLA definition (EPRS) identified the risk associated remains unchanged at 100,000 with the increasing use of non- Swiss francs.

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Introduction

Despite the increase in data volumes and In this year’s risk management and In this year’s report, we have divided technological advances, concern about regulation section, we will predominantly the risk management and regulation transparency has increased in the last focus on the fifth EU anti-money section into the following two parts: two years. This implies a perception that laundering directive coming into force in the art market is becoming a more un- January 2020, and its possible impact on 01. Survey findings 2019 democratic and less open marketplace, the art trade and the art industry as a This looks at how Art & Finance plagued by price manipulation, insider whole. stakeholders (wealth managers, art information, and conflicts of interest. In professionals, and collectors) view this year’s survey, all stakeholders call for Despite the challenges that this regulation regulation and the related theme of risk the modernization of current business will have for the art industry, lessons from management in the art world. practices in the art market, with 80 percent other sectors and industries suggest of art professionals (up from 74 percent in that the reputational benefits of a better 02. Regulation: a focus on anti-money 2017), 81 percent of collectors (up from 64 and more professional compliance laundering efforts percent in 2017), and 76 percent of wealth environment will ultimately create more In this section, professional from the managers (up from 73 percent in 2017) trust and opportunities for the market to Deloitte global network have teamed expressing this opinion. In order to restore expand beyond its current limits. up to share technical knowledge in trust in the art market, these issues need relation to the requirements to combat to be addressed. financial crime.

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Part 1 Survey findings 2019

Figure 50. Which of the following issues do you feel are the most threatening/damaging to the reputation of the art market? Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Authenticity, lack of provenance, 84% 76% forgery and attribution 76%

77% Lack of transparency 75% 75%

Price manipulation and other 79% 75% anti-competitive behaviour 75%

Lack of title register / unique identifier 72% 49% for objects 54%

Lack of international standards around 63% 56% professional qualifications in the art market 63%

76% Money laundering 59% 65%

Undisclosed conflicts 76% 69% of interest 71%

68% Secret commissions 64% 69%

62% Insider dealing 56% 60%

Confidentiality around 37% 40% the sellers and buyers 35%

34% Auction guarantees 35% 49%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Wealth Managers 2019 Collectors 2019 Art Professionals 2019

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Stakeholder analysis: current threats to the art market’s reputation

Lack of transparency problem by 72 percent of wealth managers this year’s survey, 65 percent of art This year’s findings show that 77 percent (up from 69 percent in 2017). However, professionals (up from 61 percent in 2017) of wealth managers said that a lack of this issue was viewed as being of less and 59 percent of collectors (up from 49 transparency was the key threat (down concern by art professionals, 54 percent of percent in 2017) viewed money laundering from 79 percent in 2017). Among the whom said this was a major threat to the risk as a major threat to the reputation collectors surveyed, 75 percent said art market, compared with 49 percent of of the art market. So, although many art transparency was a key issue (up from 62 collectors. market insiders are partly numb to these percent in 2017), and 75 percent of art risks, it is clear that the wider world sees professionals also said this was a major Money laundering concerns the situation differently. concern (up from 69 percent in 2016). Of the three stakeholder groups surveyed, the wealth management community Undisclosed conflicts of interest Authenticity, provenance, forgery and is the group that expressed strongest 76 percent of wealth managers felt that attribution concern about money laundering risks in conflicts of interest were the greatest 84 percent of wealth managers said that the art world, with 76 percent of wealth threat to the reputation of the art market this was the greatest area of risk and that managers saying that money laundering (up from 65 percent in 2017). Without a it posed a threat to the reputation of the was a key concern (up from 65 percent clear division between art market roles art market (up from 83 percent in 2017). in 2017). It is still to be seen if the fifth EU (advisor or dealer? Broker or valuer?), With art values reaching astronomical money laundering directive (entering into conflicts of interest will continue to arise. levels, these issues will continue to haunt force in January 2020), which requires the art market going forward. The media auction houses, art dealers, and other coverage around the US$450 million sale art intermediaries to undertake anti- of Leonardo da Vinci’s Salvatore Mundi money laundering checks on customers, and the uncertainty around its attribution will change the perception of money have come to exemplify the complexity laundering risk in the art market. In and challenges associated with buying and selling high-value art. 76 percent of collectors and art professionals also rate this as one of the most important challenges in today’s art market.

Price manipulation and other anti- competitive behavior 79 percent of wealth managers said that price manipulation and anti-competitive The lack of infrastructure behaviors were among the major risks to the reputation to the art market (up from 76 percent in 2017). A further 75 percent enabling stakeholders to track of collectors and art professionals said the same. and uniquely identify the owner Lack of title register/unique identifier and provenance of artworks was for objects The lack of infrastructure (e.g., a title register) enabling stakeholders to track seen as a key problem by 72 and uniquely identify the owner and provenance of artworks was seen as a key percent of wealth managers.

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Data & trust

Lack of trust in art market data Figure 51. What level of trust do you have in the art market data (qualitative & Technology has become part of our quantitative) currently available? (Percentage respondents saying 4 or 5) lives. Data and analytics are increasingly Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 determining how we run our private lives as well as our businesses. However, the growing reliance on data, analytics, and artificial intelligence raises an important question: how do we know whether we Art Professionnals 31% can trust the outcome? An increasing focus on trust is emerging as algorithms begin to make more decisions on our behalf. Also, data and analytics are becoming increasingly complex and opaque, and the risks associated with poor design, Collectors 30% errors, and unintended consequences are mounting.

This year’s survey findings show that there is a deficit in trust when it comes to art Wealth Managers 16% market data. The fact that more wealth managers are concerned about price manipulation in the art market is of genuine concern as it could undermine confidence in art prices and transactional data used 0% 5% 10% 15% 20% 25% 30% 35% for valuation, art-secured lending decisions, risk management, and so on. Only 16 percent of the wealth managers surveyed said they had a high level of trust in art market data, and with none of the family offices expressing this view. Among art in getting the best-quality input for these professionals, 31 percent said they had a new tools, as analytics and forecasting high level of trust, leaving the remaining 61 systems are only as good as the data you percent with a medium to low level of trust feed them. How do we achieve this? Should Only 16 percent in art market data. we move towards a neutral custodian of art data: maybe a regulated entity, such as of the wealth This is an important issue, as current and a bank? Or do we want to move towards a future decision-making tools for valuation decentralized structure using blockchain and risk models will depend heavily on technology, which could verify and track managers this data and the trust in the data. Are the provenance of art market data, i.e., big data and artificial intelligence (AI) the verify the history of the data from its origin surveyed said solution? Or might there be a risk that throughout its life cycle, addressing the analytics and AI could amplify the problem critical question: where does this data they had a high by using data that the art market does come from – and can we trust it? There is not trust? The well-known expression no doubt that trust in data has value, and level of trust in “garbage in, garbage out” rings true in this that there is a clear commercial case for context. The art industry needs to invest ethical conduct around data. art market data.

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What can be done to increase trust in art market data? Based on qualitative responses from the three stakeholder groups, here is a list of suggestions for how to increase trust in art market data.

More transparency around transactions, including buyer information, pricing data, and valuations. A large number of stakeholders raised concerns about the asymmetric information that exists in the art market, where one part of the transaction always seems to have more information and knowledge than the other. To achieve increasing transparency, the following suggestions were put forward:

•• Ownership and provenance •• Research methodology Create a mandatory register and force More transparency around research greater transparency in relation to methodology, plus greater clarity about ownership and provenance. This will the assumptions used. ensure greater transparency as regards who is the underlying buyer of the art •• Education and data literacy (ownership provenance). Invest more resources in educating consumers and the art world about •• Access to more data sources data and its limitations. With broader Increase the number of data sources: i.e., awareness of what data is and is not and through access to primary market and what it can and cannot do, some of the private treaty sales. current concerns might be addressed.

•• More analytical tools •• Standards and quality control There is a need for an art market index Establish a type of standardization/ benchmark that is publicly available; rating agency like Moody’s and S&P without such a benchmark it would be for the art world and the companies hard for art to become a true asset class. working within it. The potential need for a “certification” body in the art world is •• Research endorsement also raised by Justine Ferland, researcher Research backed by big trusted brands, at the University of Geneva’s Art-Law such as companies in the financial, legal, Centre, attorney-at-law (Quebec, Canada), and insurance businesses. and member of RAM’s Task Force and Sandrine Giroud, Partner with LALIVE, Switzerland, board member of the Art Law Foundation, and member of RAM’s Task Force on p.244.

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REGULATION: Government vs self-regulation

Self-Regulation Figure 52. Wealth managers: which regulatory approach do you favor when it comes to establishing trust and credibility in the art market? Government Regulation Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019

Wealth Managers 2019 54% 46%

Wealth Managers 2017 60% 40%

Wealth Managers 2016 64% 36%

0% 20% 40% 60% 80% 100%

It is interesting to note that there has Figure 53. Collectors: which regulatory approach do you favor when it comes to been a significant shift in perception establishing trust and credibility in the art market? among wealth managers about how to Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 best regulate the art market. Whilst in 2017 60 percent of wealth managers said Collectors 2019 78% 22% that they thought self-regulation would be the most appropriate way to regulate the art market, this has shifted this year to Collectors 2017 76% 24% 54 percent of European wealth managers surveyed stating that they think the art market should face more government regulation and only 46 percent saying Collectors 2016 72% 28% that self-regulation would be the right approach. 0% 20% 40% 60% 80% 100%

In contrast, US wealth managers favor a self-regulation approach, with 73 percent Figure 54. Art professionals: which regulatory approach do you favor when it of those surveyed expressing this view. comes to establishing trust and credibility in the art market? There has also been a slight increase Source: Deloitte Luxembourg and ArtTactic Art & Finance Report 2019 among art professionals, 28 percent (up from 23 percent in 2017) of whom feel that government regulation might be a Art Professionals 2019 72% 28% more appropriate approach to the art market. In the European context, this change in sentiment could be significant, Art Professionals 2017 77% 23% as it could signal that the European wealth management industry thinks that the art market is not doing enough to change its Art Professionals 2016 76% 24% current practices, and that self-regulation is hard to achieve in a globally fragmented art market. 0% 20% 40% 60% 80% 100%

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From the series: “Comer del Arte Quiero” © Lina Sinisterra (2011)

It is interesting to note that there has been a significant shift in perception among wealth managers about how to best regulate the art market.

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Part 2 REGULATION: A focus on anti-money laundering efforts

In the context of the upcoming implementation of important regulations, notably in the field of money laundering, many market players have voiced their concerns in terms of understanding the new rules. In this section, passionate professionals from Deloitte’s global network have teamed up to provide technical knowledge that readers will hopefully find instructive. Their contribution reflects the research they have carried out and aims to demystify certain beliefs so that art professionals can feel more confident in the runup to the entry into force of these regulations.

Our professionals have strived to considering and responding to the EU •• Market-led initiatives such as the gather insights on the following regulation on the introduction and Responsible Art Market initiative have topics: import of cultural goods been pioneers on the field of market self-regulation and we will share an •• Michael Shepard, Deloitte Global •• Each local market has its own specific update on their activities. Financial Crime Leader has been characteristics that make it more or interviewed to provide his view on the less easy for local players to deal with •• The potential impact of these global trends in the fight against money regulations. We will consider: regulations on cultural institutions will laundering be approached. ––France •• Our experts lay out the ground rules ––United Kingdom •• Money laundering risks associated pertaining to EU anti-money laundering ––Netherlands with freeports were raised by the obligations and how they will potentially ––China (Mainland) EU commission several years ago. At affect art traders and intermediaries ––Switzerland the dawn of AMLD5 enforcement, it ––Russia is understood that storage facilities •• Because anti-money laundering rules as a whole will weigh in the balance can be complex to understand, we Additionally, we felt that it was important when fighting money laundering and provide an in-depth exploration of for market insiders to share their insights terrorist financing. Operators from the concept of the ultimate beneficial on regulation and its impact in their the will explain owner. This is one of the most difficult respective market segments: how they dealt with stringent local concepts to fully comprehend under regulations ahead of AMLD5. anti-money laundering rules. This •• The diamond industry had to concept will be illustrated by case implement anti-money laundering studies regulations several years ago. In hindsight, how did it work and how •• We will also illustrate the thought could this experience benefit the art process to be conducted when market?

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Expert voices

INTERVIEW WITH MICHAEL SHEPARD, GLOBAL FINANCIAL CRIME LEADER, DELOITTE RISK AND FINANCIAL ADVISORY

Hi Michael, you are the Global Financial and lawyers) and their compliance with Crime Leader at Deloitte. Could you anti-money laundering laws. The scope of Michael Shepard please give us an overview of the EU AML regulations is also being extended Global Financial Crime Leader, global regulatory trends in the fight to include the art trade. The trend is to Risk and Financial Advisory against financial crime? What trends broaden the scope of industries required Deloitte Transactions and Business affect the art market specifically? to help in the fight against financial crime Analytics LLP Although general regulatory enforcement and this is essential if we are serious about actions in the financial services industry addressing the problem. Everyone has appear to have slowed down somewhat, to be a player and we cannot solely rely prosecutions, enforcement actions, and on financial institutions to track money regulatory scrutiny around financial crime flows and report suspicious activity to remain intense. In addition, regulators law enforcement. The broader business charged with anti-money laundering community must take responsibility to obligations are broadening their focus prevent, detect, and mitigate the risks of beyond the financial services sector in financial crime. the fight against financial crime. In the US, for instance, we are seeing this happen Many art professionals do not believe in the real estate industry. The Financial it is their responsibility to implement Crimes Enforcement Network, which is the anti-money laundering rules; instead, administrator of the Bank Secrecy Act, has they argue that this should fall to issued Geographic Targeting Orders to banks and other financiers. What can obtain more data and information on real we say to them? estate deals that do not involve loans from Why should fighting financial crime be solely financial institutions. There is a lot of press the banks’ responsibility? Say a car dealer is coming out of British Columbia in Canada selling an expensive vehicle to a drug dealer about money laundering in real estate. In for cash. The car dealer may not deposit the EU, regulators continue to be interested the money at a bank, or may do so in a in gatekeepers (e.g., accountancy firms manner that would not indicate that the

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funds were the proceeds of crime. The car dealership must be held accountable for its knowledge of its customers just as a bank is in order to fight financial crime. The same is true in the art world. Dealers, auction houses, and other artwork traders should know their customer and understand the financial crime risks they pose. After gathering customer due diligence information, the art dealer should be able to identify any red flags that indicate possible suspicious activities or money laundering. Again, the fight against financial crime must be an industry-wide effort.

Additionally, a significant portion of art dealers say they do not have sufficient financial and human resources to implement these rules. How can they overcome these difficulties? They are permitted to implement a financial crime risk management program. There is no one-size-fits-all approach. Such programs may differ depending on the size of the dealer, the countries they deal in, the types of customers they have, and the available distribution channels (e.g., face-to- face, online, telephone).

The key to developing a financial crime risk management program is to first conduct a money laundering risk assessment to determine the level of inherent risk faced across products and services offered, customers, geographies, and channels. From that, dealers can determine what controls are in place or need to be implemented to mitigate the identified risks. Regulators do not require art dealers to bankrupt themselves developing and implementing a risk-based program. For instance, in a smaller gallery, one person may have to perform multiple roles, including overseeing the program. This is actually similar to what we see in some of the smallest financial institutions. There are multiple ways to put such a program together but, as I said, I think that the key step is performing a financial crime risk assessment in advance.

“Dad” - Series: Pervivencias © Lina Sinisterra (2011)

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AML efforts have been criticized on the generally look more favorably upon Again, it does not have to be expensive. basis that money laundering cases in companies that have a financial crime Additionally, some of the procedures are the art market are rare and, as such, risk mitigation program. If the company likely to already be in place for certain the whole industry is the wrong target. made good-faith efforts to mitigate risk by art professionals or may just need to be How can we explain this phenomenon? implementing the program and controls, enhanced. To answer this question, I think it is prosecutors can better understand the important to understand some of the one-off instance where maybe a rogue Are there any technological trends ways in which money is laundered in employee did something illegal. that will disrupt the performance of this industry. Art is comparable to a AML/KYC obligations? commodity, and as such it can be used in Secondly, it is about being a good Technology is an enabler of both financial trade-based money laundering to transfer corporate citizen. If an art dealer is ever crime and financial crime risk management. value to others or across borders. In this known for being complicit in money It is just a matter of trying to stay one manner, proceeds of crime can be moved laundering—wittingly or unwittingly— step ahead of the criminals. There is or transferred without using a bank to it can have serious reputational the potential that cloud technology can simply transfer funds that criminals know repercussions. Based on my understanding, be used to enhance financial crime risk are monitored for suspicious activity. Here reputation and trust play a significant role management controls, both to mitigate is an example of how art is used for trade- in the art market and as such it is clearly and detect financial crime. Now, as based money laundering: Criminal A sells beneficial to have a financial crime risk regards the art market, companies with an inexpensive piece of art to Criminal B management program. Lastly, by meeting more sophisticated technology will be in but issues an invoice to B for US$1 million. these obligations, art dealers may find a position to leverage technology to fulfil B then wires US$1 million to A and both themselves in a position to know their their AML obligations. For example, every can then legitimize the money transfer customers better. This may be helpful to business is subject to certain economic using the invoice. dealers as they seek to market and sell trade sanctions depending on jurisdiction. additional products and services. If customer data is digital, technology is Furthermore, criminals typically enjoy available that can be used for name and luxury possessions, which can include What lessons from other industries country screening instead of checking artwork. This is why the EU has recognized could be learnt and applied by art sanctions lists manually. that the art industry is exposed to money professionals as they tackle these laundering risk. EU officials have not regulatory challenges? How do you think Deloitte can help to concluded that the art market is fraught Art professionals should educate support art professionals facing these or riddled with money laundering: they themselves on the applicable regulations challenges? are simply saying that there is an existing and perhaps attend industry events for this Deloitte is a leading financial crime financial crime risk that must be mitigated purpose. It is important to understand the professional services firm and we can by the art industry itself. kinds of financial crime risk faced by the art leverage our experiences with other trade, first from an industry perspective industries that are subject to money Finally, there are some well-publicized and then from the perspective of the laundering regulations. I see our role as cases involving art being used to launder individual company. It is not enough to say being similar to what we do for financial the proceeds of white-collar crimes such that there are no risks at all. services companies. On a global basis, as stock price manipulation. Basically, we have extensive anti-money laundering money laundering in the art market is There are some examples of galleries being subject-matter expertise and the capability designed to move the proceeds of crime used for illicit purposes. Art professionals to assist with risk assessments and the away from their tainted source. Buying should read the literature about these development of appropriate risk-based a piece of art and later selling it helps publicized cases. I also suggest that they controls and training. We can assist with to mask the source of the proceeds and reach out to professionals who have had testing these controls when they have been thereby legitimize them. experience in performing financial crime running for some time. If there is a major risk assessments and developing and issue, our forensic financial crime practice Do you foresee any benefits for art implementing risk-based AML programs could then work with the art company’s professionals once they comply with in other industries. Art dealers may find it lawyers to perform forensic investigations. these rules? useful to leverage their prior experience as Thus, we have the experience and The first benefit is that if there is a they seek to develop a risk-based program capability to assist with all aspects of problem, the government and prosecutors for their own company. financial crime risk management.

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Expert voices

ANTI-MONEY LAUNDERING OBLIGATIONS AND SOLUTIONS

Maxime Heckel Director By January 2020, all EU member states are due to transpose Advisory & Consulting Financial Crime Directive 2018/843 (also referred to as the fifth anti-money Deloitte Luxembourg laundering directive, or AMLD5) into national law. The first of its kind (Directive 91/308/EEC) was issued in 1991 and only covered financial and credit institutions.

The constant emergence of new money this guidance is considered by governing laundering schemes, coupled with the bodies, such as the European Commission, increasing terrorist threat, has prompted which sets its own rules by means of EU lawmakers to strengthen Anti-Money directives. The FATF initially defined money Laundering (AML) obligations and expand laundering as the process of disguising the the scope of obliged entities: first to illegal origin of the proceeds of criminal professions on the fringes of finance, such activities and the definition has not Astrid Brandy as accountancy and real estate, and now to changed much over time. However, it is Manager the world of art. important to note that with the fourth EU Operations Excellence & Human AML directive, the meaning of “criminal Capital - Deloitte Luxembourg To prepare themselves, buyers and activities” was broadened to include tax sellers of artworks (e.g., dealers, galleries, crimes71. and auction houses) and intermediaries The recently introduced AMLD5 does not must start familiarizing themselves with represent a radical departure from existing AML concepts and with the solutions law; instead, it fine-tunes the principles available on the market that may help set out in AMLD4. Whilst the fifth directive them to optimize their efforts to reach extends its scope to “persons trading or full compliance. To demystify AMLD5, this acting as intermediaries in the trade of works section provides a broad overview of the of art, including when this is carried out by most significant AML obligations. art galleries and auction houses, where the value of the transaction or a series of linked Adrien Chiariello Background transactions amounts to EUR 10 000 or Former Manager Anti-money laundering rules are typically more”72, certain countries, including France Operations Excellence defined through a waterfall process. and the Netherlands, proactively extended & Human Capital Deloitte Luxembourg Global inter-governmental organizations the rules to include art professions when such as the Financial Action Task Force enacting previous directives into national (FATF) regularly issue guidance. In turn, law.

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In general, these directives 01. What this means for art professionals require obliged entities to: Risk-based approach Art professionals will have to determine and assess which risk factors apply to 01. Adopt a risk-based Concept their business holistically; this assessment A risk-based approach consists, firstly, will need to be performed on a regular approach in identifying the sources of money- basis. This risk assessment will serve as a laundering/terrorist financing (ML/TF) reference grid against which each business 02. Perform customer due risks within the organization and assessing relationship will be rated and monitored. diligence these risks. The nature and frequency of Therefore, depending on the risk processes to monitor each area of risk associated with the customer in question, 03. M onitor the business depend on the severity of the ML/TF risk in the customer’s AML/CTF risk will be classed question. as low, normal or high. relationship The EU provides a non-exhaustive list of 02. 04. Implement an adequate risk factors73 that can be considered when Customer due diligence governance and operating rating each business relationship from a money-laundering risk standpoint. The risk model level may vary according to: Concept The scope of customer due diligence is to •• The types of customer considered, e.g., is some extent discretionary, i.e., relying on 05. C ooperate with authorities the customer an individual, a company, a the risk-based approach, the professional trust, etc., an existing or a new customer, can decide which checks to perform and well-known on the art market or not, when. However, a few universal rules politically exposed or not? These obligations are often prevail when performing due diligence in referred to as the “AML •• The distribution channel used e.g., did relation to a customer: the entity meet the customer face- framework”. •• It must be performed as soon as the to-face, at an art fair, through a web business relationship starts (i.e., prior to platform or intermediary? the conversion of a prospect into a client) •• The types of goods and transaction in •• It must be tailored to the customer’s question e.g., is the origin of the artwork risk level, according to the risk-based known and documented, what is its value, approach discussed above is the initiated transaction a sale, a loan, a donation, etc.? •• It must be performed on an ongoing basis •• The countries involved e.g., is the customer domiciled in a country with •• It must leave a documented audit trail equivalent AML/CTF laws, is the artwork coming from a country that is subject to Hence, the information and documentation trade sanctions, etc.? collected, as well as the nature and results of the checks carried out, must 71 A MLD4, Directive (EU) 2015/849, chapter 1, Section 1, An efficient AML framework must be be documented. Evidence must be kept Article 3 § 4 (f) – each member state transposing the directive provides its own definition of “tax crimes”. tailored to each obliged entity. and stored until the end of the business 72 AMLD5, Directive (EU) 2018/843, Article 1 §1 (i) relationship, and maybe for some time 73 A MLD4, Directive (EU) 2018/843, annex III, amended by afterwards, according to the legal retention AMLD5, Directive (EU) 2018/843, Article 44 requirements in force locally.

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What this means for art professionals entities) against sanction lists, watchlists, will need to exercise a thorough level When entering into business relationships, etc. This first line of defense is valuable of scrutiny over each transaction with professionals will need to attribute a risk not only at the inception of the business their customers to determine whether score to the customer. This will determine relationship, but also on an ongoing basis it exhibits features that indicate a risk of the nature of initial due diligence checks. to prevent the reputational damage that money laundering or terrorist financing. Professionals must carry out key due a company could suffer if it does business diligence checks to ensure that they with dubious counterparties. While there is a certain degree of leeway know their customers and their beneficial in the regulations in this regard, there are 74 owners . These due diligence measures 03. a few best practices available such as the are also referred to as “know-your- Responsible Art Market (RAM) checklists. customer” or KYC. Professionals must carry Monitoring of the business When carrying out a transaction with a out the following KYC measures75: relationship customer, art professionals will now have to identify AML/CTF red flags such as: •• Identify the customer (legal name, date Concept of birth/registration, legal address) and •• Does the transaction involve large This obligation derives from the fact that verify this identity (check documents such volumes of cash? customers’ circumstances are likely to as passports or trade register extracts) change during the course of the business •• Is the transaction settled through •• Identify the beneficial owner of relationship; they may potentially move several payments of small amounts? transactions house, or even change occupation for •• Does the trade involve jurisdictions with instance. Such changes may affect the •• Obtain and assess information about low AML/CTF standards? customer’s risk score and therefore the the purpose and intended nature of the due diligence checks that must be carried •• Is the rationale behind the transaction business relationship out. For this reason, it is crucial to keep in line with the intended purpose of •• Carry out appropriate risk-based the customer’s information up to date the business relationship with this procedures to determine whether the (along with the relevant documentation). customer? customer and/or its beneficial owner(s) •• Are third parties involved? is/are politically exposed persons (PEPs) In addition to keeping the KYC files and/or “listed” for another AML/CTF up to date, ongoing monitoring of the •• Potential red flags must be identified purpose76 relationship relies on the automated in the course of the entity’s initial risk identification of potential PEPs or assessment and considered as part of Several situations can warrant the sanctioned customers and beneficial the due diligence process. performance of enhanced due diligence owners (i.e., name screening), and the checks. For instance, when dealing with a automated detection of forbidden or risky customer located in a high-risk77 country, transactions. 74 In the art market, a “beneficial owner” is a natural professionals must increase the number person who ultimately owns or controls the customer and timing of transaction checks and Common pitfalls to exercising constant and/or the natural person(s) on whose behalf a apply the following measures, obtaining monitoring arise when the screening is not transaction or activity is being conducted. For more information on this topic, refer to the article “Ultimate additional information and/or document(s) performed frequently enough (or against beneficial owners and why you need to know about on78: outdated watchlists). For example, the them” by Hajar Ouardi on page 221). professional may realize that the customer 75 T hese are just a few examples and although EU directives •• The customer and beneficial owner(s) became a PEP months ago leading to an set rules, local national laws can be more stringent than directives. •• The reasons for and intended nature of obsolete risk score. 76 U nder AMLD5, the EU specifically requires each member the business relationship state to issue a list of precise public prominent functions What it means for art professionals qualifying a person as a PEP locally. For that matter, •• The source of funds for the transaction Art professionals should maintain relatives and close associates of PEPs are treated as and source of wealth of the customer and Politically Exposed Persons themselves. evidence of every interaction they have beneficial owner(s) 77 T he European Commission publishes and regularly with their customer in order to identify maintains the list of high-risk countries, available •• Approval of senior management to accept changes in their customer’s behavior or at https://ec.europa.eu/info/policies/justice-and- or continue the business relationship characteristics. Failure to do so can result fundamental-rights/criminal-justice/anti-money- laundering-and-counter-terrorist-financing/eu-policy- in questions from regulators as to what high-risk-third-countries_en Local laws usually require professionals to the professional did to track any relevant 78 W hen dealing with a customer located in a high-risk use systems for the purposes of checking changes affecting the customer’s risk country, one or more enhanced due diligence measures counterparties (individuals and legal profile. Furthermore, obliged entities must be performed on top of these, based on guidelines provided by each respective member state.

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04. 05. Adequate internal Cooperation with organization the authorities

Concept What it means for art professionals Concept The effective deployment of the AML risk Professionals who fall within the scope Art professionals will need to set management setup outlined above relies of AML/CTF regulations must cooperate up internal systems to ensure the heavily on the design and implementation fully with the authorities. This entails appropriate level of monitoring. They will of adequate internal AML processes. responding to requests for information need to adjust their processes in light Concretely, this set of requirements implies from the competent authorities in a timely of AML requirements. Their whole AML that obliged professionals will: manner, as well as filing, without delay, framework will need to be documented suspicious activity/transaction reports •• Develop internal policies, controls, and in general policies and operational to the Financial Intelligence Unit (FIU) on procedures to monitor, document, and procedures whose implementation will their own initiative. The right time to do so control all the steps and aspects of the need to be continuously monitored. AML process is when the professional knows, suspects or has reasonable grounds to infer that 79 Members of staff involved in activities •• Appoint a compliance officer at money laundering or terrorist financing has that give rise to AML risk will need regular management level where appropriate been committed, is being committed or is training on the topic so that they are in a with regard to the size and nature of the being/has been attempted. business position to recognize operations that may or may not be related to money laundering 80 What it means for art professionals •• Train their staff to assess AML risk and or terrorist financing activities, and they Successful implementation of AML/CTF ensure that staff have a good level of will also need to record the relevant obligations will enable art professionals to awareness so as to understand and spot information and documentation at each detect and document suspicious activities money laundering risk indicia step of the process. at the on-boarding stage or during the •• Keep track of the risks identified and relationship. For instance, this may be any action that was taken in order to be the case if the actual source of the funds able to respond diligently to authorities’ used for the transaction does not seem enquiries consistent with the information provided by the client or cannot be proven upon request, or if a client is reluctant to provide A key element of the setup lies in the the requested information. These are just professionals’ ability to prove, at all Successful a few situations in which the authorities times, that they have collected and would need to be notified. recorded the necessary information implementation and documents (via communications, identification documents, public sources, of AML/CTF etc.), performed the appropriate level of due diligence, and effectively implemented obligations the required controls. It is important to remember that if the authorities carry will enable art out an audit, any check that has not been documented is deemed to not have been performed at all. professionals to detect and

79 A MLD4, Directive (EU) 2015/849, chapter 1, Section 1, Article 8 § 4 (a) document 80 A MLD4, Directive (EU) 2015/849, chapter 6, Section 1, Article 46 § 1 – when transposing the Directive, the member state shall require that the obliged entities suspicious take measures proportionate to their risks, nature and size, including ongoing training programs, so that their employees are aware of the provisions adopted activities. pursuant to the Directive.

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How can Deloitte help? 01 Deloitte can help you to: •• Perform a company-wide risk assessment With the entry into force of Risk-based approach •• Embed your tailored risk assessment into an all-in-one AMLD5, art professionals are KYC system: D.KYC likely to find Deloitte’s expertise and ready-made tools highly beneficial. These will evidently help professionals to rise to the challenge of understanding and ensuring compliance with AML/ D.KYC is Deloitte's KYC solution covering the entire KYC CTF regulations while building value chain. It encompasses the onboarding process, a cost-efficient, effective, and 02 automated risk scoring, document management, and easily maintainable system. Customer name screening against sanction lists, PEP lists and due adverse media lists. This solution is highly customizable diligence and provides a user-friendly and streamlined way to fulfill KYC obligations.

Our solution helps you to perform review your KYC 03 files on a regular basis and tells you when it is best to Monitoring of take a look and update risk levels. D.KYC also provides the business a document management system triggering alerts relationship whenever a document is due to expire.

•• Deloitte can provide AML consultancy services that help you to define the adequate target system, set With the entry up efficient processes and technologies, and devise into force of tailor-made policies, procedures, control plans, and 04 work materials in order to document and streamline the day-to-day delivery. AMLD5, art Adequate internal •• In order to meet training requirements, generic and professionals organization customized AML training sessions are delivered by our are likely to AML experts either in a classroom or online. •• D.KYC embeds a fully flexible workflow management find Deloitte’s engine, an extensive case management interface, and an exhaustive audit trail, which can be a key support expertise and to the implementation of the designed processes. ready-made tools highly The transmission of the relevant information, either on the art professional’s initiative or upon request form beneficial. 05 the authorities can be significantly eased by D.KYC Cooperation embedded features such as the documentation of the with the due diligence performed and of the monitoring of the authorities relationship within the D.KYC workflow management, case management interface, and audit trail.

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Expert voices

ULTIMATE BENEFICIAL OWNERS AND WHY YOU NEED TO KNOW ABOUT THEM

Pascal Eber Partner Operations Excellence & Human Capital In the context of combatting financial The notion of control Deloitte Luxembourg crime, EU anti-money laundering Pursuant to this definition, the beneficial regulations entering into force in January owner may be the person who ultimately 2020 establish an obligation for art dealers “controls” the structure. In fact, there is a and intermediaries to identify the natural clear distinction between the concepts of person who stands to benefit from the “legal ownership” and “effective control”. art transaction in question. This person is “Control” is a difficult concept to grasp in known as the “beneficial owner”. relation to the art trade. Transactions in the art market typically A beneficial owner can exercise beneficial involve one or more intermediaries; as ownership or control over a company in a result, it can sometimes be difficult to numerous ways, both direct and indirect81: distinguish the intermediary from the •• Direct control is exercised when a person actual beneficiary of the transaction. Hajar Ouardi owns a significant proportion of the Consultant shares or voting rights in a company82 Art professionals classed as “obliged Operations Excellence entities” under the new EU regulation •• Indirect control covers control through & Human Capital (including auction houses, dealers, and other ownership arrangements Deloitte Luxembourg galleries), must perform due diligence checks on all their clients and identify the Specificities of non-face-to-face ultimate beneficial owner(s) of each art transactions transaction. The phrase “non-face-to-face transactions” refers to business relationships that are Definition of the term conducted via the internet, telephone or similar technology83. In 2018, the online “beneficial owner” market grew by 9.8 percent, making it 81 A Beneficial ownership implementation Toolkit, OECD, March 2019 A “beneficial owner” is the natural person(s) worth US$4.64 billion84. Each non-face-to- 82 P ercentages of direct/indirect interest may vary under who ultimately own(s) or control(s) the face transaction will need to be assessed the national laws of each member state customer, and/or the natural person(s) on by the art professional prior to execution. 83 B asel Art Trade Anti-money laundering Principles, whose behalf a transaction or activity is Non-face–to-face transactions typically January 2018 (vi), page 8 being conducted. As such, a legal entity entail a higher level of risk85 in terms of the 84 H iscox Online Art Trade Report 2019 cannot be identified as a beneficial owner. identification of the beneficial owner 85 F ATF (2012), Interpretive Note to Recommendation 10

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and enhanced due diligence processes may identification, and provided that there are buyer and seller that would appear in any be required in certain circumstances. no grounds for suspicion, may consider the contract between them. It should cover senior managing official(s) as the beneficial any natural person who, as the ultimate In this context, deciding which due owner(s)87. beneficial owner, may operate through diligence processes to perform on the another natural person or a corporate client and beneficial owner can pose What happens when there are multiple structure as an intermediary. challenges for art operators. The key intermediaries risk is that certain types of platform and One of the characteristic features of an This is vital in order to clarify whether the website allow anonymity as there are no art transaction is that the beneficial owner client is acting on its own behalf or as an checks on the buyer86. This makes the is not necessarily the client of the art agent. Intermediaries include art galleries, beneficial owner impossible to track. It operator. The client is the person or entity auction houses, art-secured lenders, also hinders the application of anti-money with whom a contractual relationship is logistics operators, and more. However, laundering regulations, especially in cases formed and refers to the buyer as well as the legal framework does not provide a of transactions between private individuals. the seller. The due diligence process should clear definition of the term “intermediaries”, The risk lies in confirming the identity of the go beyond the basic information on the which is a significant legal omission. artwork’s beneficial owner.

Identification and verification of the beneficial owner To identify an individual, professionals require a range of fundamental and basic information: their name, date of birth, The due diligence address, etc.

The identity of the beneficial owner must be verified through supporting evidence process should go that demonstrates the person’s supposed identity. The process for verifying the counterparty’s identity will depend on the beyond the basic type of counterparty in question (whether they are a natural person, legal entity, trust, foundation, etc.). information on the If the counterparty is a natural person, the documentary evidence used for the purposes of verifying the beneficial owner’s buyer and seller that identity typically includes government- issued identity cards and passports. If the counterparty is a legal entity, documentary would appear in any evidence includes extracts from the trade and companies register, articles of association, share registers, etc. contract between them. What happens when there is no beneficial owner There may be cases where no natural person is identifiable as the beneficial owner who ultimately owns or exerts 86 T RACFIN, Tendances et Analyses des risques de control over a legal entity. In such blanchiment de capitaux et de financement du exceptional cases, the art professional, terrorisme 2017-2018, page 72 having exhausted all other means of 87 AMLD4, Directive (EU) 2018/843, Article 3, (12)

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Case studies

Case Study 1

Imagine that art operator A (an auction ––Ascertain the role of the client house) is making a sale to art operator B The auction house should check in (an or professional art dealer), what capacity that intermediary is which is acting on behalf of a specific client acting and the extent of its authority to Auction who is a private collector (C). Who is subject act on behalf of the beneficial owner. house A to the anti-money laundering regulations? selling to B ––Check for potential red flags in relation to As “persons trading or acting as the beneficial owner and the transaction intermediaries in the trade of works of art”, In order to complete its due diligence, both the auction house and art gallery/ the auction house must verify whether professional art dealer must perform due there are any red flags regarding the diligence on the beneficial owner of the beneficial owner or the transaction. If transaction. red flags are detected, an enhanced B is an art due diligence process must be followed. Due diligence to be performed by art gallery or operator A: the auction house Due diligence to be performed by art professional operator B: the professional art dealer art dealer: ––Identification of the beneficial owner INTERMEDIARY The auction house (A) must identify the ––Identification of the beneficial owner beneficial owner(s) of the transaction: The intermediary (B) must also identify acting the natural person(s) who will and verify the beneficial owner (C) of on behalf ultimately benefit from the transaction. the transaction (as explained above). of C Identification involves collecting the following information: name, address, In this situation, a key question should date of birth, and nationality. In this be asked: can operator A rely on the due case, it is the private collector (C). diligence performed on the beneficial owner by art operator B as they are both ––Check on the role of the “client” in the obliged entities? As the art world is still in transaction the process of implementing the regulation, The next step is to check the client’s there is no clear answer. The beneficial role in the transaction. The auction owner is private house must establish if the client is In fact, there are no decisive factors that the principal owner, or a buyer/seller can be used to confirm that the two obliged collector C representing the client. entities have an equivalent level of due diligence as regards anti-money laundering ––Establish a clear link between the client regulations. and the ultimate beneficial owner of the transaction If the client is an agent, advisor or intermediary (as is the case here), the If red flags are detected, auction house must establish the link between the ultimate beneficial owner an enhanced due diligence process (C) and the intermediary (B) as the intermediary does not own the artwork. must be followed.

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Art dealer Case Study 2 A selling to B Imagine an art transaction involving an art •• The supposed beneficial owner has no dealer (A) that met an intermediary (B) who corroborating evidence to prove their represents a potential client—presented as ownership of the artwork the beneficial owner (C) of the transaction. •• The supposed beneficial owner is What due diligence checks should be evasive or reluctant to provide adequate carried out? information relating to their identity or they provide information that appears to Firstly, the art dealer (A) must identify the Intermediary be false B is presenting client (in this case, intermediary B) and then identify the presented beneficial owner •• The supposed beneficial owner has no C as the (C) as per the rules indicated above88. established and documented business beneficial The key question to ask is whether the relationship with the intermediary supposed beneficial owner is the true owner •• The price of the transaction is beneficial owner of the art transaction. inconsistent with what is known about (but there is In many cases, the intermediary is the the buyer (lifestyle, assets, revenue, etc.) scope for doubt true beneficial owner but they are relying on beneficial on a “front man89” pretending to be the •• The beneficiary/account holder of the ownership) beneficial owner in order to avoid the transaction cannot be verified due diligence process. A front man acts informally and usually has the same traits If such red flags are raised, art dealer A as the beneficial owner. may suspect that intermediary B is the actual ultimate beneficial owner and must To prevent this type of situation, art dealer perform all the required due diligence A must be careful and ensure that they fully focusing on B rather than C. understand the rationale behind the art The beneficial transaction. The art dealer must check for 88 S ee the paragraph entitled “identification of the owner is private the following red flags: beneficial owner” in case study 1 collector C 89 T he puppet master: How to corrupt use legal structures •• The supposed beneficial owner has no to hide stolen assets and what to do about it, Van Der involvement in the art world Does de Willebois (2011)

AMLD5 seeks to reduce criminals’ ability • BO registries of trusts and similar Beneficial owner to make use of existing legal loopholes. legal arrangements are now accessible registry It does so by, in particular, increasing to competent authorities, FIUs, and transparency as regards who really owns obliged entities in the context of legal entities and trusts and the identity their due diligence measures, and of the beneficial owner. to any person who can demonstrate The new EU AML/CTF a legitimate interest (although the The key measures implemented by directive does not define “legitimate Directive 2018/843 AMLD5 to improve transparency as interest”) (AMLD5) was published on regards the beneficial owners are as follows: AMLD5 provides for the pooling of 19 June 2018 and entered information among of all national into force on 9 July 2018 • BO registries of legal entities are registers (via the European Central publicly accessible for specific types of with effective application Platform) to promote cooperation information gathered on the beneficial between EU member states. from 10 January 2020. owner(s)

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Expert voices

SAFEGUARDING CULTURAL ARTIFACT

Shedding light on the EU regulation surrounding the Philippe Heeren Lawyer – Customs & Trade introduction and the import of cultural goods. LAGA Belgium, a Deloitte Legal member firm

On 7 June 2019, Regulation (EU) 2019/880 The new regulation starts from the aimed at controlling the introduction of fundamental premise that the introduction cultural goods into the EU was published of cultural goods into the EU that have been in the Official Journal. This regulation was removed from the territory of the country passed by the European Parliament for in which they were created or discovered in the purposes of fighting the illicit trade breach of the laws and regulations of that in cultural goods. A political agreement country should be prohibited. Compliance having now been reached at EU level, the requirements are imposed to ensure that regulation is ready for implementation and adherence to these laws and regulations is shall be fully operational by mid-2025 at the verified. latest. Compliance requirements Adrien Chiariello Art professionals (mainly antiquities To import a non-EU cultural good listed in Former Manager dealers) have expressed concern that the the regulation, the importer will have to Operations Excellence new regulation may present a significant provide an import license or an importer & Human Capital administrative burden that could harm their statement. In exceptional cases, or for Deloitte Luxembourg legitimate business activities. The European specific cultural goods, no additional Commission is expected to set out further compliance requirements will be imposed details regarding the practical application on the importer. This future enhanced of the regulation. The principles guiding the administrative importation process will introduction and import of cultural goods have an impact on the introduction of into the EU have been laid down in the goods into the EU. Nonetheless, the regulation. It is thus the right time to take compliance requirements under the new a look at these principles, which will soon regulation are not all-encompassing. Other shape the rationale behind how non-EU rules and regulations may apply (e.g., AML antiquities are traded in the EU. and CITES).

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Compliance requirements relating to ii. Original works of statuary art This list is then segregated into two sub the introduction and importation of and sculpture in any material; lists, which will affect the decision-making cultural goods will affect trade flows in iii. Original engravings, prints and process: cultural goods. Non-compliance with lithographs; •• If the goods are in category (c) or (d) and the requirements of the cultural goods iv. Original artistic assemblages are greater than 250 years old, then they regulation may have a profound impact and montages in any material; are on list A on the import process because customs authorities may stop goods at border H. Rare and incunabula; •• If the goods are in any other category, checkpoints. Fines and other penalties I. Old books, documents and exclusive of (j), (k), (l), and both greater (imprisonment, permit revocation, etc.) will publications of special interest than 200 years old and €18,000 in value, be imposed in the event of non-compliance, (historical, artistic, scientific, literary, then they are part of list B but these differ between the various etc.) singly or in collections; Member States. J. Postage, revenue and similar The import purpose stamps, singly or in collections; Whereas the regulation conceptually applies The applicability of the cultural goods K. Archives, including sound, to cultural goods that are defined in the regulation depends on two factors: photographic and cinematographic regulation, the compliance requirements • T he nature of the good itself, including archives; differ depending on the nature of the goods its value and age L. Articles of furniture more than one and the purpose of the import. Conceptually, • The import purpose hundred years old and old musical the purpose of the import may be illustrated instruments. by the chart on the right : The nature of the good The nature of the goods falling within the scope of this regulation is clearly defined in Part A of the Annex: A. rare collections and specimens of fauna, flora, minerals and anatomy, and objects of paleontological interest; B. property relating to history, including the history of science The new regulation stems from and technology and military and social history, to the life of national the fundamental premise that leaders, thinkers, scientists and artists and to events of national importance; the introduction of cultural C. products of archaeological excavations (including regular and goods into the EU that have clandestine) or of archaeological discoveries on land or underwater; D. elements of artistic or historical been removed from the monuments or archaeological sites which have been dismembered; territory of the country E. antiquities more than one hundred years old, such as inscriptions, coins and engraved seals; in which they were created or F. objects of ethnological interest; G. objects of artistic interest, such as: discovered in breach of the i. Pictures, paintings and drawings produced entirely by hand on any support and in any material laws and regulations of that (excluding industrial designs and manufactured articles country should be prohibited. decorated by hand);

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Import of cultural goods WHAT ?

Import for Safekeeping, educational / with the intent scientific / Transits of returning research free zone purpose Presentation & all other at commercial cases art fair

Good returning the EU Goods All

INTENT OF THE IMPORTATION are part other of Annex goods Part B (J), (K), (L)

Temporary admission procedure90 Goods are part of Annex Goods stay Goods Part C in the EU leave EU after fair after fair

Import Import Import Import None license statement license statement None REQUIREMENTS UNDER 2019/880

Article 3.4 – Details under validation Article 3.5 Article 3.3

Who needs to provide an import similar right of disposal over them or who regulation indicates that the holder of the license/statement? has physical control of them” (Art. 5, §34). goods should submit the application to the As illustrated in the figure, in some customs authorities of the Member State instances, the regulation requires the Where to apply for an import license? that serves as the EU entry point. Once the “holder of the goods” to present an import Whilst the details of the electronic import importation is complete, the item can be license or an import statement. This term is license application procedure still need moved to another Member State without defined by the EU customs code (Regulation to be outlined in implementing acts, it the need to request a new license. (EU) 952/2013) as follows: “the person who is worth knowing where it needs to be is the owner of the goods or who has a obtained. Article 4, §1&2 of the proposed 90 A s laid out in Article 250 of Regulation (EU) 952/2013

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also addressed a number of related topics, including proposals to apply import checks on cultural property and amendments to the VAT directive. Echoing the frustrations of entities large and small facing new obligations, the CNMA drew attention to the growing burden of compliance for an art market that is composed of small firms (i.e., often with fewer than five employees) as well as the singularity of the art Expert voices market, where trust and discretion are watchwords. Clinical requirements to verify the identity of customers, their source of funds and wealth, and to report suspicious transactions, THE FIFTH ANTI-MONEY introduce friction in an already delicate sales process. LAUNDERING DIRECTIVE: Deloitte welcomed the opportunity to share best practice and perspectives A EUROPEAN EVOLUTION, NOT on financial crime compliance with the CNMA and its members in June 2019 REVOLUTION, FOR ART MARKET in the offices of Beaux Arts & Cie. The exchange drew on our experience PROFESSIONALS IN FRANCE assisting non-bank financial institutions as well as non-financial businesses to strengthen their compliance programs. Among the trends highlighted was the growing regulatory acceptance of collaborative arrangements to manage AML obligations more efficiently and effectively. Such arrangements, including pooling staff, technology, or other resources, could be especially relevant to art market professionals, providing operational efficiencies as well as increased risk intelligence. Sean Dunphy Olivier Thierry Director Senior Manager Deloitte will be conducting a survey Deloitte France Deloitte Forensic, France of market participants to gauge their level of compliance with AML regulations and operational Art market professionals in France have In France, art market professionals are challenges. The results of this survey been subject to Anti-Money Laundering represented by the French National are expected to support industry bodies (AML) regulations since 2001. As such, Council of the Art Market (Conseil in their continued engagements with the obligations imposed by AMLD5 are National du Marché de l’Art, or CNMA), the Directorate General of Customs not new for professionals operating an apex body comprising professional and Indirect Taxes (i.e., the sectoral in the fourth-largest art market in the associations of antiques dealers, art regulator), in particular, as regards the world91. However, as the art market galleries, and auction houses, among development of practical guidelines comes under increased scrutiny, others. In January 2019, the CNMA wrote for art market professionals as well as notably as regards the evaluation to the president of the French Republic high-value dealers. The findings will also of France’s compliance with global to draw attention to, inter alia, growing inform the development of Deloitte’s standards, art market professionals regulatory complexity and the cost of Art & Finance offerings in France from are pointing to the unique challenges compliance. This letter was written in the ongoing compliance training to forensic they face in complying with AML context of Brexit uncertainty, including and business intelligence services and obligations and the potential impact the prospect that the United Kingdom managed services. of these obligations on France’s could potentially free itself from competitiveness. certain European obligations. The letter 91 Art Basel and UBS 2019 Art Market Report

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How Deloitte Netherlands interacts with the art community to comply with Case study the fifth AML directive

in agreement with the reasoning behind to the opening of TEFAF 2019. Close to 90 the inclusion of the art trade in the fifth international art dealers and exhibitors EU AMLD. The EU Parliament shrugged off attended this session. both arguments; sleeping lobbyists and some high-profile cases of tax evasion In addition to reaching out to TEFAF/ were mentioned. PAN, we engaged with organizations such as the KVHOK, the Dutch Gallery As part of the Deloitte Art & Finance Association, and the Dutch Federation initiative, we took it upon ourselves to of Valuers, Real Estate Agents and provide the art trade in the Netherlands Auctioneers and offered our assistance with further information by organizing the in setting up the Deloitte KYC solution at first mini-seminar on this subject together branch organization level. Compliance with the Ministry of Finance in November with and enforcement of the earlier 2018. The date was chosen to coincide AML directives have been fairly relaxed with the PAN Amsterdam Art Fair and was in the Netherlands and the competent Duco Wildeboer held only one metro stop away from the authorities have not yet published their Senior Manager, Financial Advisory RAI in Deloitte’s Edge building. Paul van approach to the matter. Recent inquiries IPO & Governance Services Gelderen (Manager Tax, Private Clients) with some houses have, Deloitte Netherlands and Duco Wildeboer (Senior Manager, however, sparked enthusiasm for Financial Advisory) from our Amsterdam enhancing their existing extensive CDD office introduced the subject and Adrien practices. Chiariello from our Luxembourg office A short series of articles in Dutch presented the solution designed for the Deloitte’s most recent effort was a newspaper NRC Handelsblad in April art trade: DKYC. This seminar, the first of speaking engagement at the first 2018 alerted the wider audience to a its kind in the Netherlands, was followed International PAIAM Conference outside fundamental change in the traditional up by two further conferences organized the UK/US. PAIAM (Professional Advisors and highly confidential art market: the by Russell Advocaten in Amstelveen and in the International Art Market) is an introduction of the fifth EU Anti-Money were aimed at art trade professionals. organization with over 250 vetted Laundering Directive. From January 2020, Duco Wildeboer led the audience into members from Europe and the Americas. the art trade will be obliged to perform a the matter and suggested our DKYC tool Craig Davies (Rawlinson-Hunter UK) and customer due diligence investigation (CDD) as the solution to the administrative Duco Wildeboer introduced the subject ahead of transactions. This new process burden. Clients can choose from a variety from both a UK and a Continental EU represents a steep change for a discreet of solutions, from simple screening perspective, and Duco presented the trade that relies on trust, business cards, to a fully serviced platform. The three DKYC solution that has been developed and a handshake. Performing CDD events brought together over 80 Dutch leveraging our experience in KYC/CDD for ahead of the transaction and asking for a art dealers, gallerists, lobbyists, and international banks. customer’s source of wealth (among other auctioneers. details) will be something of a shock to the Deloitte will continue its commitment to art community. Following our efforts to educate the trade, assisting the art community with solutions the TEFAF Maastricht organization invited like DKYC and has also developed The Netherlands art trade and Paris-based Mrs. Karin de Jong, partner Risk Advisory blockchain solutions to help smaller CINOA expressed surprise and said that in our Amsterdam office, to be a panelist companies cope with their administrative they were not consulted and certainly not at the dealer’s seminar held in the run-up burdens.

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Expert voices

TRANSPOSITION OF THE FIFTH ANTI-MONEY LAUNDERING DIRECTIVE INTO UK LAW: LEGISLATIVE AND PRACTICAL CHALLENGES

Tamsin Baumann Francesco Trifilo Georgia Tongue Partner - Forensic Manager - Forensic Manager - Forensic Deloitte UK Deloitte UK Deloitte UK

The UK art market is currently the Papers”94: a leak of 11.5 million files from second largest globally, accounting for 21 the Panamanian law firm Mossack Fonseca, percent of global sales after the US (44 which exposed the use of offshore percent), and before China (19 percent)92. companies by some of the world’s most 92 T he Art Market 2019 – An Art Basel and UBS Report Key to maintaining investor confidence prominent figures to hide their wealth, (https://www.artbasel.com/news/art-market-report), and eminence in the market, as for any evade taxes, and commit fraud. pg. 37 – fig. 1.4 asset class, is a robust legal framework 93 E uropean Parliament and Council Directive (EU) 2018/843 on the prevention of the use of the financial protecting it against illicit activity. Whilst few art-related money laundering system for the purposes of money laundering or cases have been brought as a result terrorist financing (2018), Official Journal of the From January 2020, the UK art market will of the Panama Papers, the documents European Union, L156 be subject to tighter anti-money laundering reveal how true ownership of artwork 94 h ttp://europa.eu/rapid/press-release_ STATEMENT-18-3429_en.htm (AML) regulations as a result of a new can be hidden behind a veil of offshore 95 95 h ttps://www.nytimes.com/2016/04/12/arts/design/ European Union directive, the fifth anti- shell companies . A lack of transparency what-the-panama-papers-reveal-about-the-art- money laundering directive (AMLD 5)93. with regard to beneficial ownership, market.html The new directive was issued in response together with art’s transportability, high 96 S hea, A., 2018, “Shooting Fish in A Bliss Bucket: Targeting Money Launderers in the Art Market”, to, among other things, the vast financial value, and inconsistent and seemingly Columbia Journal of Law & The Arts, Vol. 41, no.4, pg. dealings uncovered by the “Panama arbitrary pricing mechanisms96, may have 667

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territory where import duties and taxes Art’s transportability, high value, and do not apply to the goods introduced, inconsistent and seemingly arbitrary pricing and free port operators will also become obliged entities. mechanisms, may have led authorities to Challenges for the UK market conclude that art is, or has the potential to be, Regardless of whether the UK leaves used as an asset to evade taxes and launder the EU, all indications suggest that the UK government will implement money. AMLD 5. On 15 April 2019, it published a consultation paper that highlights a number of legislative challenges involved in implementing the requirements led authorities to conclude that art is, or Current UK regulations of AMLD 5. Two broad categories are has the potential to be, used as an asset Under the Money Laundering, Terrorist identified: to evade taxes and launder money97. This Financing and Transfer of Funds 01. definition of terms outlined in AMLD 5 hypothesis is currently being tested by US (Information on the Payer) Regulations 02. practical challenges. authorities who have seized art, including 2017 (Money Laundering Regulations), a Monet, Picasso, and Basquiat, as part individuals or entities in the art market are With regards to defined terms, the of an operation to forfeit assets allegedly only required to register with Her Majesty’s consultation paper identifies the following purchased in an effort to launder funds Revenue and Customs (HMRC) for AML challenges: misappropriated from Malaysia’s 1Malaysia purposes if they fall under the definition Development Berhad fund. of a high value dealer: “persons trading in 01. Businesses falling within the scope goods to the extent that payments are made of the term “art intermediaries” need The new requirements will pose or received in cash in an amount of EUR to be defined. “A person or company operational and commercial challenges for 10 000 or more”99. Therefore, art dealers that buys and sells works of art by art dealers and intermediaries who must in the UK can avoid the obligations under way of business”, such as a gallery establish the infrastructure required to the Money Laundering Regulations if a owner, private dealer or auctioneer, is conduct customer due diligence (CDD) and customer pays for goods worth €10,000 or generally understood to be included in report suspicious transactions. Industry more through non-cash payment methods. the term “art intermediaries”. However, groups such as The British Art Market For example, an art dealer would be it is unclear whether businesses Federation have voiced concerns around exempt from conducting CDD if a customer that are not involved in making or the introduction of AMLD 5, especially for paid €9,999 in cash and the remainder via receiving the payment, such as art smaller art businesses98. In this article, electronic bank transfer. curators, consultants or specialists in we explore some of the practical and art storage and shipment, would also legislative challenges posed by the new Future regulations fall within the scope100. If these entities directive. AMLD 5 was published on 19 June 2018 do fall within the scope, the party on and must be transposed into national law whom the intermediary must carry out by 10 January 2020. For the art market, CDD—buyer, seller or both—will also the new legislation represents a significant need to be clarified. departure from the previous regulatory regime. It explicitly names the art market 02. Clarification around the term “works of art” also needs to be provided. Within 97 h ttps://www.law.com/newyorklawjournal/2019/03/29/ in the list of obliged entities that must existing legislation, there are a number art-market-may-be-asked-to-reveal-whats-behind-the- comply with the directive. Art dealers curtain-with-proposed-legislation/ and intermediaries involved in the trade of definitions; for example, the VAT 98 ht tps://www.artatlaw.com/archives/new-anti-money- of works of art, including art galleries Act 1994 describes works of art as laundering-regulations-target-art-market and auction houses, will have to perform objects that can be executed entirely by 99 w hether the transaction is carried out in a single CDD in relation to transactions, or a hand and do not encompass antiques operation or in several operations which appear to be 101 linked series of linked transactions, amounting or collectors’ items . The paper 100 U K Government (2019) “Transposition of the Fifth to €10,000 or more regardless of the questions whether the art industry can Money Laundering Directive: Consultation”, London: means of payment. They will also have to agree on a single definition, such as the HM Treasury, pg.22 report suspicious transactions to the local one above, and whether it is suitable 101 V alue Added Tax Act 1994, s.21. for AML purposes. Available at: http://www.legislation.gov.uk/ Financial Intelligence Unit. Furthermore, ukpga/1994/23/section/21 free ports, an area within a customs

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Comer del Arte Quiero © Lina Sinisterra (2010)

03. The paper queries how free ports conduct CDD on all potential buyers Conclusion should be defined in UK money and sellers, in cases where there is While the outcome of the UK laundering legislation given that none a realistic possibility that the final Government’s consultation on the currently operate within the UK. price of one artwork will be above implementation of AMLD 5 is imminent Customs warehouses, which offer €10,000. However, the government and expected to resolve some of the the same advantages as free ports, acknowledges difficulties connected legislative challenges outlined above, may also need to be included. A to the variable pricing of works of art, art dealers and intermediaries must paper published in October 2018 by where two similar pieces can fetch nevertheless prepare to adopt a the European Parliament on money hugely different sums. CDD carried risk-based approach to managing the laundering and tax evasion risks in out on the basis of estimated value money laundering risk associated with free ports suggests that the common may pose greater administrative and transactions and customer relationships. advantages of tax-deferral and secrecy commercial challenges, particularly to offered by both free ports and customs smaller industry operators. A risk-based approach will entail drafting warehouses result in similar AML and and implementation of policies and tax evasion risk102. 02. Finally, there are challenges in procedures which address: 1) enterprise- determining what constitutes a series wide risk assessments; 2) customer risk With regards to practical challenges, the of linked transactions equivalent to assessments; 3) customer due diligence; consultation paper considers the following: €10,000. The government points to 4) ongoing monitoring; 5) screening; the definition contained in HMRC’s and 6) reporting suspicious activity and 01. The challenges around timing of CDD guidance for high-value dealers as maintaining records. Furthermore, staff for art intermediaries (described a potential approach: “multiple… will require AML training to ensure the above) that are acting in relation to a payments against a single invoice, effective embedding of these controls. transaction worth €10,000 or more which together exceed the EUR For more information on this topic, refer but not executing the transaction 10,000 threshold, regardless of to “Anti-Money Laundering Obligations themselves. CDD should be conducted how long it takes to make the and Solutions” on p.216. While larger prior to exchange of funds; however, payment”103. If adopted, this will businesses are more likely to have funds the intermediary may not be privy to require art intermediaries to establish enabling them to adapt to the new the exact date of the transaction or a transaction monitoring system that requirements, smaller businesses may have time to complete CDD prior to the sends an alert when the total sum find compliance a significant burden on transaction taking place. Timing of CDD of multiple payments reaches the their operations and finances. is particularly challenging for auction €10,000 threshold. houses as the sale may conclude before the buyer’s identity is known. 102 E uropean Parliament, 2018, “Money Laundering and Tax Evasion Risks in Free Ports”, Brussels: European The government posits that, as a result, Parliamentary Research Service, p.13 103 H MRC. (2010). Anti-money laundering supervision: guidance for high value dealers, p.22. - Available art intermediaries may be required to at: https://www.gov.uk/government/publications/anti-money-laundering-guidance-for-high-value-dealers

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While larger businesses are more likely to have funds enabling them to adapt to the new requirements, smaller businesses may find compliance a significant burden on their operations and finances.

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Expert voices

ANALYSIS OF ANTI-MONEY

LAUNDERING FOR ART Chris Cheung Partner TRADE IN CHINA Beijing AML Center - Deloitte China

In the spring of 2019, the second plenary metals trading, art auctioning and pawn privacy and identity of both buyer and meeting of the Financial Action Task Force stores) has been highlighted as a higher seller (FATF) evaluated and adopted the Mutual risk sector in a number of FATF mutual 04. The broader concept of ‘money’ in Evaluation Report on Anti-money evaluation reports. the art trading industry (traveler’s Laundering and Counter-terrorist For example: checks, bank drafts, securities, jewelry, Financing (AML/CFT) System of the 01. The Fourth Round FATF ME antiques, real estate, and so on). People's Republic of China (China). The Report pointed out the high-value report commented that China has goods dealers of the jurisdiction New business models have developed, established a multi-dimensional national should enhance their AML/CFT work including art finance, online art trading and ML/TF risk assessment framework and is participation. art shares trading, which have attracted a operating the Joint Inter-ministerial 02. The Austria Fourth Round FATF ME number of social funds. Conference for AML effectively, specifically Follow-up Report issued in 2018 for the Financial Institutions (FI) and pointed out there had been no With the growth of China’s economy in non-bank payment institutions. However, it requirement for high-value goods recent years, art trade has ushered in a also pointed out that China’s AML dealers in the jurisdictions to identify phase of prosperous development. In this supervision of Designated Non-Financial the customer identity of legal persons regard, China has taken active measures to Businesses and Professions (DNFBP) called and arrangements. strengthen the AML/CFT framework for a strengthening of the risk assessment specifically focused on this sector. and compliance standard of DNFBPs. Some of the key features of this industry that have made it susceptible to money One of the priorities for the Chinese At the 6th China Anti-Money Laundering laundering (not just in China, but globally) presidency for the FATF includes Summit Forum held in December 2016, include (non-exhaustive): developing best practices for fighting the the Deputy Governor of the People's Bank 01. No transparency in the price of laundering of money via illegal trafficking in of China (PBC) mentioned that while AML artwork, as there is no authoritative wildlife104. A practical example is the recent compliance has generally developed in the institution or evaluation standard to case in which a record 8.8 tons of ivory financial industry, money laundering determine the value of art were seized by Singaporean customs owing activities in China have begun to penetrate 02. Difficulty in determining the to accurate intelligence provided by the DNFBPs sector. authenticity of cultural relics Chinese customs. The director of Nanning 03. Lack of transparency in the end to end Customs was said to have remarked that Globally as well, high-value goods dealing transaction owing to the very nature the case was the first joint cross-border (including the sale of real estate, precious of the auction rules, which protect the crackdown by the customs of China and

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New business models have developed, including art finance, online art trading and art shares trading, which have attracted a number of social funds.

Singapore through international law Principle (the Principle). The Principle 04. Implementing controls on third party enforcement cooperation, which wiped out clearly defines the AML standard for art payments and high-value transactions the transnational smuggling network105. dealers: the use of a risk-based approach that use cash to address three major types of risks; i.e. 05. Defining typical red flags and Additionally, the Notice of the General customer identification, the source of establishing escalation protocols Office of the People’s Bank of China on artworks, and the source of funds for for transactions which display Strengthening the AML Supervision Work buyers involved in the transaction. such characteristics–for example, on DNFBPs (No. 120 [2018] of the General unwillingness to provide sufficient Office of the PBC, or the Notice) published Some best practices to consider when information about customer identity or in July 2018 stressed that DNFBPs should implementing such an approach include: assets; payment by cash, abide by the laws and regulations and 01. Providing regular training for credit card or stored value card; should work to mitigate AML/CFT risks. employees covering their roles and intentionally targeting for sales by responsibilities in preventing, detecting reducing or raising prices; providing The Ministry of Culture of China has also and reporting suspicious transactions, multiple low-value cash payments; if issued the Administrative Measures for as well as the process of escalating an entity used for purchasing or selling Operation of Art Businesses (No. 56 of the such suspicious transactions artwork has a complex structure; close Order of the Ministry of Culture, or the 02. Identifying and verifying the source connections with politically exposed Measures). These Measures clearly define of artworks, establishing a process to persons/persons who are known the objects under administration, have ascertain the authenticity of artworks (or said) to have been subjected to facilitated an industry census and have and ensuring that sufficient, legitimate criminal or regulatory investigation, prohibited the operation of art businesses instructions are provided for selling the prosecution or conviction; and residing for the purpose of raising funds or by means artworks or operating in high-risk jurisdictions of illegal pyramid selling. The Measures 03. When confirming the source of funds, 06. Defining records retention define a number of prohibitions including defining policies on the countries requirements. trading artworks from illegal sources, from which payments are accepted impersonating others, and trading artworks (for example, those that have taken In summary, the current AML control made from animals and plants that are reasonable measures to implement framework in China's art market is prohibited from trading. AML/CFT and anti-tax evasion controls, improving, and efforts to further define financial institutions with good policy and regulations in this sector are The Basel Institute on Governance also reputation, etc.) ongoing. recently published the Basel Art Trade AML

105 XinhuaNet - http://www.xinhuanet.com/english/2019-07/23/c_138251392.htm 235 Art & Finance Report 2019 | Section 6 - Risk Management & Regulation

Expert voices

MONEY LAUNDERING IN Dr Ralph Wyss Attorney at Law, Partner Audit & Assurance ARTS, A SWISS PERSPECTIVE Deloitte Switzerland

Legal framework auditor to verify their compliance with the Like everybody else in Switzerland, art specific requirements and file a SAR with dealers fall under the scope of the general the MROS if there are reasonable grounds criminal law provision of Art. 305bis of the for suspicion111. Apart from that, they are Swiss Criminal Code (SCC)106, which defines not subject to any specific supervision. money laundering as a criminal offence. Furthermore, the Swiss Anti-Money Under the Cultural Property Transfer Laundering Act107 (AMLA) applies to, inter Act, art dealers are required to establish alia, natural persons and legal entities that the identity of sellers and request a deal in goods commercially and in doing declaration in writing confirming their right 108 112 Nadine Esposito so accept cash (i.e., dealers) . Art dealers to dispose of the cultural property . If M.A., Assistant Manager who meet this definition and accept more an art dealer fails to fulfil this duty and in Deloitte National, than 100,000 Swiss francs in cash—even in doing so accepts compensation from an Deloitte Switzerland instalments—in the course of a commercial illegitimate source, they could possibly be transaction must (1) verify the identity of guilty of committing money laundering the customer, (2) establish the identity of under the SCC. the beneficial owner, and (3) keep records. They are exempt from these requirements Since the introduction of dealers’ if payments are made through a financial reporting requirements in 2016, the MROS intermediary (e.g., a bank)109. Where a has not received any SARs for the art transaction appears suspicious, they must dealer category113. However, the number immediately file a suspicious activity report of SARs filed by financial intermediaries (SAR) with the Swiss Money Laundering that in some way involve art dealing is Reporting Office (MROS)110, and the Swiss noteworthy, for example (1) the renowned Financial Intelligence Unit (FIU). Art dealers painting at the center of an advanced covered by the AMLA must also appoint an fee scam114, (2) the art dealing case Jasmina Iljazovic MLaw, LL.M., 106 S wiss Criminal Code of 21 December 1937 111 A rt. 15 AMLA. Further details are provided the Federal Assistant Manager Audit (status as of 1 March 2019). Ordinance on Combating Money Laundering and & Assurance 107 F ederal Act on Combating Money Laundering Terrorist Financing of 11 November 2015 (status as of Deloitte Switzerland and Terrorist Financing of 10 October 1997 1 January 2016). (status as of 1 January 2019). 112 F ederal Act on International Transfer of Cultural 108 A rt. 2 (1) (b) AMLA. Property of 20 June 2003 (in accordance with the UNESCO Convention of 14 November 1970), Art. 16. 109 A rt. 8a AMLA. 113 M ROS, Annual Report 2018, April 2019. 110 A rt. 9 (1bis) AMLA. 114 S ee: https://www.fedpol.admin.ch/dam/data/fedpol/ kriminalitaet/geldwaescherei/jabe/jb-mros-2016-e. pdf (para. 3.17). 236 Art & Finance Report 2019 | Section 6 - Risk Management & Regulation

involving an alleged sale of a painting by minimal legal framework: tenants must Contact Marc Chagall115, and (3) works of art and a disclose their beneficial owners and •• Jasmina Iljazovic criminal organization case116. the identities of subtenants and their MLaw activities are also required. Names and [email protected] FATF Mutual Evaluation Report ownership are cross-checked against The FATF noted in its 2016 Mutual SECO123, FINMA124, and Interpol databases. •• Nadine Esposito Evaluation Report for Switzerland Swiss free ports are neither financial M.A. that “[t]he threshold of CHF 100 000 intermediaries nor dealers in the sense [email protected] (approximately USD 101 296 /EUR 91 340) of the AMLA definition; their control is •• Ralph Wyss seems very high, even for Switzerland, for exercised rather indirectly through the due PhD, Attorney at Law, Partner ensuring transparency and limiting the diligence obligations incumbent upon the [email protected] use of cash usually associated with this financial intermediaries and dealers that type of measure”117. However, it made no meet the threshold requirement outlined specific recommendations for the sector. above. Nevertheless, the fact that there 115 S ee: https://www.fedpol.admin.ch/dam/data/fedpol/ The planned changes, which are expected is no verification that the settlement of a kriminalitaet/geldwaescherei/jabe/jb-mros-2015-e. to enter into force on 1 January 2020, transaction in the free ports was carried pdf (para. 3.2.1). will thus only extend the due diligence out by a financial intermediary remains 116 S ee: https://www.fedpol.admin.ch/dam/data/fedpol/ kriminalitaet/geldwaescherei/jabe/jb-mros-2013-e. requirement to dealers in precious metals problematic despite the regulatory pdf (para. 3.17). 125 and stones by lowering the threshold to changes . 117 FATF, Mutual Evaluation Report, Switzerland, 15,000 Swiss francs in accordance with December 2016, para 303. FATF Recommendation 22118. The threshold Self-regulation 118 FATF, The FATF Recommendations. Recommendation for all other dealers covered by the AMLA The Basel Institute of Governance 22 focuses solely on the following designated non-financial businesses and professions: casinos, definition remains unchanged at 100,000 concluded in its 2012 working paper on the real estate agents, dealers in precious metals and Swiss francs. draft Basel Art Trade Guidelines that “the dealers in precious stones, lawyers, notaries, other art trade has shown a pronounced lack independent legal professionals and accountants, trust and company service providers. Major luxury Free ports of interest in constructively dealing with sectors such as personal luxury items, art, and luxury Although Switzerland accounts for only the proposed guidelines” and “reactions transport fall outside the scope. 2 percent of the global art market119, to a letter sent to key representative 119 A rt Basel & UBS Report, The Art Market 2019. it is regarded as a major player. This is of the art trade industry […] were met 120 B BC, Geneva Free Port: The greatest art collection no- because it hosts the Art Basel fair and has with reservation and outright refusal to one can see, 1 December 2016 https://www.bbc.com/ news/entertainment-arts-38167501. a network of free ports, including the one engage.”126 The institute issued the Basel 121 T he Globe and Mail, The link between art and in Geneva (GFPW), which is the largest Art Trade Anti-Money Laundering Principles money laundering, 15 May 2018 https://www. tax-free storage site for art in the world and in 2018, seeking to complement and set theglobeandmail.com/report-on-business/ has been described as “the greatest art out in more detail the AML aspects of the international-business/european-business/ economists-urge-tighter-regulations-to-curb-money- 120 127 128 collection no one can see” . It is estimated 2012/2018 guidelines . laundering-in-art-market/article26217852/. See also to store at least US$80 to US$100 billion https://www.fedpol.admin.ch/dam/data/fedpol/ in assets. Increasingly, over recent years, In light of the above, a group of significant kriminalitaet/geldwaescherei/jabe/jb-mros-2015-e. pdf (para. 3.2.11) for an example of a SAR relating to free ports have been the subject of political market participants established the contraband watches in a Swiss free port. debate, as such warehouses could be Responsible Art Market (RAM) Initiative, a 122 F ederal Ordinance on Customs as of 1 November misused for the storage of illicit goods and non-profit, cross-market initiative formed in 2006 (status as of 1 January 2019), Art. 184 (1) for the purposes of money laundering Geneva in 2015, aiming to raise awareness (c). Detailed requirements are listed in Guidance 10-30 of the Federal Customs Administration, and tax evasion. During their stay inside amongst art businesses of the risks faced Customs Warehousing Procedure for Open Bonded the free port—that in practice can last by the art industry in Switzerland and Warehouses as of 1 June 2019. for decades—objects go untaxed, and abroad, and to provide practical guidance 123 S tate Secretariat for Economic Affairs. once inside the free port, art can be sold and a platform for sharing best practice. 124 S wiss Financial Market Supervisory Authority. privately and anonymously to other buyers, More can be learnt about this initiative later 125 GFPW, Press Conference of Free Ports and Warehouses SA Geneva – 8 June, 2016 https://geneva-freeports.ch/ without necessarily leaving the warehouse in this section. files/8714/7392/8901/dossier_presse_uk.pdf. 121. after the transaction 126 B asel Institute of Governance, Basel Art Trade As Switzerland is heavily engaged in Guidelines, Intermediary report of a self-regulation Following the strategy of the Federal distributed ledger technologies such as initiative, 2012 https://www.baselgovernance.org/ sites/default/files/2018-12/biog_working_paper_12. Council, as recommended by the Federal Blockchain, diverse market players are pdf. Audit Office, the Customs Ordinance looking into using these new technologies 127 T he 2012 Guidelines had been reissued in 2018 was amended and has stipulated since to track and trace art. Supported by without any material changes. 1 January 2016 that the name and address internet of things (IoT) solutions, these 128 B asel Institute of Governance, Basel Art Trade Anti- of the owner of the goods must be offerings have the potential to further Money Laundering Principles, 2018 https://www. 122 baselgovernance.org/sites/default/files/2019-01/ listed in the inventory . The measures improve reliability and transparency in the Basel%20Art%20Trade%20AML%20Principles%20 adopted by the GFPW go beyond the art market. 2018.pdf.

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Expert voices

AML AND THE ART MARKET IN RUSSIA

Anti-Money Laundering (“AML”) legislation in the Russian Federation is mainly based on Federal Law No. 115-FZ dated 1 August 2001 “On Prevention of Laundering Criminal Proceeds and Terrorist Financing” (the “AML Law”).

Alina Davletshina in 2009 (and amended them in 2014). The “Association”). Accredited by the Russian Senior lawyer Recommendations are aimed at creating Ministry of Culture, the Association is Deloitte Legal CIS a mechanism to counter the laundering of responsible for protecting the artists’ criminal proceeds and terrorist financing. and their successors’ “right to follow” (the The Recommendations provide a list of right to receive a fee on each resale of an “red flags” for suspicious transactions; artwork). Now the Association is entitled transactions in artworks were one such red to request financial data when art assets flag. change hands.

Neither the AML Law On 1 March 2019, Rosfinmonitoring In December 2018, two Russian art issued Information Letter No. 59, auction houses underwent a prosecutor’s nor any other Russian containing recommendations on AML inspection over an alleged violation of the law expressly requires risk assessments. One of the client risks “‘right to follow” (based on a request made mentioned is “sale of artworks, antiques, by the Association). Auction houses were art market professionals and luxury goods”. This does not mean obliged to disclose the financial documents to follow the rules and that all transactions in artworks trigger relating to the sale of certain pieces of art AML compliance measures. Instead, to clients. This measure is not primarily obligatory procedures set the Recommendations are intended as aimed at combatting money laundering; out in the AML Law. guidance for entities that fall under the however, it may prove to be an effective mandatory AML compliance requirements instrument to bring transparency to the (e.g., banks, insurance companies, etc.), Russian art market. AML compliance is monitored by the helping them to mitigate the associated Federal Service for Financial Monitoring risks. We have asked market players to comment (“Rosfinmonitoring”). Rosfinmonitoring on 5AMLD and its potential impact on the issued recommendations on the “Right to follow” and AML in Russia Russian art market. We also talked with them implementation of non-typical A recent law expanded the powers of about their art-related activities and initiatives transactions (the “Recommendations”) the Copyright Holders Association (the to promote and develop the market.

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Inna Bazhenova Ksenia Podoynitsyna Publisher of The Art Newspaper Russian contemporary art-market international network, founder of expert and founder of InArt the IN ARTIBUS cultural foundation, a project that provides Russian co-publisher of The Russian Art contemporary art analytics Focus, art collector

The implications of 5AMLD for the Ksenia Podoynitsyna, InArt founder and CEO: European market are still difficult to “5AMLD will not have direct implications for the Russian or EU art markets. However, assess. since it increases market transparency requirements, including as regards asset diversification, the resulting restructuring Inna Bazhenova: art market and reject any manipulations of portfolios may spark more interest in “The statement that art sellers ‘should that distort our picture of the market. alternative investments, including works request information on the source of of art. This will directly stimulate interest funds and the source of their clients’ funds As for the Russian art market, it depends in alternative asset classes and may in general when the client comes from a on the general economic situation and eventually affect the size of the art market third country with a high risk level’, in my the political climate of the country. One in Russia. understanding, directly concerns Russian of the significant factors limiting the art buyers. If this requirement is followed Russian art market is its isolation within At present, 5AMLD is not having a major to the letter, it will undoubtedly affect the the country. There are numerous other impact on the Russian art market. The Russian art market. In my experience, objective reasons: the quality of artworks, number of transactions involving EU-based the art market in Russia is not involved in national legislation, lack of information, trusts buying artwork from Russia is small, money laundering, at least in a broad way. and so on. As a publisher, I consider it my and Russians rarely use this tool to make However, as a rule, collectors do not like goal to integrate the Russian market into purchases. Information about art trusts to disclose their acquisitions in full. The the international context. We publish all operating in Russia is currently unavailable. market is already suffering because of its sorts of information on the international The implications of 5AMLD for the considerable isolation from European and art market in Russian and for the European market are still difficult to assess. global markets. Moreover, an additional Russian-speaking audience and share Most transactions are transparent, and barrier on the side of auction houses and Russia-related information across the those that look suspicious to financial other art sellers will reduce the activity of entire global network of our publications. authorities are investigated on a case-by- Russian buyers and further separate the In partnership with the Aksenov Family case basis. local market from Europe and the rest of Foundation, we have launched a new the world. product—the Russian Art Focus edition— Details about such transactions are which informs and educates our readers published and used to promote enhanced Personally, as a collector, I do not see any on Russian art and is in English. I hope transparency and a better understanding problems resulting from 5AMLD, since I that it will attract additional attention of the market rules. The directive may also always represent myself at auctions when to Russian art in general and modern affect projects that use digital currencies, I buy art. I stand for transparency on the Russian art in particular.” such as Bitcoin”.

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Denis Belkevich Co-founder at FUELARTS, art analyst and economist, professional manager of cultural projects, art investment & collection management consultant

Denis Belkevich comments on 5AMLD: US$1 billion to US$1.5 billion of Western “It all depends on whether the UK will art a year, while Russian art purchases remain in the EU. With the UK, the add up to only US$200 million), it might European art market accounts for up to affect the Russian market, too. Should 32 percent of global turnover; without it, collectors’ attention and capital be drawn only 11 percent. Traditionally, the most to our internal art market and should expensive purchases are made in the they receive social and status returns on UK (through London auction houses). If their spending, this may prove a positive Brexit happens, the balance of power outcome for the Russian art market.” will remain virtually unchanged: London will remain the place for trading the ‘blue chips’ and a slow decline that began in 2009 (about -1 percent per year) will continue in the remaining EU countries. If the disclosure of information on purchases above €10,000 eventually does affect the UK, many buyers are expected to move over to New York, Hong Kong, and Geneva (Switzerland, we recall, is If 5AMLD affects not in the European Union). On the other the international hand, the average cost of artworks sold at international fairs—the main sales purchases of Russian channel of the gallery market—in recent years amounted to slightly less than collectors (who, €6,000. Thus, such transactions do not according to various fall under the regulations anyway. sources, acquire US$1 In Russia, the picture is reversed. billion to US$1.5 billion Let’s say the European Parliament’s 5AMLD affects the domestic Russian of Western art a year, art market. This would signify that the market does exist and has a tendency while Russian art of becoming more transparent. While purchases add up to it is still at the formation stage, the European turbulence will not affect it at only US$200 million), all. If 5AMLD affects the international it might affect the purchases of Russian collectors (who, according to various sources, acquire Russian market, too.

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Expert voices

Trisevgeni Stavropoulos EXPERIENCES FROM Head of Compliance at the Antwerp THE DIAMOND INDUSTRY World Diamond Center (AWDC)

The art trade is not the first non-financial sector to face Anti-Money Laundering (AML) regulations. Industries sharing analogous characteristics, such as the diamond trade, have already had to adjust and the art industry could learn a lot from their experiences.

Sarah Philips Director Risk Advisory – Financial crime Interview with Trisevgeni Stavropoulos, understanding the goal of Anti-Money Deloitte Belgium Head of Compliance at the Antwerp World Laundering Laws (AMLL). Diamond Center (AWDC), which is one of the world’s largest hubs for diamond Were any initiatives led by the trading. Belgian industry itself to make the transition easier (e.g., any efforts by a When was the diamond industry first professional association to mutualize obliged to follow AML regulations the cost of compliance, industry-led and what was the industry’s initial training, sharing of procedures etc.)? reaction? As a sector body, AWDC has invested AML regulations were imposed on the substantially in raising awareness of AMLL Belgian diamond industry for the first and providing guidance and support for its time in 2004. The initial reactions of practical implementation. We have an AML diamond traders were very negative. The & Compliance Helpdesk that supports legislation seemed highly complex, written Belgian traders with all of their compliance Inneke Geyskens-Borgions for the financial sector, and not tailored to questions and issues, be they related Senior Manager Designated Non-Financial Businesses and to AML or to other legal frameworks. Risk Advisory – Financial crime Professions’ (DNFBPs’) business model Our main initiative to ease the diamond Deloitte Belgium and resources. In the early years, traders sector’s transition to AML compliance has tried to comply with the legislation as been our AML & Compliance seminars, nothing but a box-ticking exercise, without organized in cooperation with the

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supervisory authority of the diamond the quality of traders’ KYC work and Lastly, the submission of STR and sector. These seminars, held on both a risk assessments, but also enhances SAR notifications to the FIU remains a basic and an advanced level, familiarize transparency and vigilance practices in the sensitive issue. However, since a reporting traders with the legislation, explain why it is sector. Since these tools are too expensive point within AWDC was established in as it is, and describe what it entails for their for a sole trader to purchase alone, we as cooperation with the Belgian FIU, the business. the sector body fund this and provide the number of qualitative STR and SAR trader with free use. notifications has increased significantly. Initially, these seminars were often attended by traders who came to vent their What were the biggest challenges We have noticed that enabling traders to frustrations regarding the AMLL and its faced when implementing obligations? submit notifications to the sector body, implications. Clearly, there was significant Think about specific obligations which then passes the information on resistance to compliance with this legal with practical implications, e.g., to the FIU, has lowered the threshold at framework in the first instance. However, we identification of the beneficial owner, which traders decide to send notifications have made it our mission to work through definition of risk-based approach, of suspicious activities. this phase and to support traders where documentation of all actions with an possible, in order to lower the threshold audit trail, documentation of source of How did diamond industry clients for compliance in practice (e.g., we drafted funds, etc. first react when they were told by templates for Know Your Customer (KYC) How to collect clients’ identification professionals that they had to provide forms that traders could send to their documents (ID cards, company bylaws, more information? clients, we developed guidelines for client etc.) was easy to explain and quite Clients living abroad in countries without acceptance, etc.). This eventually resulted in quickly understood and implemented AMLL or where the diamond sector is not a noticeable shift in attitudes. by traders. The concept of a risk-based subject to AMLL were particularly hesitant approach was more of a challenge. This to provide identification documents. Today, the majority of industry players requires a thorough understanding of the AWDC has addressed this by drafting attend these seminars on an annual risks related to the industry, client, and/ standard letters for clients explaining the basis, to be informed about any AMLL/ or supplier. The 2017 Belgian diamond Belgian AMLL, how Belgian suppliers fall compliance updates and get the latest industry risk assessment, which we carried under its scope, which information needs information. It is not only diamond out in cooperation with our supervisory to be provided to them and why. These traders who attend, though. Even financial authority and the banking industry, letters were considered a game changer institutions, insurance companies, and identified specific potential AML risks in by many Belgian diamond traders, making AML inspectors join these seminars the Belgian sector. This document has it much easier to obtain the necessary to understand how AMLL is being proved to be an important foundation to documents from their counterparties, as implemented in the diamond industry. help the industry understand what the they were now better informed about the risks are, and to allow players to develop an legislation and its implications. A standard Aside from raising awareness, a lot adequate risk-based approach in their own letter from a sector body gives the of energy has also been invested in businesses. foreign counterparty confidence that the providing the sector with the right tools reason why the Belgian diamond trader is and documents. Our aim in this regard is Another practical challenge is the asking for identification documents is not to help traders assess what they should identification of UBOs. This remains because they distrust the counterparty do to be compliant and to assist them in particularly difficult when handling but simply because they are required to their compliance efforts. For example, in international transactions with clients do so by law. collaboration with a major publisher of located in countries without AMLL: some business information, we have created a can be unwilling to give their identification customized software tool129 through which data, especially in relation to their UBOs. Belgian traders can screen their clients The database in our custom software and assess the potential risks related to tool does help traders to some extent as the client before entering into a business it allows them to access additional UBO 129 D atabase on the AWDC website: relationship. This not only strengthens information. https://www.awdc.be/en/KYC

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The better the Was there a significant downturn in a money laundering hub. In the short sales after the regulation passed? For term, this might require some work, and perception of example, were clients so scared of you might even lose some business, but providing more documentation that in the long term, this attitude will bring the sector, the they refused to do business? more commercial benefits and it secures We do not have any real proof of a your company’s own business as well more traders are downturn in sales because of AMLL, (understanding who you are trading with although some traders do claim that and what any potential risks could be). encouraged to take they lost business when the legislation first applied to them. Over the past five In addition to that, professionals should compliance to the years, more diamond centers (outside of definitely turn to their sector body and Europe) have implemented AMLL and this ask for support through education and next level, as they has created more of a level playing field tools. Sector bodies can seek inspiration and made it easier for Belgian traders to and advice from other bodies that serve notice that it really comply with their obligations. other sectors but fall under the same legal framework. This will ensure professionals does pay off. Did the regulations have any positive have access to the best practices outcomes for the diamond industry? available. The sector body should in turn For example, did it restore trust with cooperate with its supervisory authority external players, such as financial to implement AMLL in the sector. As such, institutions, etc.? the full range of AMLL objectives—to The better the perception of the sector, prevent and combat money laundering the more traders are encouraged to in different sectors—will be achieved take compliance to the next level, as through the cooperation of the various they notice that it really does pay off. entities at different levels. The ultimate demonstration of that from a diamond trader’s perspective is that banks—many of which had stepped out of the sector as they took a “better safe than sorry” approach and viewed the diamond sector as high risk—are slowly but surely opening up to the sector again thanks to its firm focus on compliance and transparency.

Is there any advice you would provide to professionals that will have to implement these regulations soon? I think it is important to understand that compliance with AMLL in your company is not something you should adhere to out of fear of sanctions. Instead, try to embrace the objectives of the legislation: it is necessary to keep your sector clean and to help the government fight money laundering. In short, it is the right thing to do. No sector benefits from a bad reputation such as being

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members span the entire spectrum of the art market and include art businesses, academic institutions, and attorneys.

To date, RAM has published two sets of practical guidelines and checklists that are increasingly used and referred to: the Guidelines on Combatting Money Laundering and Terrorist Financing130 and the Art Transaction Due Diligence Toolkit131. RAM holds an annual conference in Geneva during the Art Genève art Expert voices fair. This provides an opportunity for art market professionals to meet and exchange ideas on market practices, challenges, and new initiatives.

PROMOTING RESPONSIBLE From the outset, RAM has endeavored to go beyond the question of whether the PRACTICES: LESSONS LEARNT art market should self-regulate. Instead, its work involves: (1) gathering industry FROM THE RESPONSIBLE ART MARKET knowledge and practices through dedicated working groups composed INITIATIVE of a diverse array of professionals, (2) synthetizing and structuring the information into practical take-aways and best practice, (3) testing findings through surveys and bilateral discussions with industry stakeholders, and (4) holding public discussions and debates at RAM’s numerous events to discuss the latest ideas. As such, these responsible practices are not exhaustive and are bound to evolve and need to be adapted to the specific context of particular art Justine Ferland Sandrine Giroud Researcher at the University Partner at LALIVE, Switzerland, businesses or industry sectors. They of Geneva’s Art-Law Centre, board member of the Art Law do not purport to set a standard to be attorney-at-law (Quebec, Canada), Foundation, and member of RAM’s applied in all situations; rather, RAM and member of RAM’s Task Force Task Force advocates for a risk-based approach to determine the degree of due diligence required in relation to a specific issue. Should the art industry be subject to still facing the art market today. The stricter regulations? Responsible Art Market Initiative (RAM) is Lessons learned The question remains a key concern a direct response to this challenge. Almost five years into the project, RAM is for many of those working in the art going from strength to strength and its trade: some argue in favor of greater An initiative by the market for the message is resonating more widely. Here transparency and accountability, market are some of the lessons learned so far: whereas others warn of the added costs RAM is the first of its kind: a non-profit, and barriers that would be created by cross-market initiative launched in There is a real and sustained appetite further regulation. People with a wide Geneva (Switzerland) in 2015, under the for practical guidance on risks in the range of viewpoints are slowly but surely auspices of the Geneva-based Art Law art market and responsible practices coming to accept the importance of an Foundation (ALF) and the University to address them. One of the measures industry worth over US$60 billion, its of Geneva’s Art-Law Centre (ALC). Its of RAM’s success is the growing number financialization and associated risks, and mission is to raise awareness among of people attending its annual event and the need for more sustainable practices. art businesses of the risks facing the art the fact that the audience includes very Maintaining trust and credibility in a industry and to provide practical guidance diverse and international art market market that has discretion at its core and a platform for sharing best practice professionals such as art dealers, gallery without undermining the commercial to address those risks. RAM’s founding representatives, academics, service interests of the industry while also promoting fair and efficient competition 130 G uidelines on combatting Money Laundering and Terrorist Financing available at for future growth: this is the challenge http://responsibleartmarket.org/guidelines/guidelines-on-combatting-money-laundering-and-terrorist-financing/ 131 A rt Transaction Due Diligence Toolkit available at http://responsibleartmarket.org/guidelines/art-transaction-due-diligence-toolkit/ 244 Art & Finance Report 2019 | Section 6 - Risk Management & Regulation providers, and government agencies. This Independence is crucial to RAM’s To facilitate smaller group conversations indicates a real interest in the initiative’s success—but other certification and ensure that national issues and mission described above and consolidates initiatives may be helpful in the long particularities are adequately addressed, RAM’s position as an initiative by the art term. Throughout its expansion, RAM has RAM is currently working on the creation market, for the art market. RAM is clearly endeavored to remain fully independent of regional committees. For the moment, viewed as able to address the risks faced and to avoid all actual or perceived these efforts are focused on the United by the industry from a practical, holistic conflicts of interests. It has done so by States and the United Kingdom (in standpoint and suggest the best practice aiming for equal representation of all addition to Switzerland). These regional that should be adopted in response. art market stakeholders in its working committees will allow smaller groups of In addition, RAM has been able to group—now renamed the Advisory interested professionals to organize local further its mission by submitting its Board. This includes large and small awareness-raising events and discuss draft guidelines and checklists for public galleries, auction houses, dealers, topics that are especially relevant to their consultations. It has reached out to key freeports, lawyers, law enforcement jurisdictions and areas of practice. stakeholders for suggestions on how to officers, art experts, appraisers, improve, simplify, and enhance them insurance companies, insurance brokers, In addition, the growing interest prior to their public launch, and thereby compliance experts, and academics. expressed by various art market players ensured that the published documents From the outset, RAM has also clearly in getting involved in the initiative has are applicable in practice. The growing held that it is not, and will not become, prompted RAM to reflect on ways to number of art dealers, individuals, and a certification body for “diligent” or further develop and encourage dialogue collectors who use or have adapted the “responsible” art businesses. However, on a daily basis, outside of its various RAM guidelines and checklists in their the fact that this question recurs again events and public consultations. In that businesses indicates that the initiative and again at RAM events and bilateral regard, RAM is currently working on has become a key point of reference for discussions with art market stakeholders an updated, more interactive website, responsible conduct in the art market. It raises the question of whether some form which it hopes will become a truly has succeeded in remaining accessible of certification by an independent body interactive platform where all interested and useful for all art trade players, may indeed be helpful in the future to stakeholders can engage in further including smaller organizations without further increase transparency and trust in discussion of risk and best practice in the large compliance or legal departments. the market. market. Although the exact form is still to be determined, RAM hopes to share The art market needs a platform The future as many relevant resources as possible, for dialogue and exchange on best Although RAM’s activities have generated link to other initiatives and organizations practice. RAM’s goal of fostering a positive responses and global interest, who are playing a role in creating a more culture of dialogue has proven effective more work has yet to be done to ensure responsible art market, invite further in creating a space where practices can that the initiative remains a useful point of comments on the existing guidelines and be discussed freely and in a constructive reference in the ever-evolving art market. checklists, and, in the long term, foster manner. Through numerous international With stricter anti-money laundering and online dialogue between all members of events, the initiative has brought together terrorist financing regulations having the “RAM Community”. unlikely groups of panelists that have recently come into force (or coming into or represent diverse—and sometimes force in the near future), RAM will be Last but not least, RAM is also opposed—interests. These panelists, reviewing its Guidelines on Combatting working on a new set of guidelines whose varied backgrounds included the Money Laundering and Terrorist aimed at summarizing best practice art business, finance, legal compliance, Financing and especially the various for authentications of fine art, in the art history, and scientific expertise, country guides summarizing the anti- specific and practical spirit of the two participated heartily in frank exchanges money laundering regimes that apply in previous publications. These guidelines on topics such as the need (or not) for different jurisdictions132 to ensure that all will be launched at RAM’s next annual further regulation in the art market, its materials remain up to date. conference, which will be held in Geneva, the usefulness of new technologies, Switzerland, at the beginning of 2020. and the practicalities and limits of risk Moreover, having organized events in management procedures. Some panelists Geneva, London, and New York so far, and The RAM experience shows that the art also agreed to touch upon sensitive with Advisory Board members coming market needs and wants more dialogue topics about which they usually prefer from all across Europe and the United on best practice. Whatever the direction not to speak in public, strengthening States, RAM has long since transcended taken as regards (self-) regulation of the RAM’s position as an independent and the Swiss borders of its two founding art market, dialogue must be the first step open discussion forum that welcomes all institutions to become an international to ensure that the relevant information art businesses and their employees to point of reference in responsible art is shared and considered to lay the discuss art market practices. market practices. This is excellent foundation for a sustainable art market. news but also sometimes complicates discussions and working sessions For more information: between the stakeholders involved. http://responsibleartmarket.org

132 T hese country guides were drafted by legal professionals from various jurisdictions on a voluntary basis and are available at http://responsibleartmarket.org/guidelines/ guidelines-on-combatting-money-laundering-and-terrorist-financing/ 245 Art & Finance Report 2019 | Section 6 - Risk Management & Regulation

Expert voices

KNOW YOUR PATRON: THE IMPLICATIONS OF THE NEW 5AMLD ON MUSEUMS IN THE EU AND BEYOND

The views expressed in this article are the personal views of the author and not those of Deloitte.

At first glance, the fifth Anti-Money The only instance where museums should Laundering directive (“5AMLD”), due to be be directly aware of the legislation is if they implemented in January 2020, has nothing are actively acquiring or to do with cultural institutions or museums. works. For any work acquired for more than However, the art market in general must €10,000, additional checks would need to pay close attention, as the legislation be conducted to ensure that they know calls out “intermediaries” involved in art- the ultimate beneficiary of the museum’s market “transactions” and/or the “trade of purchase, that there is nothing suspicious works of art”, for any transaction or linked about the source of funds, and that the transactions amounting to €10,000 or work’s provenance makes sense. Similarly, more133. Most art-market professionals will for deaccessioned works, the buyer’s need to conduct risk-based due diligence source of funds should not be suspicious, checks on the ultimate beneficiaries of any and a beneficiary should be identified. major art transaction. Most museums work with intermediaries Luckily, in most cases, museums have little such as gallerists and auction houses 133  Article 1 Amendments to Directive (EU) 2015/849 to do with transactions, and do not have a for these transactions, so their trusted point (3) of Article 2(1) is amended as follows: (i) persons trading or acting as intermediaries in the role as an intermediary in the market. This advisors will presumably be able to assist in trade of works of art, including when this is carried means that the rules set out in 5AMLD do these matters. out by art galleries and auction houses, where not extend to these institutions directly. the value of the transaction or a series of linked transactions amounts to EUR 10 000 or more; Most of the lawyers interviewed for this Despite the presumed lack of direct (j) persons storing, trading or acting as article agreed that the new legislation has implications for the museum industry, intermediaries in the trade of works of art when no direct impact on the work of cultural the new laws have an indirect impact and this is carried out by free ports, where the value of the transaction or a series of linked transactions institutions in the EU and worldwide today. raise important questions about current amounts to EUR 10 000 or more.

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practices. In particular, museums should to ensure that the source of funds and its bear in mind that any unscrupulous use is scrutinized; in this sense, both the behavior, or links to such behavior, involve enquiry and 5AMLD advocate a similar risks that could ultimately affect the approach. institution adversely. There are two main setbacks to these pre- This article will outline a few of the points emptive measures, which are covered in to bear in mind in relation to knowing the 5AMLD but can be difficult to apply to your patron—whether they are helping the world of museums. Firstly, the process purchase a work for the museum, funding of understanding the ultimate beneficial an exhibition, or paying to be a part of the owner can be complex and involve both museum’s inner circle of sponsors. criminal risk and reputational risk, and secondly, the administrative costs of all There are three main reasons why financial of these pre-emptive measures can be institutions conduct Know Your Customer prohibitive for museums. (KYC) practices as part of due diligence: to avoid accepting proceeds of crime, Know your patron Bernadine Bröcker Wieder to avoid being involved with those who The Sackler family, long-standing CEO/Co-Founder are avoiding fiscal duties such as paying supporters of the art world, were targeted Vastari Group taxes, and to avoid being connected with in 2019 for the fact that Perdue Pharma, the individuals on sanctions lists. Proceeds of company they own, sells Oxycontin (a drug crime may be linked to terrorism financing, that has been singled out as a potential key dealing in illicit goods, or funding gained driver of the opioid crisis)135. Photographer through bribery and they are generally a Nan Goldin, who has personal ties to the Most art-market police matter. Tax avoidance is a completely opioid crisis, refused to work with museums professionals will different issue, with different government with ties to funding from the Sackler family, bodies’ regulations in each jurisdiction. But and has even continued her campaign in need to conduct it is a serious threat: those convicted of Europe in July 2019136. being directly or indirectly linked to money risk-based due laundering face up to 14 years in jail. What is unclear in this regard is how the institutions in question could pre-emptively diligence checks In all instances, culprits are trying to assess that this family, who earned their bring funds into circulation from a less money in a legal (though some may on the ultimate reputable original source and they use argue unethical) way, could have posed a the confidentiality and opacity of the art reputational risk to museums. beneficiaries of market to their advantage. The authorities have clearly identified this market as a In a statement, a family spokesperson any major art place where this type of misdeed occurs, said, “our goal has always been to support otherwise they would not have added art to the valuable work of [...] outstanding transaction. the 5AMLD so explicitly. Museums should organizations, and we remain committed be conscious of this in their daily work. to do so”.137 But, despite their good intentions, the family ended up doing 134 W oolf Inquiry Report, page 143. “Donations 8” Pre-emptive measures a lot of harm for the museums they 135 “The Opioid Timebomb: the Sackler family and To this day, most museums in the UK patronized, leading to adverse reactions how their painkiller fortune helps bankroll interviewed for this article look at the among visitors, and affecting museums’ London arts” London Evening Standard 19 March guidance provided by the Woolf Inquiry relationships with other sponsors, as it 2018 https://www.standard.co.uk/news/health/ the-opioid-timebomb-the-sackler-family-and-how- into LSE’s links with Libya from 2011. Going was widely publicized in the press. The their-painkiller-fortune-helps-bankroll-london- forward, one could read this enquiry’s relationships might be mended with arts-a3793651.html advice alongside the wording of 5AMLD. the institutions in the long run, but the 136 “ Nan Goldin and Anti-Sackler Opioid Activitsts The conclusions from the enquiry state damage in the press and public opinion Swarm the Louvre, Marking their First Action in Europe” 1 July 2019, Artnet News https://news.artnet. that institutions “should adopt [...] an up- has been done. It is a thorny issue. The com/art-world/nan-goldin-sacker-louvre-1588336 to-date policy on donations [...including Economist put it clearly: “Does it benefit 137 C NBC, 31 May 2019 an additional] document on ethical and humanity more to return a sack of cash to the 138 “ Culture Vultures: The Moral Maze of Museum reputational risk.”134 The policy is really Sacklers, or to spend it on bringing culture to Management”, The Economist, 28 March 2019. about enforcing pre-emptive behaviors multitudes?”138 https://www.economist.com/leaders/2019/03/28/ the-moral-maze-of-museum-management

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The 5AMLD practices for identifying the UBO (ultimate beneficial owner) of a company will make asking required questions easier to a certain extent.

“Culture-washing” mentioned in a report called Ethics Matters, to keep track of this information - but the Participating in the art world, especially with “statements of commitment mean little cost of subscribing to a database will no museums, provides a certain kind of kudos without policies and procedures to translate longer be a barrier. One could argue that that one cannot achieve anywhere else. The aims into action”141. it would be worthwhile for international general public reportedly trusts museums institutional associations to provide direct more than newspapers and NGOs139. The 5AMLD practices for identifying advice to museums, and potentially assist in Therefore, museums may attract financial the UBO (ultimate beneficial owner) of collaborative databases to share knowledge supporters who wish to achieve a moral a company will make asking required between larger, national museums and uplift in their public personas. Attaching questions easier to a certain extent. If these smaller, regional ones. a name to a museum gallery, helping to corporations, trusts, and foundations are purchase an artwork, donating a collection being routinely asked for more information Across the board, museum staff are or contributing to popular exhibitions can about their ultimate beneficial owners due already bogged down with bureaucratic be very beneficial to a person’s reputation. to EU legislation, it will be less awkward for and administrative tasks. Public funding for museums to do so as well. museums is decreasing every year, resulting This is not as straightforward as identifying in an increased reliance on funds from the the source of the funds that are supporting Administrative costs private sector. I do not envy those who now the institution. What kind of research would Keeping all of these risks in mind, 5AMLD need to think about these issues, but if one an institution need to do to understand all will benefit museums in another way. Today, can learn one thing from the above, it is that of the potential links of connected persons a subscription to a database of Politically foresight and pre-emption, awareness and resulting from an act of patronage? Another Exposed Persons (PEPs) can be prohibitively knowledge-sharing are key to preventing example helps to illustrate this issue. In expensive. Research for this article risky situations of all kinds. 2019, a well-known arts institution decided indicated that although major national to withdraw from sponsorship from a institutions subscribe, many smaller and company, because its director was linked regional museums are priced out of that to anti-gay legislation.140 To flag up this kind of research database. potential issue pre-emptively, a member of staff at a museum would have had to Though it will not be possible to search for 139 “ People Trust Museums More Than Newspapers. go beyond due diligence on the source people by name, with 5AMLD governments Here Is Why That Matters Right Now (DATA)” https://www.colleendilen.com/2017/04/26/people- of funds, to check the political and moral will now have to publish a non-subscription- trust-museums-more-than-newspapers-here-is-why- leanings of the ultimate beneficiary behind based database of roles/positions that are that-matters-right-now-data/ a corporation! considered politically exposed142. It will 140 “ Stagecoach’s sponsorship of Turner prize ends be interesting to see if culture ministers, over LGBT rights row” (MSN Money Online, powered by Microsoft News) https://www.msn.com/en-gb/ Conducting due diligence checks is no museum directors, and other cultural money/business/stagecoachs-sponsorship-of-turner- simple task. The institution needs to create offices will be included in the list. What this prize-ends-over-lgbt-rights-row/ar-AAAOBKn systems that help employees and other would mean is that for any partnership 141 “ Ethics Matters”, Institute of Business Ethics and connected individuals understand what is or donation, PEPs will need to provide ID, the Council for Industry and Higher Education: paragraph 1.3. https://www.ibe.org.uk/userfiles/ required of them to perform in an ethical proof of address, and an explanation of the ibe_cihe_ethicsmatters.pdf way and avoid reputational backlashes source of their funds. It is not a red flag, 142 “ Politically Exposed Persons”, Comply Advantage or individuals taking advantage of the but simply an indication that further due https://complyadvantage.com/knowledgebase/ good reputation of the culture sector. As diligence is required. Museums will need regulation/5amld-politically-exposed-persons-peps/

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The role of free zones Case study in the compliance chain

The fifth AML directive143 adds storage providers in free zones in the EU to the list of obliged entities. This article will look at the risks associated with these free zones, the broader context of risk in art storage, and the lessons that can be learnt from the experience in Luxembourg, Claude Herrmann Carole Schmitz Executive Manager Commercial & Events Director where the Freeport has been Fine Art Logistics Natural Le Freeport Luxembourg subject to national AML rules Le Coultre S.A. since 2015.

Money laundering and tax evasion the same effects as tax havens”, and 143 5 th AML Directive, Directive (EU) 2018/843 of the risks in free zones that “money laundering risks in free European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the In 2010, an FATF/OECD report entitled ports are directly associated with money prevention of the use of the financial system for the Money laundering vulnerabilities of free laundering risks in the substitute assets purposes of money laundering or terrorist financing, trade zones144 identified free zones as market”, which meant art and other and amending Directives 2009/138/EC and 2013/36/ EU, https://eur-lex.europa.eu/legal-content/EN/ tools for money laundering and criticized high-value collection objects. This opinion TXT/?uri=CELEX%3A32018L0843 a lack of oversight, non-existent, or is partially shared by the European 144 FATF/OECD, Money Laundering vulnerabilities of Free outdated AML/CFT procedures, and a Commission147, which views free zones Trade Zones, March 2010, https://www.fatf-gafi. lack of transparency. These findings as attractive places for money laundering org/publications/methodsandtrends/documents/ moneylaunderingvulnerabilitiesoffreetradezones. were later confirmed by two special and terrorism financing, despite having html European Parliament committees: in found no evidence of systematic use of 145 P ANA Final Inquiry Report A8-0357/2017, http:// 2017 by the PANA committee related free zones in the EU to commit fraud. www.europarl.europa.eu/cmsdata/134368/A8- to the discoveries in the “Panama 0357_2017_EN.pdf papers”145, and in 2018 by the TAX3 The most recent risk analysis of free 146 T AX3 report as adopted by the Plenary on 26 March 2019 (P8_TA-PROV(2019)0240), http://www.europarl. committee on financial crimes, tax zones is the study titled Money laundering europa.eu/cmsdata/162244/P8_TA-PROV(2019)0240. evasion, and tax avoidance146. They and tax evasion risks in free ports148, pdf concluded that “‘freeports may constitute produced by the European Parliamentary 147 L etter from Pierre Moscovici to Dr. Wolf Klinz, offshore storage facilities, enabling Research Service (EPRS) for the TAX3 Brussels 28.02.2019, Ref.Ares(2019)1375924- 28/08/2019 money laundering and untaxed trade committee. It confirmed previous 148 M oney laundering and tax evasion risks in free ports, in valuables”, “must not be used for the criticism, for example that free zones http://www.europarl.europa.eu/thinktank/en/ purposes of tax evasion or to achieve could be havens of secrecy. document.html?reference=EPRS_STU(2018)627114

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Money could be laundered through are not limited to free zones. Free warehouses or other storage providers transactions happening while artworks zones, originally intended as spaces to are not included. The final report of were in storage, without the knowledge temporarily store merchandise in transit, the TAX3 committee did take note of of any public authority. Free zones provide temporary relief from import this oversight by recommending that at could also serve as storage facilities for customs duty and import VAT, though least customs warehouses “be put on an artworks purchased with proceeds from typically not from other forms of taxation equal footing with free ports under legal predicate offences for money laundering. such as wealth tax, inheritance tax or measures aimed at mitigating money Since free zones and their actors were capital gains tax. It is undisputed that laundering and tax evasion risks therein, not subject to any AML/CFT laws and alternative assets are now often stored such as AMLD5”. did not have to perform customer due in free zones on a permanent basis. diligence, the ultimate beneficial owners Customs warehouses, which are mostly Compliance at the Luxembourg of substitute assets in storage, such as unknown to the general public, can offer Freeport art, wine, or precious metals, would not the same advantages in terms of security, The EU member country most exposed be properly identified. storage conditions, and the suspension to risks inherent to free zones is of import VAT and customs duties as Luxembourg. In September 2014, it The EPRS study added a new element free zones in the European Union. They became the first EU country to house of risk resulting from the increasing use are also much more important for the a free zone dedicated to high-value of non-financial assets as substitute art world than free zones in the EU. In alternative assets when Le Freeport assets for the storage and transfer of the UK, France, and Germany, which Luxembourg opened for business. In wealth. With the end of banking secrecy, according to recent figures from the Art the 2015 revision to its national AML investment in new assets such as art has Basel and UBS Global Art Market Report law, Luxembourg included the logistics increased massively, which (at least in 2019149 together make up as much as 89 providers at the Freeport in the list of the eyes of the European Parliament) has percent of the European art market, there obliged entities, without the transaction contributed to the rapid growth of the is not a single free zone that focuses limit that is now present in the fifth AML art market in recent years. Art storage on art or other alternative assets. The directive. and logistics providers are, however, not demand for tax efficient storage in these required to participate in any automatic markets is exclusively met through Luxembourg also took preemptive action data exchanges under FATCA, the OECD’s customs warehouses. on the potential risks resulting from a Common Reporting Standard (CRS) or the lack of traceability and information and EU’s reporting agreements between tax The number of free zones and customs required Freeport operators to provide authorities as set out in the directive on warehouses pales into insignificance documentation on all objects to be stored administrative cooperation. in comparison with the number of free for their clients as well as to communicate warehouses, such as self-storage, storage in real time any movement or transaction This means that direct tax authorities at logistics or removals companies, and that clients requested from the operator. have no immediate access to information even safety deposit boxes. While free This made secrecy regarding the objects on wealth stored in the form of non- zones and customs warehouses are in storage a thing of the past. To this day, financial assets, transactions, or subject to approval and regular control 100 percent of all inbound shipments are beneficial owners, and therefore can by customs authorities in their respective physically inspected by customs agents neither tax these locally nor inform the jurisdictions and need to be able to together with art handlers. relevant authorities in the country of produce inventory lists (with more or less residence of the beneficial owner. Since detail, depending on their location), free In 2016, when operator licenses first artworks can remain in storage in free warehouses have no formal obligations came up for renewal, the zones for an indefinite time and benefit towards public authorities. Customs Administration further from the suspension of VAT and taxes, strengthened the documentation they are an ideal means of transferring The fifth AML directive formally includes requirements by requiring commercial large amounts of wealth from one person “persons storing, trading or acting as invoices or other documentary proof of to another in a tax efficient way. intermediaries in the trade of works of ownership as part of the documentation art when this is carried out by free ports, package for any inbound shipment or Free zones play only a marginal role for where the value of the transaction or a change of ownership at the Freeport. art storage in the EU series of linked transactions amounts This enables customs to not only have Despite the implications of the title of to €10 000 or more” as new obliged 100 percent accurate information on the EPRS study, however, these risks entities. However, operators of customs all objects stored in the Freeport, but

149 T he Art Market 2019, An Art Basel & UBS Report, Prepared by Dr. Clare McAndrew Founder of Arts Economics, https://www.artbasel.com/news/art-market-report 250 Art & Finance Report 2019 | Section 6 - Risk Management & Regulation

also up-to-date documentation on the for operational matters to improved AML compliant, the most important ownership of each piece. handling of invoices. advice is to start preparing right away. It would be dangerous to count on a The final step from ownership to the UBO Compliance is also a key ingredient when lack of preparedness in their country is ensured through the full customer due working with banks, funds, and other of establishment and the difficulties diligence process, performed by licensed institutional clients and obliged entities, associated with enforcing the new rules operators that are audited by the Indirect which require their counterparts to starting in January 2020. While money Tax Administration on a yearly basis. uphold the same standards of customer is certainly a factor, every entity in the This strong regulatory environment, due diligence. Inversely, working with market is concerned and this fact should together with effective oversight by two these obliged entities means that the ensure a level playing field, at least in the public authorities, led the Luxembourg clients they refer to licensed operators are EU. government to reassess the risk of the themselves already previously vetted and Freeport in the National Risk Assessment approved. Furthermore, the AML law contains a for the upcoming FATF review. While best-effort obligation rather than an the inherent risk of the Freeport is still The compliance procedures at the obligation to achieve a specific result, high, the actual risk, accounting for the Freeport further strengthened the which should mean that larger and more mentioned mitigation factors, could be international recognition obtained from potent organizations in the art market will lowered to a moderate level. the World Free Zones Organization be held to higher standards than smaller (WFZO) and other institutions. Free operations, provided they can supply The change in national legislation zones currently represent 30 percent material proof of their compliance efforts. created a very unique set of challenges of international trade and many The cost to become fully compliant should for licensed operators. The lack of are members of the WFZO, which is also be put in perspective against the compliance solutions tailor-made for recognized by the UN, WTO, WCO, and potential for high fines to be paid by non- their special situation meant that they OECD. In June 2019, the Freeport obtained compliant obliged entities and the possible had to find the best solutions for similar- the Safe Zone Platinum certificate publication of their names by national sized entities and adapt them to their from the WFZO based on international authorities. specific use case. Their business case standards for compliance management, was also affected, given compliance costs integrity, safety, and security developed The upsides of compliance, of which there resulting from the need for external by the OECD. This certificate reflects the are many, should be of particular benefit expertise, software, processes, and time high security, safety, and compliance to the art market which—not without to create and implement the changes procedures already in place since the reason—is still described as one of the last and perform ongoing due diligence. opening of the Freeport in 2014 and “unregulated markets”. Many of the deals Becoming compliant also resulted in loss developed further over the intervening that currently happen in a more or less of revenue caused by the departure of years through the obtention of the ISO improvised manner will tomorrow benefit existing clients that were either unwilling 9001 and ISO 45001 certificates. from better organization in a compliant to cooperate or not in line with the new environment. The parties will (have to) standards. Advice for the art market on the road to know each other much better than they compliance do today, whether the deal involves On the upside, compliance has enabled The fifth AML directive will focus the professionals or end clients. Better licensed operators to better understand burden of compliance on the actual knowledge of the origin of funds and the their clients and their background, market-makers in the art world: the financial situation of the client might even which helps with managing reputational galleries, dealers, intermediaries, and lead to fewer outstanding invoices. risk (among other forms of risk). Client other consultants that interact with buyers profiles that are incompatible with a and sellers. Because many of them do not At the very least compliance will bring fully AML-compliant operation can be accept cash payments over €10,000, they some much-needed transparency into identified at a much earlier stage. In a did not fall under the high-value dealer the market, given that it will be almost market that for the most part is lacking provision of previous iterations of the impossible to hide behind intermediaries in structure and organization, the filter AML directives and had little incentive for and shell companies and continue to do of AML compliance resulted in a list of compliance in the past. business on the art market under the fifth clients that are better organized than AML directive. the rest, which has advantages ranging For those art professionals now from improved flow of information faced with getting their business

251 Art & Finance Report 2019 | Contacts

Contacts

Deloitte Luxembourg Deloitte Austria Deloitte CIS Pierre-Jean Estagerie Gernot Schuster Svetlana Meyer Partner - Global Employer Partner - Tax Services Managing Partner - Tax & Legal Services Leader +43 664 805 376 900 +7 495 787 06 00 20 39 +352 451 452 940 [email protected] [email protected] [email protected]

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Davide Bleve Rudolf Janssen Tamsin Baumann Partner - Tax and Legal in Central Director - Tax Partner - Forensic Advisory Mediterranean +31 882 883 182 +44 20 730 321 82 +39 010 531 784 7 [email protected] [email protected] [email protected]

Monica Palumbo Deloitte New Zealand Mark Stokes Partner - Sustainability Services Partner - Deloitte Private Jeanne du Buisson and Art & Finance +39 028 332 293 2 Director - Tax & Private [email protected] +44 20 700 709 56 +64 930 308 05 [email protected] [email protected] Barbara Tagliaferri Deloitte USA Director - Internal Services in Central Mediterranean Deloitte Poland Michael Shepard & Communications Leader Partner - Global Financial Crime Adam Mariuk Leader, Risk and Financial Advisory +39 028 332 614 1 Partner - Tax [email protected] +1 215 299 52 60 +48 225 110 557 [email protected] [email protected] Deloitte Japan Micaela K. Saviano Daisuke Kuwabara Partner - US Leader for Art & Finance Partner and Country Deloitte Singapore +1 312 486 33 54 Lead of Art & Finance Japan [email protected] +81 909 140 651 8 Mohit Mehrotra [email protected] Partner - Leader of Southeast Asia Strategy & Business Design Julia Cloud Kaori Iizuka +65 623 272 16 [email protected] US Private Wealth Leader - National Senior Manager - Risk Advisory Investment Management Tax Leader +81 804 600 635 5 +1 312 486 98 15 [email protected] [email protected]

Gauthier Vincent Ayako Joséphine Yamada Deloitte Consulting LLP - National Senior Staff - Risk Advisory Wealth Management Leader +81 909 966 002 2 +1 203 905 28 30 [email protected] [email protected]

253 Comer del Arte Quiero © Lina Sinisterra (2010)

Contacts

ArtTactic Anders Petterson Managing Director +44 778 866 1049 [email protected]

Deloitte Luxembourg - Art & Finance Vincent Gouverneur Partner - Art & Finance Leader Deloitte Luxembourg +352 451 452 451 [email protected]

Adriano Picinati di Torcello Director - Global Art & Finance Coordinator Deloitte Luxembourg +352 451 452 531 [email protected]

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