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what will the mention of the Rotenbergs lead to in the report of the US Senate

Фото Spencer Platt / Getty Images

Фото Spencer Platt / Getty Images

In late July, the US Senate National Security Committee’s Permanent Subcommittee on Investigations released a report entitled “US Art Industry and Policies That Undermine the Effectiveness of Sanctions.” This document can form the basis for the global “tightening the screws” in the highly profitable art market, says Sergei Glandin, a professor at the Moscow State University’s Faculty of Law.

The only industry that hasn’t changed much over the last hundred years is the art market. High prices, big money, constant growth in value, serious interests, confidentiality of transactions, unknown name of the final purchaser are the constant companions of the art business. However, new rounds of US sanctions policy may lead to significant changes in this area of ​​business and investment.

The last safe haven of big money

For 2019 the volume of transactions in the art market made up $ 64.1 billion, with 44% of the market in the US, 20% in the UK. Annual growth since 2000 is estimated at 8.9%. At the same time, over 75% of professional participants in this market as the main cause for concern called its opacity. There are reasons for this: only 42% of the market is occupied by auction houses, while the rest of the niche in 58% is reserved for private collectors. If the “four” Sotheby’s, Christie’s, Phillips and Bonhams under pressure from their banks, at the very least, trying to comply with the rules on the prevention of money laundering and terrorist financing, the situation with private collectors and dealers is more complicated.

The art market is not subject to the US Bank Secrecy Act and similar laws of other countries; he is subject to unwritten rules. The lion’s share of the deals is carried out through private dealers who are called “art critics.” Among them, it is not customary to be interested in the personality of the seller or to ask the buyer about the purity of the origin of funds. Both in the United States and in Russia or in most other countries, the law does not impose special requirements on customer identification (KYC), control over the purity of sources of funds received (AML) for private art dealers and collectors. There is no obligation even to register as an individual entrepreneur. They are subject only to the general provisions of civil law on transactions and obligations.

However, the golden era of the classic art market seems to be coming to an end. This was triggered not by concerns about money laundering practices or the identified imperfection of banking legislation, but by a violation of US sanctions laws.

The perfect case for investigating a circumvention of US sanctions

As follows from the Permanent Subcommittee of Inquiry Report (hereinafter referred to as the Report), at the beginning of 2012 the gallery staff Christie’s asked the collector and art dealer Gregory Balzer to disclose the ultimate beneficiary of the offshore company from Belize Steamort Limited… At first he replied that he did not know the name. A few weeks later, he was already given an ultimatum: either he gives a name, or is not allowed to the next auction. The collector verbally named Louise Brown, but did not provide any supporting documents so that the gallery could verify her identity or at least verify the fact of her existence.

Early 2019 Sotheby’s demanded that Mr. Balzer give the name of the ultimate beneficiary of the painting to be auctioned Brucke II the brush of Lionel Feininger and report whether she is under sanctions. Balzer stated (see pages 5, 7 and 12 of the Report) that the painting had been resold by a company from the Marshall Islands and provided a Russian passport to its UBO (ultimate beneficial owner – Forbes).

This explanation satisfied the auction house, but did not satisfy the Permanent Subcommittee on Investigations of the US Senate, which at the time was in the midst of an investigation into circumvention of sanctions through participation in the art market. As part of the parliamentary investigation, the subcommittee examined over a million documents, mainly on bank transactions, leaks Panama Papers, requested and received statements from auction house officials and private dealers. He also made a request to Balzer personally, but he refused to cooperate (p. 141 of the Report).

Investigators from the Senate Committee were unable to find out the name of the final beneficiary Steamort (p. 5 of the Report), but it was possible to trace when and what amounts were credited to the accounts of this company and how offshore paying companies are connected with Arkady and Boris Rotenberg (see diagram on page 76 of the Report). This is how the facts were established that undermined the US sanctions regime.

Violation of US sanctions laws in a Senate investigation

Contrary to common misconception, the Rotenberg brothers are not subjects of sanctions relations. In legal terms, they are only the subject of appropriate regulation. US sanctions legislation applies to its own residents. Simply put, entities whose personal law is US law are prohibited from entering into any economic relationship with individuals whose name appears on the US SDN blacklist. (Specially Designated Nationals — Forbes)… They are also ordered to block the assets and property of such persons. American subjects, on the other hand, are subject to administrative or criminal liability for violation of the relevant rules.

The Rotenberg brothers become prohibited persons on March 20, 2014. They are not US citizens. But Grigory Baltser is an American citizen and is obliged to comply with US sanctions laws.

The basis for the inclusion of the Rotenberg brothers in SDN was the executive decree Barack Obama No. 13661. Its Article 4 prohibits American persons from providing services for or in the interests of prohibited persons, as well as from receiving money or other reciprocal provision from them. Article 5 prohibits a transaction of any kind and in any form that results in a violation of any of the prohibitions of decree 13661.

Received from Christie’s copy of the contract between Steamort and Balzer indicates that the latter received over $ 1 million in 8 years of cooperation (page 5 of the report). According to an investigation by US Senators Rob Portman and Tom Carper, only after being sanctioned, companies associated with the Rothenberg could transfer or spend $ 91 million, including $ 18.4 million on art.

Balzer’s lawyer previously stated that he had no dealings with billionaires and that the investigation prevented him from doing his job. A spokesman for the Rotenbergs called the accusations “complete absurdity.”

Repair Bermana. Sanctions vs works of art

For simplification, sanctions are the legal provisions on restrictive enforcement measures. These are full-fledged norms of legislation, the observance of which is ensured by the force of state coercion. By virtue of the 1977 US law “On economic powers in the event of an international emergency,” the US president, to prevent threats to citizens, foreign relations or the US economy from an external source of threat, has the right to use the entire arsenal of measures, including financial and economic prohibitions and restrictions, as well as to regulate external trade.

The role and effectiveness of the sanctions at the end of 2017 is very good said the then head of the OFAC sanctions body John Smith: “By freezing the assets of banned persons, cutting them off from the US financial system and limiting their ability to operate in the international financial system, we present them with an obvious choice: either to change their behavior, or to accept isolation and negative financial and economic the consequences of being on our black list. “

This law has been amended several times. In 1988, it was included amendment Berman to remove the executive’s power to regulate or sanction “publications, films, posters, phonographic recordings, photographs, microfilms, microfiche, tapes, CDs, CD-ROMs, artwork, and news feeds.” Until now, it has not been specified what can be understood as a “work of art”, but despite this, works of art are not prohibited for import or circulation. At the same time, transactions with them to American entities may be prohibited or limited by sanctions laws or presidential decrees if the counterparty is under sanctions. Thus, the American banking regulation does not apply to the art market, but market players are required to comply with the legislation on sanctions in terms of entering into a prohibited legal relationship or with a prohibited circle of persons.

Key findings from the Senate report

It is the responsibility of Congress and the US executive to improve the effectiveness of sanctions. The regime of anonymity of the ultimate beneficiaries of offshore and shell companies contradicts this task.

With all due respect to the confidentiality inherent in the art market, offshore companies with nominee directors and shareholders negate the efforts of the authorities to prevent sanctioned persons from entering prohibited transactions.

The Subcommittee’s investigation revealed a lack of anti-money laundering measures at auction houses, and hand-held art sales fail to meet even the minimum transparency requirements.

Thus, Congress should include the professional sale of high-value art objects in the list of industries that must comply with the requirements of the Bank Secrecy Act. Given the internal opacity of the art market, it is clear that in this market with multi-billion dollar turnover, there is a need for change.

Thus, the last days of the haven are coming. Using the example of companies associated with the Rotenbergs, the Senate subcommittee revealed the practice of circumventing sanctions legislation through offshore companies with anonymous owners and the lack of compliance practices among market players. The US Congress will soon amend the Bank Secrecy Act and will oblige all participants in the art market to establish the ultimate beneficiaries of the paintings sold, as well as to carry out KYC and AML procedures prior to the transaction.

Obviously, following the United States, control measures will be strengthened by Great Britain and other Western countries, and after them the rest of the world. Private collectors will not leave the market, but now they need to seriously think about compliance with the sanctions and anti-money laundering laws.

The opinion of the author may not coincide with the point of view of the editorial board

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