The Art Market: Would More Regulation Spoil All the Fun?

October 2016Art & Advocacy, Volume 23

The international art market has seen tremendous growth over the past several years. The industry has not only rebounded from the 2009 recession, but also scored record prices in art and jewelry auctions. Take, for example, Christie’s specially curated blockbuster sale in New York in May 2015, which raked in more than $700 million for only 34 lots sold and set seven artist records. Picasso’s Les Femmes d’Alger (Version ‘O’) sold for a record $179 million that evening, setting a new record for any artwork ever sold at auction.1 In the two weeks of auctions during which the Picasso sale took place, Sotheby’s and Christie’s sold roughly $2.5 billion worth of art combined, up 74% from auctions held during the market’s last peak in 2007.2 Although there have been more recent reports of “a downturn in the international art market,” art sales globally exceeded $68 billion in 2014 and $63 billion in 2015.3 There are several reasons why prices for art have exploded, including globalization and the proliferation of private art collections and museums owned by billionaires. These factors have transformed how auction houses operate and how dealers make money.4

What an Unregulated Market Has Wrought

Unlike the securities market, however, the art market remains largely unregulated. There exists no regulatory agency in the United States equivalent to the Securities and Exchange Commission overseeing art transactions. It is no surprise that the art market has been criticized for its lack of transparency, since regulation in other industries often ensures that markets are open and trading on “insider information” is prohibited. Even auction houses, like Christie’s and Sotheby’s, that report the prices paid for the artworks sold at their auctions do not list the estimates for selected lots or only provide symbols to designate that a guarantee or irrevocable bid has been placed on that item without further details. Dealers, galleries and private sellers – the primary market for art – hold information more tightly. Unlike auction houses, they generally do not reveal what pieces they sell or at what price. Auction houses and private sellers rarely disclose the identity of buyers or sellers. This lack of information often makes it harder for buyers to attach any concrete value to the artworks being sold. Economists who have studied the art market refer to this sort of secrecy as “information asymmetry,” which they say keeps buyers from knowing when they are paying inflated prices.5

While this lack of disclosure often encourages competition among prospective buyers and creates greater returns for auction houses and dealers, it may also lead to an array of financial and legal problems, especially because buyers routinely purchase artworks without knowing the identity of the seller. For example, a buyer may unknowingly purchase a work that has been looted, stolen or otherwise acquired under dubious circumstances, perhaps through an organized crime ring or a money-laundering operation. Not knowing the name of the seller makes the buyer completely reliant on the due diligence of the dealer, gallery or auction house used to broker the sale, since the anonymity of the seller makes conducting research on the seller’s right to sell the work much more difficult, if not impossible.

Earlier this year, the publication of more than 11 million internal files leaked from Panamanian law firm Mossack Fonseca – now known as the Panama Papers – provided a rare window into some of the art world’s secretive strategies. The Papers illustrated the critical role anonymity plays in today’s art market by definitively linking art ownership with the murky world of offshore shell companies. Two clients of Mossack Fonseca who used offshore holding entities were already familiar to those with an eye on art world scandals: Dmitry Rybolovlev, the Monaco-based Russian billionaire and avid art collector, and Swiss businessman Yves Bouvier.6

Bouvier, who owns Natural Le Coultre, one of the world’s biggest companies specializing in art shipping and storage, had been selling artworks to the Rybolovlev family for a decade, helping it to amass a collection thought to be worth $2 billion, including masterpieces by da Vinci, Modigliani and Toulouse-Lautrec. The artworks were bought for investment purposes and stored in Bouvier’s immense tax-free storage facilities at the Geneva Freeport.7 Through a chance conversation with New York art dealer and hedge fund adviser Sandy Heller, Rybolovlev allegedly discovered that a Modigliani painting he had purchased through Bouvier had been marked up by more than $20 million.8 That led to a fateful turn in their relationship when, in February 2015, Bouvier was arrested at Rybolovlev’s Monaco home and charged by law enforcement authorities with price fixing and money-laundering pursuant to a complaint filed weeks earlier by Rybolovlev’s lawyers.

Bouvier’s arrest has captivated the European art world, but the scandal has much broader implications, prompting a renewed wave of questions about whether the lack of transparency in art deals leaves the market vulnerable to unfair manipulation. Also, as noted, some worry that the common practices of non-disclosure make it more difficult for buyers to properly research an object’s provenance. This may even encourage illicit trading in art objects since the market knows it is virtually impossible for the owner of a lost, stolen or looted artwork to bring a claim against the current possessor of the artwork. As the Financial Times put it, the Rybolovlev-Bouvier dispute “shows how multi-million-dollar sales of art can be carried out with little oversight and, according to the legal complaint, with no written sales contracts.”9

That this scandal has coincided with a spectacular surge in the art market is no coincidence, according to Dr. Nouriel Roubini, the famous economist who earned the nickname “Dr. Doom” for predicting the last decade’s housing crisis and financial crash.10 In widely published comments made last year, Dr. Roubini said the art market is prone to abuse through “routine trading on inside information,” and that art is “commonly used for tax avoidance and evasion, and money laundering.”11 He stated that buying expensive art can become “the equivalent of a safe deposit in a bank previously in Switzerland,” as wealthy buyers avoid tax authorities by storing lucrative pieces at freeports like Bouvier’s.12 Although some art industry insiders have said that Dr. Roubini’s warnings are exaggerated, the Deloitte Art & Finance Report 2016 confirmed that “[p]rice manipulation, conflicts of interest, lack of transparency and secret commissions are the most threatening issues to the reputation and functioning of the art market,”13 and law enforcement officials who investigate art-related criminal cases echo his claims about money laundering.14 Thus, as purchasers increasingly buy artworks for investment, since they resemble other types of assets utilized, for example, to diversify portfolios or to collateralize loans, many in the art world are calling for increased regulation in line with that for other assets, like securities.

Auction House Guarantees

Yet another issue that arises in this context involves auction house guarantees, which have spiked in recent years. The concept of guarantees – where the seller is ensured a minimum price regardless of the auction’s outcome – was first introduced in the 1970s at Sotheby’s, when 47 Kandinskys and other works from the Guggenheim Museum were offered with a guaranteed minimum. At the time, Sotheby’s “put its own money at risk,” and in exchange it received from the seller either higher commissions or a portion of the profits above the guaranteed amounts.15 But after the 1970’s oil crisis, guarantees all but disappeared, at least until the 1980s, when they once again became popular as the art market picked up. The prevalence of guarantees dipped after the 9/11 terrorist attacks and the most recent recession, but are now on the rise once again. This time around, however, third parties are often involved, with auction house risk frequently reduced by relying on outside dealers or collectors.16

Despite the popularity of guarantees (in last November’s New York auctions, half of the $2.1 billion of art offered for sale by Sotheby’s, Christie’s and Phillips was guaranteed),17 many commentators analyzing the recent sales results have cast a wary eye on their aggressive use by auction houses. The Telegraph’s Colin Gleadell noted that “[a]side from the dampening effect guarantees can have on bidding because estimates are set high, and the question mark over their profitability, there is some skepticism about whether the guarantees can be a form of price manipulation, and, because of their competitive nature, a driving force behind price inflation.”18 Likewise, Lucy Mitchell-Innes of the Mitchell-Innes & Nash gallery recently remarked that, when it comes to auction house guarantees, “[t]he disclosure is just not clear enough. . . Now, you just do not know whether you are bidding against a house, the guarantor or the guarantor is sitting in the room bidding against his own guarantee. . .”19 Others in the industry have argued, however, that third-party guarantees are a creative way to push the art market forward – especially if auction houses are more likely to offer a guarantee without risking their own money – calling guarantees “just one item on a wider menu of possible ways in which the market is not purely a marriage of supply and demand.”20

Pros and Cons

Proponents of regulation seek more open trading and greater disclosure of all aspects of art transactions, including details regarding the parties, prices and any guarantees.21 They argue that regulation would have positive effects for everyone involved in the art economy and would raise the ethical standards of the market generally. But art market operators are divided on what should be done and how, or even whether anything should be done for fear of interfering with the age-old practices of the industry. Further, the diverse makeup of the art market – comprising major auction houses and mega-galleries in addition to smaller galleries and independent dealers – makes a one-size-fits-all regulatory approach difficult, if not impossible. Some are concerned that if the art market does not change its practices voluntarily – imposing some form of self-regulation – the only option left will be for the market to fall under the purview of governmental regulatory agencies. As Dr. Roubini put it at the World Economic Forum in Davos in 2015, “the market had to regulate itself or be subjected to external regulation because it had weaknesses that would not be allowed in other kinds of financial markets, such as equities.”22

While it may be true that governmental regulation of the art market would increase transparency and standardize practices, many, perhaps most, art market participants and commentators agree that too much regulation would detrimentally affect the art market. Indeed, many take issue with the characterization of the art market as being “unregulated” at all, pointing to myriad regulations covering various aspects of the market: data protection legislation; intellectual property protections, including copyright, moral rights and artists’ resale rights; anti-money laundering legislation; consumer protection legislation; customs and cultural property regulations and anti-corruption regulations, such as the Foreign Corrupt Practices Act in the US and the Bribery Act in the UK.

As for increasing transparency in the market, some fear that the market “would [likely] collapse overnight [since] [e]ntire careers are built upon fabrications [such as] which shows sold out and at what prices.”23 Indeed, there are those who say that the same lack of transparency that is often criticized for creating artificially high prices is also what permits this segment of the economy to be the exciting, special sector that it has become: “secrecy, as well as preferential treatment of certain consignors and buyers, ‘are all effective tools in creat[ing] something exclusive…’”24 This has led to the argument that there should be no regulation at all, and that the art market should evolve on its own without interference. Many in the art world believe that the industry functions at its best when it is run the “old fashioned way”—based on trust and a handshake. As described by one critic of regulation, “the only thing to regulate is precisely what could never be regulated: information.”25 He explains that there are those who are in the know, and those who are not, but regulation would not change that. Indeed, Suzanne Gyorgy, the head of Citibank’s Art Advisory Service, recently stated that “[t]he opaqueness is an attraction. . . You become part of a game, with insider rules. I would like some more transparency with third-party guarantees. But people don’t want the art market to be regulated, because then all the fun would be taken out of it. Kind of like when Dorothy pulled back the curtain on Oz.”26

Regulation also would not change another predominant factor that drives the art market: personal taste. It must not be forgotten that many collectors do not purchase works of art because they view them as sound investments, but rather because they enjoy and wish to live with these objects in their homes or donate them to a public institution for the benefit of a larger audience. A personal attraction to a work in which they find an expression of themselves motivates these collectors. These buyers often purchase some of the world’s most expensive art and thereby exercise great influence over collecting patterns and financial trends in the art market.

A Solution - “Light” Regulation?

The controversy over regulation is sure to continue for some time, but the Rybolovlev-Bouvier case has already spurred action in Geneva. An amendment to Switzerland’s Customs Act, which came into effect on January 1, 2016, put stricter regulations in place for freeports and customs warehouses as part of a wider effort to prevent money laundering.27 The revised law includes fiscal violations and ends the distinction between tax fraud and tax evasion for which the country has been strongly criticized. The modified law does not directly regulate art traders, but sets a limit on cash payments for all traders in Switzerland. Unsurprisingly, the revision already has its detractors.28 But the Geneva Freeport, aware of increased scrutiny and hoping to ward off outside regulation, has begun taking its own steps to discourage shady behavior by systematically checking antiquities as they arrive.29 Increased calls for art market regulation also prompted the not-for-profit Basel Institute on Governance to issue a Green Paper in June 2016 that outlines Anti-Money Laundering Principles for the Art Trade. The new Principles set out a self-regulatory framework for art market operators as a proactive alternative to waiting for outside regulators to take action.30

Perhaps the best possible alternative is to introduce “light” regulation into the art market, as opposed to adopting draconian rules or having them imposed on the art market from the outside by governmental authorities. This might comprise recommended guidelines, similar to the codes of ethics adopted by groups such as the American Alliance of Museums, the Association of Art Museum Directors, the International Council of Museums, the Art Dealers Association of America and the Appraisers Association of America. Using the proposed guidelines as a template, art market associations, museums, galleries, dealers, and others could then formulate their own internal regulations modeled after the guidelines. Moreover, even art market operators that currently utilize some form of internal regulation would benefit from adapting their rules to reflect such proposed guidelines, as this would promote uniformity within the art market and increase transparency in the process. The Deloitte Art & Finance Report found that “76 per cent of art professionals, 72 per cent of art collectors and 64 per cent of wealth managers surveyed, are in favour of a self-regulation of the art market.”31

In the complex, international market for art, even the most sophisticated and intelligent buyers might be harmed by operating in an inherently secretive and opaque industry. Thus, while “light” regulation may not solve the art market’s transparency issues overnight, gradually, more uniformity may be established, creating standard practices for the art market as a whole. Of course, regardless of what steps are taken along these lines, it cannot be overemphasized that art market players should consult with legal and art advisors to obtain as much information as possible regarding their own transactions.

This article should only be considered as an introduction to the issues raised here. We hope and anticipate that our readers will continue the conversation. To that end, Herrick is participating in two upcoming programs on art market regulation: the first, on October 20, 2016, from 6 p.m. to 8 p.m. at our offices (more information can be obtained at; and the second, for our European and other internationally based colleagues, a joint program organized by the Art Law and Tax Law Commissions of the Union Internationale des Avocats (UIA) to be held at the annual UIA Congress in Budapest on October 30, 2016, entitled “Is the Art Market a Wild Horse?” (more information can be obtained at

The authors thank their colleague Yael Weitz for her invaluable assistance in preparing this article.

This article adapts and updates a speech previously delivered at a symposium held at Universität Basel on June 17, 2011, and published in Kunst & Recht 2011 / Art & Law 2011 (Peter Mosimann and Beat Schönenberger eds., Stämpfli Verlag AG Bern 2012).

1  Judd Tully, Picasso Painting Shatters Record at Christie’s Blockbuster, Art Info (May 12, 2015),

2  Kelly Crow, Global Art Free-For-All Sends Prices Soaring, The Wall Street Journal (May 14, 2015),

3  Alexander Forbes, The 10 Most Important Takeaways from the 2016 TEFAF Art Market Report, Artnet News (Mar. 11, 2016),

4  Georgina Adam, Big Bucks: The Explosion of the Art Market in the 21st Century (Surrey, UK: Lund Humphries, 2014).

5  Daniel Grant, Secrets of the (High-End) Art Market, Huffington Post (Dec. 14, 2010),

6  Jake Bernstein, The Art of Secrecy, The International Consortium of Investigative Journalists (Apr. 7, 2016),

7  Cynthia O’Murchu, Art: A market laid bare, Financial Times (Apr. 7, 2015),

8  Robert Frank, A Multimillion-Dollar Markup on a Modigliani, N.Y. Times, Apr. 4, 2015, at BU3.

9  O’Murchu, Art: A market laid bare.

10  Matt Egan, Dr. Doom’s latest warning: The art world is ‘shady’, CNN Money (May 11, 2015),

11  O’Murchu, Art: A market laid bare.

12  Egan, Dr. Doom’s latest warning.

13  Deloitte Art & Finance Report 2016, Key Facts, Section 5,

14  Patricia Cohen, Valuable as Art, but Priceless as a Tool to Launder Money, The New York Times, May 12, 2013.

15  Georgina Adam & Charlotte Burns, Guaranteed Outcome, The Art Newspaper, ‘The Armory Show edition’, Mar. 2-3, 2011.

16  Id.

17  Katya Kazakina, Before Paddles Are Even Raised, $1 Billion of Art Already Has Buyers, Bloomberg (Oct. 29, 2015),

18  Colin Gleadell, Art Sales: at what price guarantees?, The Telegraph (May 19, 2015),

19  Panel Discussion, Kunst & Recht 2015 / Art & Law 2015 (Peter Mosimann and Beat Schönenberger eds., Stämpfli Verlag 2015).

20  Adam & Burns, Guaranteed Outcome.

21  Jason-Louise Graham, “Art Exchange? How the International Art Market Lacks a Clear Regulatory Framework,” in V Vadi and HEGS Schneider (eds), Art, Cultural Heritage and the Market: Legal and Ethical Issues (Springer 2014) 320.

22  John Gapper, “Art world’s shady dealing under scrutiny at Davos,” (Jan. 22, 2015).

23  Marc Spiegler, Time To Reform The Art Market?, Forbes (May 30, 2005),

24  Daniel Grant, Secrets of the (High-End) Art Market.

25  Adam Lindemann, Regulate the Art Market? Don’t Even Think About It, Observer (May 10, 2011),

26  Scott Reyburn, A Tug of War Over Art-Sales Transparency, N.Y. Times (Sept. 25, 2015),

27  Henri Neuendorf, Switzerland’s Tough New Stance on Freeports Will Shake the Art World, Artnet News (Nov. 19, 2015),

28  Isabelle Eichenberger, Art: the new frontier in the fight against money laundering, Swiss Info (June 1, 2015),

29  Silke Koltrowitz & Paul Arnold, Freeports boom highlights risks of shady activities, Reuters (Sept. 22, 2016),

30  Basel Art Trade Principles on Anti-Money Laundering: Green Paper for Public Consultation, June 17, 2016,

31  Deloitte Art & Finance Report 2016, Key Facts, Section 5,