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“ENABLERS Act” Pursues Art Market but Threatens Longstanding Protections Against Government Intrusion

Posted by Nicholas O'Donnell on July 20, 2022 at 1:39 PM

Consistent with efforts in recent years to apply banking laws to the art market, the prospects of passage of a bill in Congress that would apply those rules to a broad category of advisors and attorneys have recently increased. The “ENABLERS Act,” a gimmick of nomenclature apparent from the moment it was proposed, was briefly attached to the annual National Defense Authorization Act, which in keeping with longstanding tradition easily passed the U.S. House of Representatives on July 14, 2022. This tactic, which was also used to extend the reach of the Bank Secrecy Act to antiquities dealers in 2021, greatly enhances the odds that what seemed initially like an unserious publicity stunt might become law. Readers of the Art Law Report will not be surprised at a critical view here of the effort to place a square peg—the art market—into a round hole—bank oversight. This bill is considerably worse, however. Compounding the confusion is that despite widespread coverage about its attachment to the NDAA, the ENABLERS Act as originally proposed is not in the version of the NDAA that passed the House of Representatives last week (it was added then revised, notwithstanding at least one report to the contrary). What was approved for the moment omits the worst parts of the ENABLERS Act. But the perception that it is a done deal ironically may have the effect of lowering vigilance about its prospects. Even if this bill never becomes law, it has come much closer than it should have.

Empirical evidence is thin to suggest that the art and collectibles market is particularly prone to bad actors within the market itself. Are art galleries, consultants, or lawyers, more likely to engage in money laundering than other businesses? Absolutely not. This is not for lack of aspersions cast. Yet as a report by the Treasury Department this year confirmed, whatever value these financial crimes regulations have work best when applied to financial institutions, which are all but unavoidable in the modern world with respect to payments and transfers. The intrusion of bad actors who victimize those very art market actors is no excuse for an encroaching surveillance state by compelling the creation of a network of informants. Sneaking this substantive idea into a defense bill is deeply cynical and seems to be the tactic of choice for back-door policy.

The bill (H.R. 5525) was introduced by Rep. Tom Malinowski of New Jersey on October 8 ,2021 as the “Establishing New Authorities for Businesses Laundering and Enabling Risks to Security Act,” ENABLERS for short. The existing Bank Secrecy Act, 31 U.S.C. § 5312(a), confers various obligations on regulated entities, principally banks, to file suspicious activity reports with the Financial Crimes Enforcement Network (FinCEN). The best known of these obligations is to report transactions in cash greater than $10,000. That obligation was extended in 2021 to “dealers in antiquities,” a term than nearly two years later is undefined by statute or regulation.

Notably, FinCEN issued its report earlier year as directed by Congress about the state of risk in the art market. FinCEN’s report noted the risks of bad actors using the art market in money laundering, but effectively concluded that additional regulation was not warranted.

The ENABLERS Act would continue this trend, and add to those entities covered by the Bank Secrecy Act: “a person engaged in the trade in works of art, antiques, or collectibles, including a dealer, advisor, consultant, custodian, gallery, auction house, museum, or any other person who engages as a business in the solicitation or the sale of works of art, antiques, or collectibles,” as well as any attorney involved in financial activity or related administrative activity on behalf of another person,” a trust or company service provider, CPAs, “a person engaged in the business of public relations, marketing, communications, or other similar services in such a manner as to provide another person anonymity or deniability” and certain third-party payment services.

That is quite a list. The addition of the trade in art or collectibles is similar to other proposals that never made their way into law, most recently in 2018 in the “Illicit Art and Antiquities Trafficking Protection Act” that never became law. It is an expansive definition that would include almost literally everyone involved in any way with the art or antiquities market, and would treat them like a bank.

That is, believe it or not, the narrowest part of the bill. And while I can acknowledge the eyerolls that will follow, perhaps the worst part of this very bad idea is the suggestion that any attorney involved in any financial transaction share these obligations as well. Everyone hates lawyers until they need one, as they say. But the suggestion that attorneys would inform on their clients not only violates centuries of settled law, it is abhorrent to public policy.

Here, therefore, we will take a brief detour into the attorney-client privilege presently under assault. The privilege was recognized as long ago as 1577 by the English Chancery Court as a legal right, in the case of Berd v. Lovelace (1577), 21 Eng. Rep. 33 (Ch.). Professor Wigmore, the author of the definitive evidence treatise, described it as “designed to secure subjective freedom of mind for the client in seeking legal advice.” John Henry Wigmore, Evidence § 2317 (1st ed., Little Brown & Co. 1904). As the Supreme Court later noted in endorsing this view, “If the privilege did not exist at all, every one would be thrown upon his own legal resources. Deprived of all professional assistance, a man would not venture to consult any skillful person, or would only dare to tell his counsel half his case.” Blackburn v. Crawfords Lessee, 70 U.S. 175, 192-93 (1865). This concept exists in some respect in every state’s law as well, and was codified in the Federal Rules of Evidence in 1974.

The revised language that passed the House is narrower, but hardly acceptable. It would now include within the regulated group “legal or accounting services” that involve “corporate or other legal entity arrangement, association, or formation services.” That is still a very broad category that could easily include attorneys consulted for creating ownership structures to hold art. “Shell corporation” is a popular straw man in this regard, but read literally the bill as proposed would put an attorney between her client and the law to assess what the client had said confidentially. This is completely untenable. When you threaten the very act of consultation, the unintended consequence is that more people will not seek advice about how to comply with the law.

It really comes down to this: do you believe the government is justified in knowing what you tell your attorney in confidence? Do you believe the government is entitled to take your words to your attorney in confidence, take them out of context, and fine or imprison you? Perhaps there is a government that you trust with that power. I have encountered none yet. Put another way, pick the issue on which you disagree with either major political party. Would you be confident that a government under that party would act with discretion if in possession of your most intimate confidential information? Count me out.

What is the case for this bill, then? What I have seen cited most frequently traces the impetus to the so-called Pandora Papers, which followed the so-called Panama Papers. According to the International Consortium of Investigative Journalists, its Offshore Leaks database “contains information on more than 810,000 offshore entities that are part of the Pandora Papers, Paradise Papers, Bahamas Leaks, Panama Papers and Offshore Leaks investigations.” These papers, it has been suggested, “strip[] away the secrecy that cloaks companies and trusts incorporated in tax havens and exposes the people behind them. This includes, when available, the names of the real owners of those opaque structures. In all, the interactive application reveals more than 750,000 names of people and companies behind secret offshore structures. They come from leaked records and not a standardized corporate registry. . . ” The NDAA that did pass calls the Pandora Papers “the largest exposé of global financial data in history.” There is another way to describe those people and that exposed data: victims of a crime in which that data was stolen. As noted, none of these papers were publicly filed, they were “leaked.”

Two wrongs still don’t make a right. Gallerists, lawyers, and accountants aren’t bankers. It is certainly welcome that someone noticed and struck out the worst part of the bill, but the celebration of privacy breaches still drips from the current bill.

Topics: Congress, Supreme Court, House of Representatives, AML, Money laundering, FinCEN, Financial Crimes Enforcement Network, Illicit Art and Antiquities Trafficking Protection, suspicious activity reports, Bank Secrecy Act, 31 U.S.C. § 5312(a), National Defense Authorization Act, Treasury Department, ENABLERS Act, NDAA, art market regulation, Tom Malinowski, dealers in antiquities, JOHN HENRY WIGMORE, Berd v. Lovelace, Federal Rules of Evidence, Panama Papers, International Consortium Investigative Journalists, Offshore Leaks database, English Chancery Court, Blackburn v. Crawfords Lessee, Pandora Papers

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About the Blog

The Art Law Report provides timely updates and commentary on legal issues in the museum and visual arts communities. It is authored by Nicholas M. O'Donnell, partner in our Art & Museum Law Practice.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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