On February 4, 2022, the United States Treasury Department released its Study on the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art. In this Study, the Treasury Department goes through the basics of money laundering in the art world, the particular risks the art world presents for money laundering, the possibility of the use of money derived from illicit art trades to finance terrorism, and potential ways to reduce the art world’s risk. The Study was mandated by the Anti-Money Laundering Act of 2020, as previously discussed on this blog here.

As regular readers of this blog may be aware, money laundering describes the process by which funds derived from illegal sources are disguised and moved into the legitimate market.  Put most simply, it involves taking money earned illegally and ‘washing’ it. It is generally considered to involve three steps: placement, layering and integration. The money is first ‘placed’ into the legal financial system, then  ‘layered’ to disguise its origins, (for example by transferring money through numerous accounts) after which it is ‘integrated’ into the financial system by another/other transaction(s), (such as the purchase of high-value art).

As recognized in the Treasury Study, the art market has multiple qualities that make it vulnerable to money laundering schemes. These include:

• the relatively high value of art compared to other goods and commodities;
• the historically opaque nature of the high value art market;
• the subjectiveness of valuations and a lack of stable and predictable pricing;
• the transportability of certain types of art works;
• the difficulty faced by law enforcement to monitor the movements and assess the value of works of art; and
• the accepted use of third-party intermediaries to purchase, sell, and hold artworks while their clients remain anonymous.

The Study recognizes the secondary art market to be more vulnerable to money laundering than the primary market, where there are certain in-built protections in some cases (e.g. a preponderance of smaller businesses, more limited client bases, and importantly, fewer uncertainties about provenance than for dealers in the secondary market).

High-value art has a particular susceptibility to money laundering. Not only are participants able to conceal their identity through the use of shell companies and third party dealers which provide an additional level of anonymity, the art itself provides an ideal method for transporting money internationally as it is highly mobile. With the use of Free Trade Zones, the owner of the work placed in the zone can conduct financial transactions outside of it, allowing these transactions to occur without ever needing to move the art itself.

In the United States, the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) laws require financial institutions to establish and implement AML/CFT programs. Art market participants are not subject to these obligations per se. Art traders do, however, have to follow general reporting requirements. These include filing reports of cash payments at a value of over $10,000 (for any transaction or combination of related transactions). Voluntary reporting for certain suspicious activity, even for transactions under $10,000 is also a possibility (though is not legally required for art traders), and provides the US authorities with useful information. Additionally, all US art market participants, and indeed, all US citizens must comply with the regulations of the Office of Foreign Assets Control relating to economic sanctions against targeted countries, individuals or groups.

Though art market participants are not specifically required to implement AML/CFT related programs, many (particularly institutions such as auction houses and galleries) maintain voluntary programs that include procedures for collecting information on customers. These can include:

• obtaining the provenance history of the object;
• requesting identification information from the seller, and checking out the seller’s credibility and plausibility;
• referring to publicly available databases to confirm details about both the parties and the art object in question.

While beneficial, these programs are not legally mandated and are entirely at the discretion of the dealer or institution. Thus, government authorities cannot take administrative or enforcement actions when programs are ineffective or nonexistent.

The emergence of the digital art space creates new problems in relation to the prevention of money laundering. Non-fungible tokens (NFTs) provide new ways to launder money. For example, NFTs can be used to ‘self-launder’ the money (sometimes referred to as ‘wash trading’). The NFT can be purchased with illegal funds through one crypto wallet, the criminal then transacting with themselves to purchase it using another wallet, thus creating records of sales on the blockchain. The NFT can then be sold on to an unrelated party, providing the criminal with clean funds. Additionally, the digital art space does not require the movement of physical art, increasing the risks yet further.

Another area of concern identified in the Study is the provision of financial services in connection with the art market. The Study acknowledged the increasing use of art as a financial asset, particularly the use of art as collateral for loans, and expressed concern that boutique art finance companies would not generally be subject to comprehensive AML/CFT requirements, leaving them vulnerable to money laundering activity.

Despite the Study pointing out these risks, perhaps rather surprisingly, the US Treasury Department does not suggest imposing additional restrictions or implementing new legislation at this stage. According to its assessment, whilst there is some evidence of money laundering in the art trade (particularly in high-value institutional transactions) there is little evidence of terrorism financing through high-value art. One of the main reasons for the latter boils down to the simple fact of geography – namely that the high-value art trade is not generally located close to areas of terrorist activity. There are other, easier ways for terrorists to move money. Even for the money laundering risks, the Treasury considered there to be important mitigating factors, including the relatively infrequent use of cash in the high-value art market, and the existence of regulatory reporting requirements for high-value cash transactions (as noted above). The fact that buyers are frequently already known to large galleries, that smaller galleries lack high price inventory and that  galleries tend to be concerned with their reputation also countered the risks of money laundering through art transactions, to some degree, in the Treasury’s view. Additionally, while the level of art-related money laundering may be significant, it is considered to be far exceeded by other financial crimes such as fraud and cyber crime.

The Treasury Department suggests a few non-regulatory and regulatory options to strengthen protection against money laundering in the art market. The non-regulatory options include  encouraging private sector information-sharing programs to foster transparency within the market as well as updating guidance and training for key players such as law enforcement and customs agencies. The regulatory options include imposing obligations on certain market actors to report key matters such as the identity of clients and the persons behind shell companies to FinCEN (the Financial Crimes Enforcement Unit) and, more broadly, bringing certain art market participants under the AML/CFT legal framework and obligating them to create and maintain AML/CFT programs.

Whilst the immediate results of this Study may not impact on the practices of many who participate in the US art market in fundamental ways, US art traders increasingly need to be aware of the issues which arise for the art market in the context of money laundering. This is not least because of the international nature of the art trade and the fact that other countries have already implemented much more robust regimes. The UK, for example, has imposed tighter anti-money laundering legislation within the art market in the past few years in response to the EU’s Fifth Anti-Money Laundering Directive. This may create confusion and uncertainty for US art market participants. It may also leave the US market at greater risk of money laundering activity, if it fails to keep pace with the more protective regimes found in other jurisdictions.

 

Image credit: Jericho (CC BY 3.0) via Wikimedia Commons