The US Treasury has released a Study of the Facilitation of Money Laundering and Terrorist Through the Trade in Works of Art.
The report states
Section 6110(c) of the Anti-Money Laundering Act of 2020, enacted as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, directs the U.S. Department of the Treasury to study the facilitation of money laundering (ML) and terror finance (TF) through the trade in works of art (the “Study”). This Study identifies art market participants and sectors of the high-value art market in the United States that may present ML and TF risks to the U.S. financial system. The Study also examines what efforts U.S. government agencies, regulators, and market participants should explore to further mitigate these risks.
Most art market participants, including some entities that provide financial services within the high-value art market, are not subject to anti-money laundering/countering the financing of terrorism (AML/CFT) obligations. Several qualities inherent to art, the high-value art market, and market participants may make the market attractive for ML by illicit actors. Specifically, the high-dollar values of single transactions, the ease of transportability of works of art, the long-standing culture of privacy in the market (including private sales and transactions), and the increasing use of art as an investment or financial asset, all could make trade in high-value art vulnerable to ML.
However, the infrequent use of cash in the high-value art market and preexisting requirements for financial institutions and commercial businesses to report high-value cash transactions, both of which are described later in this Study, may make the institutional high-value art market a poor vehicle for laundering illicit cash proceeds. The Study found some evidence of ML risk in the institutional high-value art market but found little evidence of TF risk. Furthermore, the emerging online art market may present new risks, depending on the structure and incentives of certain activity in this sector of the market (i.e., the purchase of non-fungible tokens [NFTs], digital units on an underlying blockchain that can represent ownership of a digital work of art).
To mitigate these risks, some institutional art market participants, such as certain auction houses and galleries, maintain procedures for conducting due diligence on potential buyers and sellers. Institutional art market participants have inherent economic incentives, such as credit risk issues and reputation maintenance, to collect this information. These good business practices can collect information that may help reduce ML in the art market. However, these programs are purely voluntary, and the procedures can be suspended or disregarded at the institution’s discretion without the risk of the U.S. government (USG) bringing a civil or criminal enforcement action, which presents a vulnerability to the U.S. financial system. These programs are less common in certain areas of the online art market, such as with exchanges that host digital art transactions. Furthermore, illicit actors may attempt to utilize or bribe merchants, professionals, and financial services employees in the art market to ignore policies and best practices for a desired transaction. A significant portion of ML in the high-value art market is likely conducted with the help of such complicit professionals. While the use of complicit professionals is not unique to the art market—it can happen in any profession or service—the historically private nature of the high-value art market makes it more challenging for government authorities to identify and investigate potential ML.
To address these ML risks, the Study considers several regulatory and nonregulatory actions the USG should consider. Nonregulatory options include (1) providing government support for the creation and enhancement of private sector information-sharing programs to encourage transparency among art market participants and (2) updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies. Regulatory options include (1) using targeted recordkeeping and reporting requirements to support information collection and ML activity analyses and (2) applying comprehensive AML/CFT measures to certain art market participants. Weighed against other sectors that pose ML/TF risks, the Study concludes that the art market should not be an immediate focus for the imposition of comprehensive AML/CFT requirements.
On January 1, 2021, the U.S. Congress enacted the Anti-Money Laundering Act of 2020 (the AML Act) as part of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021 (NDAA). Section 6110 of the AML Act includes several AML/CFT provisions related to antiquities and art. Section 6110(c) of the AML Act directs the U.S. Department of the Treasury (Treasury) to conduct a study of the facilitation of ML and TF through the trade in works of art, including an analysis of the following:
1. The extent to which the facilitation of ML and TF through the trade in works of art may enter or affect the financial system of the United States, including any qualitative or quantitative data or statistics;
2. An evaluation of which markets, by size, entity type, domestic or international geographical locations, or otherwise, should be subject to any regulations;
3. The degree to which the regulations, if any, should focus on high-value trade in works of art and on the need to identify the actual purchasers of such works, in addition to the agents or intermediaries acting for or on behalf of such purchasers;
4. The need, if any, to identify persons who are dealers, advisors, consultants, or any other persons who engage as a business in the trade in works of art;
5. Whether thresholds and definitions should apply in determining which entities, if any, to regulate;
6. An evaluation of whether certain exemptions should apply;
7. Whether information on certain transactions in the trade in works of art has a high degree of usefulness in criminal, tax, or regulatory matters; and
8. Any other matter the Secretary of the Treasury determines is appropriate.
The report comments
The global trade in art is a multi-billion-dollar industry. According to The Art Market 2021, a leading industry report published by UBS and Art Basel,2 in 2020, global sales of art were valued at an estimated $50 billion, down from approximately $67 billion worldwide just a few years earlier. This decrease is likely primarily due to the ongoing COVID-19 pandemic. According to the same study, the United States, the United Kingdom, and China account for an estimated 82 percent of global art sales by value, with the U.S. share estimated at 42 percent ($21.3 billion). Headlines consistently identify paintings sold by galleries or at auctions that are valued in the hundreds of millions of dollars. In 2017, Christie’s auction house sold a painting for nearly half a billion dollars, the most expensive sale on record. High-value art has even been purchased by investors speculating with excess capital to allocate, demonstrating the viability of art as an investment asset class. Economic growth, rising purchasing power, and growing disposable income in the global economy are also likely driving factors behind the thriving high-value art market. Technological innovations, such as the rise of distributed ledger technology and NFTs, have presented and continue to present new opportunities for the exploration of creative media, and financial innovations in cross-border payments have allowed the global art market to thrive and expand.
The substantial number of art-related transactions taking place globally in the high-value art market provides an opportunity for disguising illicit transactions as legitimate commercial transactions. Highnet-worth individuals (HNWI) seek high-value goods or commodities for personal consumption or as an investment. Illicit actors attempting to launder large amounts of illegitimate wealth, such as kleptocrats and drug traffickers, are among those who seek out such possessions or investments. While the risk that high-value art can be a conduit to launder illicit proceeds is long-standing, this Study considers market indicators and case studies of misuse to assess the extent to which the high-value art market attracts illicit finance and whether certain sectors of the market are particularly vulnerable to abuse by criminal actors. The Study also examines what efforts should be undertaken by U.S. government agencies, regulators, and market participants to further mitigate the laundering of illicit proceeds through the high-value art market.
The high-value art market is the part of the market that is of greatest concern from a ML perspective but represents a limited portion of the broader art market. According to the UBS and Art Basel report, in 2020, less than 20 percent of works sold internationally by art dealers had values over $50,000. Approximately 10 percent of sales by auction houses internationally in 2020 had values over $50,000, but those sales accounted for over 85 percent of the total sales value.
The high-value art market and art market participants who routinely transact in the type of high-value artworks have certain inherent qualities that make them potentially vulnerable to a range of financial crimes. These qualities include the following:
• The relatively high value of art compared to other retail goods and commodities;
• The historically opaque nature of the high-value art market;
• Subjective valuations and the lack of stable and predictable pricing;
• The transportability of certain types of artworks, including across international borders;
• The difficulty faced by law enforcement to monitor such movements and assess the value of artwork, including across borders; and
• The accepted use of third-party intermediaries to purchase, sell, and hold artwork while their clients remain anonymous (i.e., art dealers, advisors, interior designers, shell companies, trusts).
For example, in September 2005, Brazilian financial institution Banco Santos went bankrupt, and its owner, Edemar Cid Ferreira, was convicted of bank fraud and ML in Brazil. As part of the case, a Sao Paulo Court judge also ordered the search, seizure, and confiscation of assets that Ferreira, his associates, and members of his family had acquired with unlawfully obtained funds from Banco Santos. Brazilian authorities ordered the seizure of his art collection, valued at $20 to $30 million, which included high-value works of art. However, when Brazilian law enforcement searched Ferreira’s properties, several of the most valuable works of art were missing. In 2007, a U.S. investigation revealed that one of these high-value works of art had been illegally imported into the United States from a storage facility in the Netherlands with an invoice that valued the work at $100; however, it had been recently appraised for approximately $8 million.
The Ferreira case highlights the ease of transfer, even across international borders, of high-value art. National border authorities can struggle to identify when high-value works are mis-declared as they lack the specialized experience to detect and appraise high-value art.
AML/CFT and Other Reporting Requirements in the United States
In the United States, AML/CFT laws and implementing regulations require that financial institutions establish and implement AML/CFT programs, which generally include the following elements:
(1) designation of a compliance officer;
(2) maintenance of a system of internal compliance controls;
(3) ongoing, relevant training of employees; and
(4) independent testing and review.
As part of their AML/CFT programs, certain financial institutions are also required to identify and verify the identity of the beneficial owners of legal entity customers who own, control, and profit from companies when those companies open accounts. Most financial institutions are also required to file Suspicious Activity Reports (SARs) with Treasury’s Financial Crimes Enforcement Network (FinCEN) when they know, suspect, or have reason to suspect that a transaction or group of transactions involve funds over applicable thresholds that are designed to evade federal reporting requirements, have no business or apparent lawful purpose, involve the use of the financial institution to conduct criminal activity, involve funds derived from illegal activity or are intended or conducted in order to hide or disguise funds or assets derived from illegal activity, or when the financial institution believes the reporting may be relevant to possible violations of the law.
While banks are defined as financial institutions under FinCEN’s implementing regulations, other participants in the art market are not subject to comprehensive AML/CFT requirements.Although a bank is required to establish and implement an AML/CFT program, including appropriate risk-based procedures for conducting ongoing customer due diligence (CDD), and to file SARs, it is generally the bank’s customers, such as galleries, auction houses, or other art market participants, that are in a position to collect information regarding specific transactions, such as the identities of buyers and sellers and other transaction data. That said, some banks may require some supporting documentation before processing certain payments. In addition to SARs, certain financial institutions must file Currency Transaction Reports whenever a transaction in currency exceeds $10,000.
Though they are not subject to AML/CFT obligations, participants in the U.S. art market are subject to certain general reporting requirements. First, any person engaged in a trade or business in the United States must file a “Report of Cash Payments Over $10,000 in a Trade or Business” (referred to as the “Form 8300”) for the receipt of more than $10,000 in cash, coins, or certain monetary instruments in one transaction or two or more related transactions (meaning that large currency and monetary instrument transactions are mandated to be reported by art industry participants that are not financial institutions). A Form 8300 may also be filed voluntarily for certain suspicious transactions, even if the total amount does not exceed $10,000. The Form 8300 provides valuable information on the movement and use of cash to the Internal Revenue Service (IRS), FinCEN, and the broader law enforcement community. Second, all U.S. persons must comply with Office of Foreign Assets Control (OFAC) regulations, including all U.S. citizens and lawful permanent residents regardless of where they are located, all individuals and entities within the United States, and all U.S. incorporated entities and their foreign branches. For some OFAC programs, foreign subsidiaries owned or controlled by U.S. persons also must comply. Since the enactment of the “Berman Amendment,” U.S. sanctions regulations administered by OFAC generally exempt from regulation transactions related to sanctioned jurisdictions that involve “the importation from any country, or the exportation to any country…of any information or informational materials, including but not limited to…artworks.” OFAC has issued public guidance indicating that it does not interpret this exemption to allow blocked persons or their facilitators to evade sanctions by exchanging financial assets for high-value artwork or vice versa. OFAC has further noted it will apply its sanctions to transactions involving artworks in which a blocked person has an interest, to the extent the artwork functions primarily as an investment asset or medium of exchange.
Outreach conducted by Treasury over the course of this Study revealed that while most art market participants are not mandated by federal regulations to maintain AML/CFT programs, many maintain voluntary programs that may include procedures for collecting information on customers. These voluntary programs can include information collection regarding “obtaining the provenance history of the object, requesting identification information from the seller, establishing credibility and plausibility references relating to the seller, referring to publicly available databases and listings relating to the parties to the transaction and the art object respectively, obtaining any relevant and available legal documents, witness declarations, expert opinions as the case may be, and checking the restoration history as appropriate and presenting circumstantial evidence when no direct documentation is available.” Whether the establishment and implementation of these programs are due to inherent art market incentives, such as knowing the customer for credit risk issues or to maintain the reputation of art market participants, adoption of these voluntary programs appears to be a best practice in the industry for high-value art. Additionally, some trade groups that represent auction houses, galleries, or other dealers maintain certain required due diligence policies and procedures that member businesses must adhere to as a membership requirement. That said, all these programs are not legally mandated and can be suspended or amended by the institution or trade group categorically or on a case-by-case basis. Moreover, the lack of regulatory requirements for such programs also means that government authorities cannot take administrative or enforcement actions when such programs are ineffective or nonexistent.
While some art market participants may provide information in response to informal law enforcement requests, this is at the discretion of individual art market participants. There may be few other legal mechanisms for obtaining customer information other than a subpoena or court order. Based on these facts and the evidence presented throughout the rest of the Study, this report concludes that there is some evidence of ML risk in the high-value art market and little evidence of TF risk.
