Anti-Money Laundering Guide For the Art Market

The art world isn’t highly regulated, either, and governments have a hard time taxing and controlling transactions. When Mexico introduced a law requiring more information about art buyers and limiting the amount of cash that could be spent on a single piece of art, art sales nosedived by 70% - probably because Mexican cartel rings were some of the biggest art buyers on the market. The Economist ran a story that the Geneva Freeport probably held $100 billion of art as of 2013, where pieces could remain and change ownership multiple times without even leaving the warehouse.

Money Laundering in The Art World

When federal agents arrested drug kingpin Ronald Belciano, they found $2.5 million in cash and fifty highly coveted works of art by Dali, Renoir and Picasso in his home. He was using rare art to launder some of the proceeds of his lucrative crimes. But art isn’t limited to paintings. 

According to the VAT Act in the UK, a work of art can include ceramics, tapestries, paintings, sculptures, plaques, photos, casting and drawings, as well as collections of mineralogical, zoological, botanical or archaeological interest. 

This is important when we consider international terrorism and terrorist financing. Terror organizations like ISIS have been noted for looting and then laundering cultural antiquities. Squads of diggers would allegedly raid sites of historic interest in places like Syria and sell the items to ISIS, who would resell them for profit. Millions of dollars may have been generated this way thanks to their secretive antiquities trading activities and used to fund terrorist attacks around the globe. 

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Combating Money Laundering in The Art World

The 4th and the 5th Anti-Money Laundering Directive published by the European Commission aims to curb the dangerous money laundering trend in the art world by requiring organizations within the art sector to adopt a risk-based approach to money laundering and due diligence. 4MLD recognizes liable assets as those who trade goods in operations and receive or make cash payments of €10,000 or more. 5AMLD broadened the definition of obliged institutions to include “a person or person trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses” and “persons storing, trading, or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to €10,000 or more.”

Free ports are special economic zones that are designated as open to all traders. Art can be stored in a free port warehouse and defined as “in transit” which exempts it from customs duty. Sales can be arranged directly in freeports without moving the item, making it hard to detect. 

In addition to the AML directives of the EC, the Responsible Art Market (RAM) has also compiled a guide urging art vendors to comply with KYC procedures for risk assessments and to create risk profiles for customers as required. They also urge companies to train their staff accordingly so that transactions and customers may be monitored effectively.

In July 2020, the US Senate Permanent Subcommittee on Investigations conducted a study and issued a paper regarding the art industry and several policies that may undermine AML sanctions. This study showed that the art market was the largest legal and unregulated market in the US. While many major auctions administer voluntary AML programs, they tend to treat the representative of the art buyer as the party to the transactions and do not ask for the identity of the actual client or the ultimate beneficial owner of the entity making the purchase. The report also revealed that many private dealers do not have documented AML controls in place as they are not legally required to do so. 

The report strongly recommended amendments to AML regulations to include art dealers and high-value art transactions to ensure that business isn’t being conducted with sanctioned individuals. They also made the recommendation that dealers determine and document ultimate beneficial ownership (UBO) information to conduct due diligence. 

FinCEN issued a notice informing financial institutions with the existing Bank Secrecy Act that certain obligations of AMLA 2020 related to trades in antiquities, including filing suspicious activity reports related to art and antiquities. 

In the US, the Anti-Money Laundering Act of 2020 also made amendments to its definition of a “financial institution”. It now includes an “a person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities.” Under this Act, antiquities dealers and their intermediaries have the same AML reporting responsibilities as financial institutions like banks, and are required to have AML/CFT programs in place. While art collectors can remain anonymous if they choose to by using representatives, that may not be the case for long. Additional rules will probably come into play that would see more stringent financial system controls implemented. 

OFAC has also made it clear that all persons must comply with US sanctions, including art market participants. 

The UK has adopted the EU’s AML directives and after Brexit, amended The Money Laundering, Terrorist Financing and Transfer of Funds Regulations Act 2017 to include provisions applicable to the art market. In 2020, the government issued Guide On AML for UK Art Market Participants which stated that “art market participants who deal in sales, purchases and/or storage of works of art… with a value, for a single transaction or a series of linked transactions, of 10,000 euros or more, will be subject to further anti-money laundering obligations under the Money Laundering Regulations 2017.” 

These obligations include: 

• establishing and maintaining AML compliance
• nominating a person responsible for AML compliance
• conducting staff training
• reporting suspicious transactions and activities
• keeping appropriate records 

Robust due diligence and KYC practices form the heart of all the best practices and regulations. Art dealers need to know who their customers are and how they’ve obtained their funds.

Conclusion

Governments and regulatory bodies are turning their attention to the art world and their existing, insufficient regulations. It’s in the best interest of art brokers, intermediaries and auction horses to become compliant with the various regulations and best practices that reduce money laundering activities and combat terrorist financing. Know Your Customer procedures and Customer Due Diligence will help art companies recognize the risks of a customer or transaction before the sale takes place, reducing their complicity in financial crimes. Scanning Sanctions Lists, PEP lists, and adverse media data can assist these organizations with their customer risk assessments.