April 2022

The dangers of money laundering within the art market

Written by David Povey on Thursday 21 April, 2022

Do you know your Pablo Picasso from your Inigo Philbrick, or Leonardo da Vinci from your Larry Salander? Two of them are amongst the world’s most renowned artists, while the other two have both been imprisoned for a variety of crimes linked to the art market. This article will look at the vulnerabilities of the art market and what compliance officers can do to help protect it.

While the realms of fine art and criminal activities may seem worlds apart, they are unfortunately coming ever closer together. Transparency International has estimated that billions of GBP is flowing through the UK and its ‘tax havens’ as art, jewellery, and collectables. In 2016, Swiss authorities seized cultural relics looted from Syria’s ancient city of Palmyra, as well as from Libya and Yemen, which were being stored in Geneva’s free ports.[1] These are not isolated reports; the level of crime linked to the art world is staggering.

What is the art market and how does it work?

The value of the global art market has reached $67.4 billion, with the US and UK currently being the two largest markets, according to a recent report by Art Basel and UBS.[2] Regulators have warned that the sheer volume of activity in the global art market makes it a prime target for potential misuse.

In its July 2020 report, the Art Industry and U.S. Policies that Undermine Sanctions,[3] the U.S. Senate’s Permanent Subcommittee on Investigations observed that ‘[t]he art industry is considered the largest, legal unregulated industry in the United States’. In 2019, the US was the world’s largest art market, representing about $28.3 billion, or about 44% of global art sales.

An auction house is a company that enables the buying and selling of assets, such as works of art and collectables. An auction house can sometimes refer to the physical facility that an auction is taking place in, though it most commonly refers to the company running the auction. The auction itself is the process of buying and selling goods or services by offering them up for bids, taking bids, and then selling the item to the highest bidder or buying the item from the lowest bidder. This process brings with it high stakes and potentially large amounts of money.

Many auctions are pretty open, and you can see who you are up against, but over the years there has been an increase in telephone bidders who action the requests of a third party. The values of art on auction can push well into the millions of pounds, and this makes everyone involved very wary. An art auction inherently involves an element of secrecy, which was originally intended to protect buyers and sellers and the integrity of the market, but it has been exploited over the years. We are now faced with the situation where many purchases at an art auction are on behalf of someone else but who’s identity is kept secret – a scenario that will be all too familiar to compliance officers dealing with shell companies, unknown beneficial owners and so on.

Consider this: any piece of art will have a value, and that value is determined by what someone else is willing to pay for it. With this in mind, it’s easy to see how the market can be worth so much. Further – and this will come as no surprise – where there is riches and wealth, there is opportunity for criminal activity, and this is what the compliance industry needs to focus on to remove these dangers.

What can happen?

According to Gareth Fletcher, from Sotheby’s Institute of Art, there are three main facets to art crime

Theft by deception — forgery, fakes, white-collar crime such as money laundering, the manipulation of ownership histories and the process of illicit trafficking of cultural objects…
Theft by larceny — art theft and illegal acquisition of objects from museums/public collections. Historical antecedents of theft by larceny include iconic works — such as the well-known Mona Lisa or The Scream by Munch…
Theft by destruction — socio-economic and political forces have had an impact upon material culture. Cultural restitution and spoliation is not merely a past issue, but lives today in ongoing court cases and the ravages of war-torn countries. For example, ArtNet reported on two busts destroyed by ISIS returning to Syria after they were restored in Italy by a novel method involving 3D printing and powerful magnets.[4]

One particular example of the abuse of the art market is that of individuals using the art market to try to evade financial sanctions. This was particularly prevalent when Russian oligarchs appeared to have used transactions involving high-value art to evade sanctions, which had been imposed on them by the United States on 20 March 2014 in response to Russia’s invasion of Ukraine and annexation of Crimea. People under sanctions will always try to find a way to evade them, and the art market has been targeted for some time. As the net of sanctions tightens around these individuals, there is a high chance that the art market will be targeted as a way of laundering their assets. Preventing this will go a long way to seizing these assets and stopping the criminal merry-go-round of laundered funds from financing further criminal activities.

What rules and legislation are there to protect the art market?

The EU 5th Money Laundering Directive (5MLD) came into UK law on 10 January 2020. It extended the MLD to the art market for the first time.[5] After extensive consultation, and with HMRC as the regulator, art market participants (AMPs) now face considerably more strenuous anti money laundering expectations. Any AMP involved in an art transaction (or series of transactions) valued at €10,000 or more is now expected to be able to answer complex questions in addition to the provenance and authenticity challenges they already face, and these must be answered before a transaction is concluded. In addition, the 5MLD applied the same set of organisational expectations on AMPs as has been applied to financial services firms for years, which include appointing money laundering reporting officers, training staff, and carrying out customer due diligence.

In early 2021, the US government brought in new laws and published regulatory guidelines that will have major implications for art dealers, collectors, and anyone engaging in the art trade. The new laws are aligned with measures already in place in Europe and apply existing anti money laundering (AML) and sanctions regulations to some art-market participants. The government began implementing these laws in December 2021.

The art market in the Asia-Pacific (APAC) region is booming. China has established itself alongside the US and UK as heavyweights of the global art market, with these three hubs responsible for the majority of market activity. For 17 of the past 30 years, fine-art sales in Hong Kong have accounted for more than 40% of fine-art sales in China as a region, not counting the first half of 2021, during which Hong Kong contributed more than 41% of China’s fine-art sales by value.[6]

However, beneath the stretched canvas of this booming market lies a murky world of fraud and corruption, acknowledged by Chinese stakeholders and the international community alike. It is this that the authorities and regulators are trying to clean up across the region. It remains unclear how recent legal and regulatory changes in Hong Kong may affect galleries in the city. In Taiwan, the state’s Ministry of Culture relaxed some regulations in an effort to boost the art trade in 2019, but some dealers say the current 5% sales tax on art is still stifling growth.

Impact of more regulation

A direct impact of the increase in regulation will be felt by galleries and dealers who will need to implement screening processes for sanctions and money laundering risks. This will mean that buyers and sellers will no longer be able to disguise their identities by hiding behind advisors or intermediaries, all parties involved will need to make sure they know who is on the other side of any deal. Historically this can be complicated, as a piece of art may be owned by one party or more than one investor. As a minimum, we can expect all sides to reveal their identities to each other’s legal teams in order for vetting and sanctions screening to be carried out. This may result in more paperwork to be done, but will bring about a cleaner process for all involved.

Steps the compliance world can take

Place a focus on the source of wealth and the source of funds from all parties involved.

By understanding where the money is coming from to buy artwork, we can be sure that it is not involved in any criminal activities or related to someone that is a cause for concern.

Carry out enhanced due diligence on your customers

By doing proper know your customer (KYC) checks on your customers, you can be sure they aren’t linked to any criminal activities or other individuals that we don’t want to do business with.

Ultimate Beneficial Owners

Much artwork is bought on behalf of someone else or even through a company, these often have an ultimate beneficial owner (UBO); rather than them hiding behind paperwork and being unknown, it is useful for financial institutions to know who they are and ensure there are no criminal links there.

Study an ICA course

Launching soon, the ICA Specialist Certificate in AML and Art will be a great tool for anyone looking to understand this area in even more detail.

The bottom line for all parties involved in art dealing is that they need to be confident that they can accurately and quickly provide any required information to a regulator when they ask for it. This new challenge can be met through proper investment in record keeping and staff training, and then through continuous efforts to ensure all parties involved in any deal are clearly identified.