State of Financial Crime 2023 Report
Anti-Money Laundering Regulation in the Art and Antiquities Markets
Banking and investment transactions have become highly scrutinized, making traditional financial transactions less conducive to pass money through the financial system for illicit purposes. Legislators and regulators have strengthened anti-money laundering regulations in the US, Canada, and Europe. Nevertheless, there remain significant concerns in these geographic areas regarding laundering money through the use of transactions in art, antiques, and other high-value merchandise. The value of the global art market has reached $67.4bn, with the US and UK currently the two largest markets, according to a recent report by Art Basel and UBS. Regulators have asserted that the volume of activity in the global art market makes it susceptible to potential misuse.
Despite the fact that most purchases and sales of antiquities and works of art are legitimate, there have been documented cases of oligarchs and drug kingpins acting through agents to hide criminal proceeds through the purchase of art works. These are then shipped to warehouses to be stored for an extended period until they are put up for sale. While art works are in storage, they can be pledged as collateral for loans of fresh, clean money. Regulators are aware that these types of activities are ongoing, and are working to set forth new regulations to curtail the illegal use of these markets.
Transactions in art and antiquities have historically been ideal methods to launder money, as objects can be smuggled across borders and hidden or stored in ultra-secure warehouses in freeports for years or decades after the sale. A freeport is a special economic zone designated by the trade and commerce administrations of various countries as open to all traders to encourage economic activity. Technically, merchandise stored in a warehouse in a freeport is defined as being “in transit” and is exempt from customs duty and may be able to be exported without the intervention of customs authorities. Also, sales of art or antiquities in freeports can also be arranged without ever moving the item from the warehouse.
Transparency International, a non-governmental organization, publishes an annual Corruption Perceptions Index that ranks countries “by their perceived levels of public sector corruption, as determined by expert assessments and opinion surveys.” Despite the fact that Western Europe is the highest-scoring region on the Corruption Perceptions Index, it is exposed to considerable risks. Regulators have identified vulnerabilities related to the use of high-value goods, including art, antiquities, and other luxury items to conduct trade-based money laundering. In response, the European Union (EU) has made significant efforts to strengthen anti-money laundering and anti-corruption legislation.
Some of the identified AML vulnerabilities related to sales of art and antiquities are due to subjective sale prices. The popularity of private transactions means transactions don’t always match market prices. Historically, dealers and intermediaries met face-to-face with clients and developed professional relationships with them, but changes in technology have resulted in more transactions taking place online.
According to a January 2021 Barron’s magazine article, “Online-only auctions grew exponentially in 2020 as the Covid-19 pandemic had a severe impact on the traditional art market…”
Barron’s reported that “Global online-only auction sales, which encompass the three top auction houses, Sotheby’s, Christie’s, and Phillips, surged 524% year-over-year to $1.05 billion, breaking through the $1 billion mark for the first time.” According to information provided to Barron’s, “The three [top] auction houses organized 644 online-only auctions throughout 2020, most of which took place in the second half of the year” and “the average lot price of online-only sales increased 150.6%” as compared to 2019.
In addition to dealers and art markets conducting a large number of transactions with buyers and sellers online, business is conducted through one or more intermediaries such as advisors, dealers, and auction houses. In response to these potential issues, regulators in some jurisdictions have modified AML regulations to apply to art market participants as well as dealers in antiquities and other high-value goods.
Changes in US Regulation
The US adopted the Anti-Money Laundering Act of 2020 (AMLA 2020), which amended the definition of “financial institution” to include “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.” This definition was written to be broad enough to include not only the antiquities dealers themselves but also the intermediaries involved in the sale and purchase of such items.
AMLA 2020 requires antiquities businesses to have reasonably-designed programs for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT). Wealthy art collectors are still able to maintain anonymity through agents, brokers, advisors and other intermediaries hired to represent the buyers and/or sellers at auctions but it is likely that participants in the US art markets may also become subject to AML regulation in the near future. Regulators have focused on enacting additional rules that would apply to the art markets as a way of closing additional gaps in financial system controls.
In July 2020, the US Senate authorized the Senate Permanent Subcommittee on Investigations to conduct a study and issue a paper regarding the art industry and US policies that undermine AML sanctions. The study found that the art market is the largest legal, yet unregulated, market in the US. The study also found that all of the major auction houses administer voluntary AML programs, however, they generally treat the client’s representative as the party to the transaction. Often, the auction house staff do not know or ask the identity of the actual client or, in the case of an entity, the ultimate beneficial owner. The Senate investigation found that private dealers generally do not have documented AML controls in place as they are not required by regulation to do so.
The Senate subcommittee report recommended that the US amend its AML regulations to include art dealers and transactions in high-value art to help ensure that art dealers are not doing business with sanctioned individuals. The subcommittee also recommended that art dealers be required to determine and document ultimate beneficial owner information and use that information to conduct due diligence on the actual parties to the sale. The report further recommended that, when imposing sanctions on individuals, the government include members of the individuals’ immediate family and make the sanctions effective immediately upon their publication.
As a prelude to regulation, FinCEN issued a notice on March 9, 2021, to inform financial institutions that have existing Bank Secrecy Act obligations of certain AMLA 2020 provisions related to trades in antiquities and art. The notice describes new AML Act measures, provides information about existing illicit activity in the antiquities and art trade, and provides specific instructions for filing suspicious activity reports related to art and antiquities.
The notice reminds financial institutions that the amended definition of “financial institution” now includes persons “engaged in the trade of antiquities,” and that the federal government intends to perform a study of the facilitation of money laundering and the financing of terrorism through transactions in artworks. FinCEN also emphasized that “Crimes relating to antiquities and art also may include money laundering and sanctions violations, and have been linked to transnational criminal networks, international terrorism, and the persecution of individuals or groups on cultural grounds.” List, other blocked persons, and those covered by comprehensive country or region embargoes.” The advisory was issued to provide guidance and does not have the force of law but delivers a warning that, based on strict liability, OFAC will impose civil penalties to anyone deemed to violate US sanctions. The standard of “strict liability” is civil liability even if an individual did not know, or have reason to know, that it was engaging in prohibited conduct.
In accordance with AML standards, a suitable risk-based approach to AML for art dealers and art marketplaces should focus on three major risk categories: the client’s identity; the provenance of the art object; and the origin of the funds used to purchase the item. Other important factors include the country in which the sale is conducted; the background of the dealer(s); the location of contracting parties; the background and purpose of the transaction; the method of financing the purchase; and the assessed value of the object. Depending on the nature and value of the transaction, the geographic location of the parties, among other factors, enhanced due diligence may be appropriate.
Until the US government adopts specific rules later this year to provide details and clarification, there remain some questions regarding the definition of an antiquity and what type of parties to the sale of antiquities are subject to the regulation. It is not yet clear whether the US rules will include financial advisors, attorneys, accountants, museums, or foreign entities that sell into US markets. The Department of Treasury is required to propose new regulations by December 27, 2021. However, OFAC has made it clear that even though the law doesn’t specifically cover art market participants, they expect all persons to comply with US sanctions.
Regulatory Proposals in Canada
The most recent FATF Mutual Evaluation Report for Canada, published in 2016, identified dealers in high-value goods, including auction houses, as highly vulnerable to potential money laundering and terrorist financing. The high-value goods sector includes luxury automobiles, art, and antiques.
In 2018, the Standing Committee on Finance of Canada’s House of Commons issued a report titled, ‘Confronting Money Laundering and Terrorist Financing: Moving Canada Forward’, which included 32 recommendations regarding modifications and additions to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).
The report states that at the time of publication, dealers in precious metals and stones were subject to AML regulation in Canada, while other dealers of high value and/or luxury goods were not. The report contains a wide-ranging set of suggested measures that could result in a significantly expanded AML/ATF regime in Canada. The report recommends that “Federal, provincial, and territorial governments should collaborate to close the loophole regarding the transaction of sales between parties who are not subject to PCMLTFA reporting requirements, which creates vulnerability for money laundering to occur.” It also argues for amending the PCMLTFA to establish sanction orders relating to high-risk geographic jurisdictions, similar to the orders enacted in the United States.
Furthermore, the Canadian government authorized the creation of the Trade Fraud and Trade-Based Money Laundering Centre of Expertise within the Canada Border Services Agency (CBSA), Canada’s customs service. The centre was operational as of April 2020 and is mandated to enhance the CBSA’s capacity to identify, preclude, and investigate complex trade fraud and to refer cases to the Royal Canadian Mounted Police. By establishing a multi-disciplinary team of intelligence analysts, trade specialists, and criminal investigators, the CBSA is now better positioned to identify and investigate anomalous trade transactions indicative of trade-based money laundering.
If the recommendations in the FATF and finance committee reports are implemented, each dealer in high value and/or luxury goods will need to implement a risk-based AML program, conduct due diligence for clients, conduct enhanced due diligence for clients in high-risk jurisdictions, and monitor and report suspicious activity.
European Union AML Directives
The 5th Anti-Money Laundering Directive
The 5th Anti-Money Laundering Directive (5AMLD) expands coverage by regulating persons trading in art, acting as intermediaries in the trade of art, storing art in freeports, or carrying out transactions via freeports if the value of the transaction or a group of linked transactions equals EUR 10,000 or more. The regulation also covers transactions in high-value goods including oil, arms, precious metals, tobacco, historical, cultural, and archaeological antiquities, and artifacts. Several smaller transactions that are linked may exceed the threshold and trigger AML requirements including customer verification, which previously only applied only to transactions in cash, but now extends to all payments. Customer verification includes obtaining photo identification, birth dates, and information about their business activities and source of wealth.
5AMLD also compels dealers and other obliged entities to disclose the ultimate beneficial owners of companies, foundations, trusts, and other legal entities. The term, “obliged entity” is defined as credit and financial institutions, as well as regulated service providers from the non-financial sector. 5AMLD explicitly lists freeports as “obliged entities”.
The directive permits EU member states to enact rules requiring companies that have dealings in countries with deficient AML and CTF regimes to conduct regular and enhanced due diligence checks on the transactions and clients in these countries. One of the aims of 5AMLD is to harmonize enhanced due diligence measures across member states.
In accordance with the regulation, Financial Intelligence Units (FIUs), law enforcement, and other authorities will be provided with centralized automated systems, such as central registries or central electronic data retrieval to identify clients in a timely manner. FIUs, which are responsible for receiving, processing, analyzing, and disseminating information relating to suspicious financial transactions have the authority to obtain the information they need from any obliged entity, even without a suspicious transaction report.
The directive expands the types of individuals, entities, and assets covered by the legislation. All covered businesses are required to conduct risk-based AML/CFT programs that include:
- Customer due diligence (CDD) and enhanced due diligence (EDD) checks
- Determining whether a client is a politically exposed person
- Screening clients against published sanctions lists
- Monitoring adverse media to detect information relating to their clients
- Monitoring and reporting potentially suspicious activity
The 6th Anti-Money Laundering Directive
While the focus of 5AMLD was to increase transparency, 6AMLD seeks to harmonize the approach that EU member states use to combat money laundering by defining the criminal offenses that are to be considered “predicate offenses” with regard to money laundering, setting forth minimum sanctions, and extending criminal liability to legal entities in addition to liability for individuals.
6AMLD regulates obliged entities that trade in art, act as a third-party in the art trade, or store art in freeports. If the transaction value or linked transactions in works of art total EUR 10,000 or more, the parties must be verified. In effect, 6AMLD has made Anti-Money Laundering (AML) screening and Customer Due Diligence (CDD) compulsory for all participants in the art market. In addition, the scope of money laundering has been expanded to include accessory offences such as “aiding and abetting”, “attempting” and “inciting”. 6AMLD also contains provisions to improve cooperation between member states and provide harsher punishments for AML/CFT violations.
The UK adopted the European Union’s Anti-Money Laundering Directives and, upon exiting the EU, the country amended The Money Laundering, Terrorist Financing and Transfer of Funds Regulations Act 2017 to include the provisions applicable to the art market. Further amendments to the regulations were made in 2019, effective January 10, 2020.
On January 24, 2020, the government issued “Guidance On Anti Money Laundering for UK Art Market Participants”, approved By Her Majesty’s Treasury. The guidance states, “From 10 Jan 2020, 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 the requirement for obliged entities to register with Her Majesty’s Revenue and Customs, establish and maintain anti-money laundering procedures, nominate a person responsible for anti-money laundering compliance, conduct training for the entity’s staff, report suspicions, and keep applicable records.
One of the core principles in the government-issued guidance is a requirement that art market participants identify the l person with whom they are dealing in any transaction or, when dealing with an entity, the person or persons who control that entity. Art dealers and intermediaries who conduct transactions that meet or exceed the monetary threshold are required to conduct risk-based due diligence on their clients. The regulation requires verifying the client’s identity, carrying out customer due diligence checks on the customer, the source of funds, and identifying and reviewing any potentially suspicious instructions or payments from the client.
Because the AML requirements are “risk-based”, the obliged entities must identify and understand the level of risk related to the client and the type of transaction and assess the corresponding level of risk. High-risk transactions include those relating to “cultural artifacts and other items of archaeological, historical, cultural and religious importance…” and require enhanced due diligence to be performed. This requires a greater awareness of the client’s identity, background, and the purpose of the transaction in order to evaluate the risk.
A subsequent consultation paper issued in July 2021 sets out the government’s approach and plans for amending the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 and aims to, “provide further clarity to the art sector with regard to an amendment to the current definition for Art Market Participants…” and is intended to clarify the government’s position that would exclude artists from the current definition for Art Market Participant as well as other proposed changes to the regulation.
Enhanced Disclosure to Provide Transparency
Participants in the art and antiquities markets understand the potential for money laundering and terrorist financing through purchases of high-value art, antiquities, and other high-value goods. Many dealers and market participants have established – or are establishing – appropriate procedures to review and investigate the background of the parties to such sales and the details of the transactions.
Art auction houses, dealers, financiers, and insurers have begun to conduct money laundering risk assessments to understand potential exposures, some of which are unique to the art trade. Based on these risk assessments, art market participants can design, implement, and maintain internal controls to mitigate exposure to financial crimes and thwart the financing of illegal activity and potential sanctions. Predicting the total impact on the art and antiquities markets is challenging, in part because governments are still in the process of determining and enforcing the final regulations.
Various regulators will likely continue to provide guidance regarding controls relating to antiquities and works of art but, until then, some questions remain:
- Which markets and market participants will be subject to regulations?
- Who in the art trade will be covered by the regulations?
- Will the requirements apply only to high-value works of art?
- How are“antiquities” and “art” to be defined?
The introduction of new AML regulations pressures the art market to become more transparent. Since many art market participants, including galleries and dealers, have already implemented customer due diligence and screening processes for sanctions, buyers and sellers may no longer be able to hide their identities behind advisors or other intermediaries.
Although rules regarding ultimate beneficial ownership are in the process of being adopted, the names of buyers and sellers will likely not become public. Dealers on both sides of a transaction may be required to reveal the identity of their client to each other. They may enforce this with standard confidentiality and non-disclosure agreements or could observe industry practices regarding confidentiality and privacy. If these changes are enacted, dealers and auction houses would be better able to determine who they are dealing with to help prevent abuses of the system, avoid dealing with sanctioned individuals and entities and be able to respond to inquiries from regulators or law enforcement.
Regulators’ attention to the threat of art- and antiquities- related financial crimes and updated regulation will likely also require greater cooperation and information sharing between participants in the art markets to combat potential money laundering and financing for illicit purposes. International AML regulations and sanctions are likely to get stricter, so it would be judicious for art market participants to adopt strong AML programs now.