How does art money laundering work?

Due to price flexibility and purchase anonymity, the art and antiquities market can provide an attractive environment for racketeers to launder money. According to a 2023 report, the global art market grew from $441 billion in 2022 to $579 billion in 2023, with Asia-Pacific the largest single region. The increasingly high volume of activity in the global art market makes it susceptible to potential misuse, as the Financial Action Task Force (FATF) pointed out in its 2023 guidance paper.

With anti-money laundering (AML) regulations continuously being updated and tightened, some of the more “traditional” money laundering vehicles, such as real estate, may become less attractive to criminals. Art money laundering, however, continues to be an attractive avenue as the industry’s price fluidity and traditional use of free ports can be exploited by criminals to anonymously abuse the system. 

What is art money laundering? 

Art money laundering involves the buying and selling of art and antiquities – often at inflated prices – to disguise the origins of illegally-obtained funds and reintroduce them into the legitimate economy. In addition to “works of art” and “antiquities”, the FATF also includes “cultural objects” in its sector-specific guidance due to the prevalence of forgeries and illegal trafficking being used to launder funds and finance terrorist groups or activities. 

The FATF’s report highlighted 40 examples of money laundering in the art market, over half of which involved fine art. The report also shows examples of money laundering that implicated non-fungible tokens (NFTs), which are susceptible to misuse due to numerous vulnerabilities, including the ease of transferable ownership and subjective pricing.  

How does art money laundering work?

Criminals exploit many unique factors related to the art market to launder illicit funds. Common techniques and tactics include:

• Price inflation: Since the artwork valuation process is not regulated, criminals and their co-conspirators will often use this as an opportunity to purposely drive up the price at auction, allowing them to launder large amounts of money in one sale. 
• Anonymity: Regulations in many jurisdictions enable criminals to maintain anonymity at auctions through agents, brokers, advisors, and other intermediaries hired to represent them. This can make it difficult for art market participants (AMPs) to fully understand who they are doing business with.
• Ultra-secure freeport warehouses: These are commonly used to store purchased artwork. In these locations, merchandise is classed as “in transit” and is exempt from customs duty, making it a tax haven for legitimate buyers as well as oligarchs and drug kingpins with money laundering intentions. 
• Changing ownership: Artwork stored in freeports can also technically change ownership multiple times through selling and reselling, putting further distance between the latest transaction and the origin of the illicit funds.
• False shipping invoices: Sometimes, fraudsters fill out false documentation or shipping invoices to smuggle stolen artwork and forgeries into countries where they go on to be sold. According to the FATF, multiple case studies showed this to be a common method of terrorist financing, particularly with physically small antiquities or cultural objects that attract less attention.
• Misuse of corporate structures: Criminals often use intermediaries such as shell companies or non-profit organizations (NPOs) to obscure the transfer of high-value art, hide the source of funds, and conceal the identities of sellers and buyers.
• Bribery: The FATF highlights multiple case studies in its 2023 report that showed corrupt officials receiving high-value art as a bribe or kickback rather than receiving payment directly through the financial system. This method allows the involved parties to avoid moving funds between bank accounts, complicating attempts to trace the funds.

Regulators are aware that these types of activities are ongoing and are working to create new art and antiquities AML regulations, to curtail the illegal use of these markets. 

Example of art money laundering

A prominent example of art money laundering hit the headlines in 2015 when local Philadelphian art dealer, Nathan “Nicky” Isen, was charged with money laundering and fined $15,000 for advising an undercover cop on how to launder her “drug money”. 

Isen had been introduced to the police by Ronald Belciano, a convicted drug dealer and previous customer of Isen’s who had been caught buying artwork to launder his illicit funds. When Belciano’s house was raided in 2011, vast amounts of high-value artwork were found alongside $2.5 million that was hidden in a secret compartment under a fish tank.

While Isen denied knowing about Belciano’s money laundering scheme and was not convicted, he was charged four years later on account of his conversations with a wired undercover agent.

AML regulations in the art and antiquities market

Regulators across the globe are aware that art money laundering activities are ongoing and are working to set forth new regulations to curtail illegal activities within the art and antiquities market. 

Art AML regulations in the US

The Anti-Money Laundering Act of 2020 (AMLA 2020) brought antiquities dealers under the same AML regulatory framework that previously applied to US financial institutions via the Bank Secrecy Act (BSA). Becoming law in January 2021, AMLA 2020 requires antiquities businesses to identify beneficial owners; train staff on appropriate record keeping; keep provenance and transaction records; adopt appropriate compliance policies; report obligations, and audit their recordkeeping and compliance measures.

The US Treasury published a report in February 2022 on the facilitation of money laundering and the financing of terrorism through trading high-value artwork. The study found that while the art market is vulnerable to money laundering, further regulations are not required until “we’ve tackled more systemic issues, like creating a beneficial ownership registry to crack down on shell companies”, says Scott Rembrandt, Deputy Assistant Secretary for Strategic Policy in the Office of Terrorist Financing and Financial Crimes.

Art AML regulations in Canada

The FATF’s 2016 Mutual Evaluation Report of Canada identified the luxury goods sector as an area with increased money laundering and/or terrorist financing risks, including luxury automobiles, art, and antiques. A subsequent report issued by the Standing Committee on Finance of Canada’s House of Commons in 2018 reiterated this. It recommended that “the Government of Canada require companies selling luxury items to be subject to reporting requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and report large cash transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) if those transactions are not already reported through other means.”

In June 2019, an amendment to the Criminal Code of Canada came into effect, which broadened the possibility of financial intermediaries being prosecuted for money laundering offenses if they are “reckless as to the source of those funds”. If the recommendations in the FATF and finance committee reports are implemented, each high-value sector dealer will need to implement a rigorous risk-based AML program to avoid such prosecution. This includes conducting due diligence for clients, conducting enhanced due diligence (EDD) for clients in high-risk jurisdictions, and monitoring and reporting suspicious activity.

Art AML regulations in the EU

The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) came into effect on January 10th, 2020. Expanding the scope of previous legislation, 5AMLD requires art businesses within EU member states – including agents, dealers, galleries, auction houses, warehouses, and any other individual or firm involved in the buying, selling, or storing of art – to implement risk-based AML/CFT programs. 

The Sixth Anti-Money Laundering Directive (6AMLD) followed a year later and is regarded as the EU’s toughest set of measures to deter money laundering to date. 6AMLD essentially made Anti-Money Laundering (AML) screening and customer due diligence (CDD) compulsory for all participants in the art market and provided harsher penalties for any violations moving forward.

Art AML regulations in the UK

When it left the EU in 2020, the UK adopted the EU’s AML Directives and amended its Money Laundering, Terrorist Financing and Transfer of Funds Regulations Act (MLR) 2017, to include provisions applicable to the art market. 

In 2020, the Treasury issued guidance to art market participants for money laundering supervision. The guidance states, “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 HMRC, establish and maintain AML procedures, nominate a person responsible for AML compliance, conduct training for the entity’s staff, report suspicions, and keep applicable records.

Following this, in June 2022, the British Art Market Federation issued updated guidance on AML requirements for UK AMPs and how they can be implemented. While the guidance offered by the Federation is not mandatory for AMPs to implement, departures from the guidelines must be documented alongside the rationale for doing so.

What are the challenges in combating art money laundering?

Despite these regulations, various risk factors associated with the art market can make it challenging for AMPs to distinguish legitimate sales from money laundering activities. Some of these challenges include:

• Navigating insufficient or inconsistent regulations: In its commentary on the FATF’s 2023 art market guidance, UK think-tank RUSI noted that while art dealers are subject to reporting requirements in some countries as high-value goods dealers (HVGDs), there is no common or consistent regulatory approach. Currently treated as a “regulatory add-on at the discretion of each jurisdiction,” RUSI said this leaves the art market “highly exposed to abuse”.  
• Subjective pricing: While art dealers, curators, and gallery owners usually play a role in gauging the value of a piece of art, the process is ultimately subjective as prospective buyers can radically raise the price while at auction. This can create a challenge for compliance staff as they seek to determine whether the price is legitimate or whether it was deliberately inflated to allow the buyer to launder a higher amount of illicit funds. 
• Identifying forgeries and fakes: According to the FATF, forgeries of art and cultural objects are more likely to occur in the secondary art market, where the artists and/or their representatives are absent during the sale. In addition to generating illicit sales, forgeries present a significant threat to the financial system as they can be used as collateral for loans. This is when criminals insure forged art or cultural objects at the price of the real ones and fraudulently present them to financial institutions as collateral for borrowing large sums of money.
• Handling buyer anonymity: While anonymity has historically been favored in the art market to prevent bias in the bidding process, the practice can make it difficult for law enforcement to effectively trace the movement of dirty money and track the ownership of particular assets.

How to mitigate art money laundering risks

1. Ensure familiarity with red flag indicators

In a March 2023 interview, Rena Neville, Lead AML Consultant at FCS Compliance and ex-Global Compliance Director at Sotheby’s, reminded art market professionals it is “not sufficient” to know “your client personally and have a good feeling about them.” Rather, firms must ensure their staff are “truly familiar” with red flag indicators of corrupt finance and criminal clients. 

The FATF provides a non-exhaustive list of red flags relating to money laundering and terrorist financing in the art and antiquities market, including:

• Cash transactions, in particular using large amounts of cash
• The use of large-denomination banknotes
• Sales or purchases of art involving purchasers who do not appear to be concerned with paying a substantially higher price than the notional value of the work
• Sales or purchases of art where a client is not interested in the provenance, history, style, genre, or artist of an object
• The unwillingness of a customer to provide identification information
• Transactions involving AMPs without expertise in concluding high-value purchases or sales 
• Transactions involving politically exposed persons (PEPs) or their family members or close associates

Additionally, HM Revenue & Customs in the UK published guidance on understanding money laundering risks and taking action for AMPs in June 2021. The guidance highlighted five cross-sector risks for all art market participants: off-record sales, anonymity, face-to-face sales, unusual purchasing activity, and high-risk jurisdictions. 

2. Harness the power of AI-driven AML solutions

Neville also highlights the importance of “tech tools” to carry out comprehensive screens of global databases. Firms working in or with a nexus to the art and antiquities market should implement robust AML solutions to mitigate the risk of art money laundering. Some solutions to incorporate into an AML program include: 

• Customer screening: Whether screening customers at the onboarding stage or on an ongoing basis, firms should consider partnering with a vendor with a real-time AML risk database and the ability to refresh entity profiles within minutes of a change. Not only will this enable AMPs to exceed regulatory screening and CDD requirements, but it also helps firms effectively establish who they’re doing business with and whether or not they want to continue the relationship if a customer’s risk profile was to change. 
• Transaction monitoring: AMPs should prioritize implementing a transaction monitoring tool where custom rule sets can be built to mitigate the threat of emerging art money laundering typologies. Considering the high-value nature of the arts and antiquities market, AMPs should also ensure their solution has easily adjustable thresholds. 
• KYB: For corporate clients, firms should utilize a robust know-your-business (KYB) screening solution that facilitates the mapping out of company ownership and control through a single combined search. Since corporate structures are often misused in art money laundering, a good KYB solution can help firms mitigate that risk. 
• PEP screening: As identified by the FATF, high-profile officials and politically exposed persons (PEPs) can sometimes present a higher risk of money laundering, particularly if they have received valuable works of art and antiquities as a bribe or kickback. AMPs should ensure they have a robust PEP screening tool in place to mitigate this risk, adjusting their ongoing due diligence measures accordingly.