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.