In response to International Regulations adding the art market under anti-money laundering regulations, the US recently brought the sale of antiquities under the Bank Secrecy Act (BSA) and began a study of the potential need to bring fine art transactions under the BSA as well.
The Treasury concluded that despite the potential ease of money laundering through high-value art transactions, the government should first turn to regulating real estate transactions because of the prevalent recent use of cash. However, it found that particular actors within the art market are more at risk of being unknowingly or complicitly involved with money laundering and terrorist financing transactions.
In order to immediately address the potential risk of money laundering, the Treasury suggested that the government could take the following steps:
- Encourage the use of a single state run database with third-party identity services to protect and verify the identity of buyer and sellers in the market for providing intermediaries and law enforcement with helpful information;
- Update guidance and training for law enforcement, customs enforcement, and asset recovery agencies;
- Using FinCEN record keeping authorities to support information collection and enhanced due diligence; and
- Bring certain art market participants, who are a higher risk of participating in ML under the current legal framework and obligating them to create and maintain Anti-Money Laundering (AML) programs.
What is it about the art market?
If you are reading this, you probably already know the art market is an opaque world where private sales and confidentiality rule. Artworks are easy to transport (with a trusted handler of course) and may be stored for years in freeports changing ownership numerous times with out being touched. The subjectivity of an art works value and issues with provenance verification, particularly from the prospective of outsiders, such as regulatory officials, makes enforcement of illicit sales a challenge. Fine art has also become a significant asset class and has been used to secure loans. Finally, as transactions move to the digital world, there are more avenues to obfuscate who the the actual beneficial purchaser may be in a transaction.
Levels of Vulnerability of Art Market Participants and The Treasury’s Reasons
Auction Houses: “Potential Vulnerability”
- Many already maintain programs but there is no current way to regulate their effectiveness.
- The secondary market does not have an incentive to protect artist reputations
- Auction Houses have incentives to sell at the highest price.
Galleries: “Low Vulnerability”
- Many rely on repeat customers where a relationship has been built and have incentives to identify high-net worth individuals and collectors.
- The primary market has an incentive to protect artist reputation.
- Generally, money laundering through a gallery would require a complicit or negligent dealer or unknown intermediaries acting on behalf of the buyer.
Art Fairs: “Potential Vulnerability”
- When transactions occur at a fair there may be time constraints, therefore opportunity for money laundering to unknowingly occur.
- Success is not measured by the number the of sales but the relationships built, therefore, actual sales may be more likely to occur in the future.
Online Marketplaces (including Auction Houses, Galleries, and Art Fairs online pretense): “Exploitable Vulnerability”
- Pose a money laundering challenge when verifying even voluntarily disclosed information from the buyer, such as their drivers license, passport or other government issued photograph identification.
- Accepting digital currency poses a higher money laundering risk as it is unregulated.
- Third-party and peer-to-peer marketplaces cannot be easily regulated, creating a higher vulnerability.
Museums, Universities, and other Nonprofits: “Exploitable Vulnerability”
- Museums do not maintain market incentives to collect any information on the buyer if a work is deaccessioned.
- Donations are an easy way to get tax write-offs and launder money through the donation of illegally purchased goods.
- There is generally limited staff that specializes on tax evasion or AML regulations.
- Other nonprofits do not have art or financial staff involved with acquisitions or sales of works and may be particularly vulnerable when transacting on their own behalf.
Art Advisors, Interior Designers, and Other Intermediaries: “Exploitable Vulnerability”
- Represent money laundering vulnerabilities in the art market due to their role in maintaining anonymity.
- May have the contractual ability or verbally expressed authority to make purchases with their own funds on behalf of the ultimate beneficiary without any legal or business obligations to dislocate the end client to sellers.
- Certain trade organizations, such as Art Dealers Association of America, require provenance verification which in turn requires the name of seller and buyer to be divulged, however, many intermediary transactions do not.
Art Lending and Finance Firms: “Exploitable Vulnerability”
- When using art as a lien, boutique lending firms do not have a legal obligation to collect information on the ultimate owner of the art or the source of funds used to acquire it before providing loan secured by a high-value artwork.
Freeports and Art Storage Facilities: “Minimal Vulnerability”
- In “black box” freeports, items can be stored anonymously and indefinitely and have the potential to change ownership without the facility even knowing.
- US Customs has limited jurisdisdiction and insufficient knowledge of the art world.
- Primary use of such facilities is for the tax benefits.