The Art of Money Laundering

They say that art is in the eye of the beholder.

Why can a sketch that looks like my 7-year-old nephew drew it sell for millions?

The name of the artist of course.

And therein lies the genius. Art is the perfect vehicle for money laundering.

Great stories abound here.

For instance, take the conviction of Edemar Cid Ferreira for bank fraud.

In the search and seizure of his assets, a U.S. investigation found a piece of artwork appraised at $8 million that had been illegally imported into the United States with an invoice valuing it at $100.

Russian Oligarchs Strike Again

Sanctions aren’t the only issue facing Russian oligarchs that should be on our radar as compliance officers.

A few years ago, when Russia invaded Crimea, sanctioned individuals Arkady and Boris Rotenberg were the targets of an investigation that traced more than $18 million in art purchases made through private dealers and auction houses via anonymous shell companies.

A U.S. Senate investigation report stated, “If wealthy Russian oligarchs can purchase millions in art for personal investment or enjoyment while under sanction, it follows that their businesses or hidden resources could also continue accessing the U.S. financial system.”

In other words, buying and selling art is a fantastic way to avoid sanctions and launder money.

The Many Reasons Art is a Great Money Laundering Tool

Art is a near-perfect vehicle for money laundering.

First, many works of art are small and easily transported, especially via private jet.

Art is often bought in private sales and, when this happens, there aren’t usually public records.

Art can be bought through shell companies with opaque ownership.

Art is an “invisible asset” when it is not held by a financial institution.

Pieces of art may disappear from view for decades, only to resurface without a clear chain of ownership because of sales through third-party art dealers.

Enter Cryptocurrency and NFTs

A new twist on the old problem is the use of cryptocurrency and non-fungible tokens (NFT).

NFTs can be transferred in a peer-to-peer environment without the assistance of a bank or other financial institution.

It makes self-laundering easier and fails to create a public record.

As the use of cryptocurrencies increases, opportunities for money-laundering increase as well, especially when combined with the world of fine art and antiquities sales.

More AML legislation?

On February 4, 2022, the U.S. Department of Treasury published a study highlighting the art market participants and sectors that present money laundering and terrorist finance risks to the U.S. financial system (Study).

This Study was requested by the Director of FinCEN, who directed the Secretary of the Treasury to create the Study.

It was meant to assess, among other things, which markets should be subject to regulation, and what regulations might be applied to the trade of high-value works of art, including identification of the ultimate buyer.

The Study is the next step in what has become a march toward more regulation of art sales. The call for regulation is partially in response to the Senate investigation that found the art world is considered to be the largest unregulated industry in the United States.

Time will tell whether the U.S. implements more legislation governing the fine art market.

If it does, there will certainly be pushback from those in the market, especially smaller vendors, and independent agents.

However, history has shown that a certain amount of regulation can be beneficial.

For instance, in the early 2010s, the Mexican government passed a law requiring more information about buyers and dictating how much cash could be spent on a single piece of art.

In response, the market fell 70% in less than a year.

It’s important to note that according to reports, many believed that was because Mexican cartels had previously been the biggest buyers in the market.

What to Watch Out For

Having a successful compliance program is crucial if your company trades in the art space, but also for any product or service that is vulnerable to money laundering.

The AML Standards for Art Market Operators are set forth by an independent non-profit organization called the Basel Institute on Governance.

The following are warning signs that warrant further investigation. The client, customer, seller, or buyer:

  • Is evasive or reluctant to provide adequate information relating to their identity or property or provides information that appears to be false.
  • Insists on paying in cash (perhaps with a di minimis limit) or anonymous credit or cash cards.
  • Asks detailed questions about procedures for reporting suspicious activity and/or financial matters to tax authorities.
  • Knowingly wishes to sell at an artificially low or inflated price.
  • Makes multiple low-value cash payments for a single or connected transaction.
  • Suggests unusually complicated structures for achieving a purchase or sale.
  • Is a Politically Exposed Person (PEP) or closely connected to a PEP, e.g., government officials or persons who hold a prominent public function.
  • Is known to be (or associated with) a person subject to criminal or regulatory investigation, prosecution, or conviction.
  • Lives, operates, or banks in a higher-risk jurisdiction such as countries where drug trafficking, terrorism, and/or corruption are prevalent or where tax and money laundering regulations are less stringent.

AML Standards for Art Market Operators also urge art dealers to report transactions to authorities when the “source of funds gives rise to grounded suspicion of money laundering and in the absence of a plausible explanation.”

These red flags should raise concern regardless of whether the product is art or armadillos.

Art will always be valuable and portable, and as such, will be attractive to money launderers.

It’s up to those in this space to ensure compliance not only with the law but also with common sense and the duty to be good citizens of the world

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Kristy Grant-Hart

Kristy Grant-Hart

Kristy Grant-Hart is the founder and CEO of Spark Compliance.
She's a renowned expert at transforming compliance departments into in-demand business assets.

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