Using Art to Evade Sanctions and Launder Money: The Senate Report

Is Art an “Ideal Playing Ground” for Money Laundering?

Last week, the Permanent Subcommittee on Investigations for the U.S. Senate released a detailed, 147-page report titled “The Art Industry and U.S. Policies That Undermine Sanctions” (“the Report”). Although the Report ostensibly addresses the evasion of U.S. sanctions law, much of the Report actually focuses on the connection between high-end art and potential money laundering schemes and anti-money laundering (“AML”) risks. Among other proposals, the Report recommends that the Bank Secrecy Act (“BSA”) be amended to include art dealers as “financial institutions” subject to AML obligations under the BSA.

The Report focuses on an elaborate case study documenting how certain Russian oligarchs allegedly used transactions involving high-end art and shell companies to evade U.S. sanctions, imposed on them on March 20, 2014 in response to Russia’s invasion of Ukraine and the annexation of Crimea. We will not focus on the detailed allegations in the Report regarding the particular facts of this alleged scheme, or the alleged involvement of certain major art auction houses. Rather, we will focus on the more general sections in the Report relating to systemic concerns about the potential role of high-end art in money laundering schemes, and the more general findings of fact and recommendations generated by these concerns.

The Report was not issued in a vacuum; rather, it clearly was written in part to spur legislative action. Proposed legislation on BSA/AML reform is pending before the U.S. Congress and Senate, including a proposal – currently nestled within a lengthy proposed amendment to a defense spending bill – to (i) add to the list of “financial institutions” covered by the BSA “a person trading or acting as an intermediary in the trade of antiquities, including an advisor, consultant or any other person who engages as a business in the solicitation of the sale of antiquities;” and (ii) require a study by the Secretary of the Treasury “on the facilitation of money laundering and terror finance through the trade of works of art or antiquities,” including an evaluation of whether certain art industry markets (“by size, entity type, domestic or international geographic locations, or otherwise”) should be regulated under the BSA. And, this general issue has been percolating for some time. Last year, we blogged in detail about the potential role of high-end art and antiquities in money laundering schemes, and the voluntary AML programs which art dealers might adopt to combat such schemes.


Art Transactions and Anonymity

The Report identifies the art market as “an ideal playing ground for money laundering.” This assertion rests in part on the level of anonymity provided by the market, as well as the fact “that other channels [for money laundering] have been narrowed by tighter regulation” in recent years. The recent focus on imposing regulations on the art industry in the U.S. also stems from the fact that some currently consider the art industry as the largest legal, unregulated industry in the U.S. because art can be purchased without any clear record of a transaction, even when large amounts of money are involved.

Unlike the art market in the European Union, whose member states recently have adopted its Fifth Anti-Money Laundering directive, as well as in the United Kingdom, which adopted similar rules in the weeks before its exit from the European Union, the U.S. art market is not subject to AML regulations. The recent European Union directive requires businesses selling art to verify the identity of seller, buyer, and ultimate beneficial owner involved in art transactions of €10,000 or more. Although the BSA of course includes requirements for covered industries for reporting, customer identification, and due diligence, these requirements do not currently apply to the art industry. The Report also notes that insider-trading rules, while applicable to the commodities market, do not apply to the art market – so collectors may buy art based on privileged information.


Findings and Recommendations – and Potential Legislation

The Report makes several findings, followed by certain recommendations. The findings include:

•The art industry is largely unregulated. “While the BSA does not apply to art transactions by art dealers and auction houses, sanctions do.”

•The art industry has been enjoying a boom – even during the COVID-19 pandemic, and investors “have taken notice” of the art industry.

•Secrecy is “pervasive” in the art industry. Specifically: “While the art market is not regulated by the BSA, it is governed by unwritten rules. A large number of art sales happen through intermediaries referred to as ‘art advisors’ who can represent both purchasers and sellers. In a typical transaction, a purchaser may not ask who owns the piece of art they are purchasing; the seller may not ask for whom it is being purchased or the origin of the money. And in general an art advisor would be reluctant to reveal the identity of their client for fear of being cut out of the deal and losing the business.” As a result, “auction houses treat[] an art agent or dealer as the principle purchaser of art, even if they [have] reason to believe they were working with an undisclosed client.” This creates a “significant AML vulnerability” because “[t]his practice enables the auction house to perform due diligence on the art agent or dealer instead of identifying and evaluating the undisclosed client[.]”

•Auction houses have (only) voluntary AML policies. “While the four biggest auction houses have voluntary [AML] programs, the employees who facilitated art purchases in the Subcommittee’s case study said they considered the art advisor the identity of his client.”

•Tracing the ownership of anonymous shell companies, including those involved in high-value art transactions, is difficult. “This difficulty continues even though corporate secrecy suffered a blow in the spring of 2016 when the International Consortium of Investigative Journalists (‘ICIJ’) shocked the world by releasing information on 214,449 offshore entities from the Panamanian law firm Mossack Fonseca (the ‘Panama Papers’).”

Based on these findings, the Report also makes several recommendations, many pertaining specifically to the application of U.S. sanctions law. The AML-related recommendations include:

•Congress should amend the BSA to add businesses handling transactions involving high-value art, similar to the European Union’s recent steps in this area.

•Congress should require the Treasury Department to collect beneficial ownership information for companies formed or registered to do business in the U.S. Such a requirement has been the topic of legislative proposals regarding BSA reform in the U.S. for several years, and remains currently before the U.S. Congress and Senate.

•The Treasury Department should maximize its use of Suspicious Activity Reports, or SARs, filed by financial institutions so as to “more effectively mine SARs for information related to Specifically Designated Nationals” identified by OFAC.


Some Restrictions Apply

Although the Report primarily focuses on the lack of AML regulations applicable to the U.S. art industry, it does acknowledge that the art industry in the U.S. is not completely unregulated, because participants in the art industry may still be subject to the following restrictions:

•Import and export regulations;

•Cultural property regulations;

•Data protection and privacy laws;

•State anti-money laundering laws;

•Tax regulations;

•Local auction regulations; and

•For those participants in the art industry who buy or sell art outside of the United States, anti-money laundering regulations of other countries.


Are Voluntary AML Programs Sufficient?

Although art dealers and auction houses do not have any legal obligation under the BSA to implement AML programs, the Report details voluntary AML programs in place at large art auction houses. As we blogged previously, the Basel Institute on Governance, an independent not-for-profit organization, has set forth the voluntary AML Standards for Art Market Operators (“AML Standards”). The AML Standards adopt a “risk based” approach to establishing measures to mitigate money laundering risks, and further note that “[s]mall businesses may not have the resources to address money-laundering risks in the same way that large auction houses or major dealers and galleries will have, and may have a different risk exposure.”  The AML Standards are intended to apply to everyone trading in art objects, and intermediaries between buyers and sellers.  They also suggest that service industries supporting the trade in art objects that are already subject to AML laws, like financial institutions, should identify their clients and customers in the art trade “as higher risk as long as there are no internationally applicable standards.”

Likewise, the Responsible Art Market, or RAM (an industry-supported not-for-profit organization which describes itself as ”[r]aising awareness of risks faced by the art industry and providing practical guidance on establishing and implementing responsible practices to address those risks”), provides both an Art Transaction Due Diligence Toolkit, as well as Guidelines on Combatting Money Laundering and Terrorist Financing (“AML Guidelines”).  The AML Guidelines are similar to the protocols set forth by the Basel Institute, but provide slightly more concrete detail.

However, the Report views these voluntary programs as insufficient, in part because the auction houses and dealers consider art advisors to be the principal purchaser and therefore perform any due diligence on the art advisor, even when – according to the Report – it is known or suspected that the advisor will not be the ultimate owner of the purchase. This leaves a significant loophole for art advisors to mask the identities of their clients. Some auction house employees interviewed for the Report allegedly stated that they never asked art advisors the identity of their clients.  For example, the Report includes an account of one private art dealer based in New York who did not have any AML policies in place. According to the Report, the private art dealer did not receive any AML related training in thirty years of experience in the art market. Indeed, she explained that “questioning the source of funds would be considered contrary to industry standards and norms” regarding privacy and discretion, and while she has raised some questions on occasion, she primarily relies on “gut instinct” alone to identify any potential red flags in transactions.

The complex issue of whether the BSA should apply directly to the art and antiquities industries resists facile analysis, and some strongly criticize the wisdom of such regulation. Nonetheless, the Report clearly will provide political ammunition to those interested in advancing such regulation, which seems increasingly likely. According to Senator Rob Portman, Republican of Ohio, who is chairperson of the subcommittee that issued the Report, “[i]t is shocking that U.S. banking regulations don’t currently apply to multimillion-dollar art transactions, and we cannot let that continue . . . . The art industry currently operates under a veil of secrecy allowing art advisers to represent both sellers and buyers masking the identities of both parties, and as we found, the source of the funds. This creates an environment ripe for laundering money and evading sanctions.”


By Alexa L. Levy & Peter D. Hardy, August 6, 2020