Mike Lamson, Meredith Riley and Francesca Bonner-EvansFebruary 3 2022
Historically, the art and antiquities markets have been characterised by robust discretion but limited regulation, features that have long made them a potential target for financial crime.
But this is now changing, with the EU, UK and US introducing regulation to prevent these sectors from being used for money laundering, sanctions evasion, fraud, and the illicit transfer of goods and wealth. The reality for advisers dealing with clients who invest in or collect art and antiquities is that more regulation is in the pipeline that they need to be aware of.
Financial crime risks
Recent headlines have made clear that the risk of financial crime in the art and antiquities markets is not hypothetical. The Pandora Papers revealed offshore trusts used to shield assets accumulated by trafficking in looted Cambodian artefacts. Disgraced Malaysian financier Jho Low forfeited a Picasso, Monet and Basquiat to US authorities in 2018.
Repeated revelations of fraudulent art-based investment schemes have landed in New York courts in the past few years, and seemingly regular stories arise regarding forged artworks, money laundering through purchase and sales, art used for organised crime collateral, and antiquities trafficking tied to terrorist financing.
Perhaps most notably, Arkady and Boris Rotenberg, Russian billionaires and purported close allies of Vladimir Putin, successfully evaded financial sanctions by laundering money through the US and UK art markets, including by purchasing a $7.5mn (£5.5mn) Magritte in London and $18mn of art in the US – revelations that were the subject of a 147-page bipartisan US congressional report and a substantially increased enforcement focus.
A number of other factors make the art and antiquities markets attractive to potential criminals. The market is global, with transactions, sales, auctions and objects criss-crossing continents and traveling across national borders.
It is characterised by high-value transactions, with portable pieces frequently selling for tens of millions of dollars. And it is also enormous. After a pandemic downturn in 2020 to a mere $50bn, the major auction houses Sotheby’s, Christie’s, and Phillips all recorded record-high turnover last year of $7.3bn, $7.1bn, and $1.2bn respectively.
The potential liquidity of high-value works also makes them appealing. A piece by Hockney is almost guaranteed to be snapped up at auction. New technologies also play a role, with cryptocurrency payments now representing a viable purchasing mechanism after both Christie’s and Sotheby’s began accepting them for certain auctions last year.
In addition, non-fungible tokens (NFTs) have become the breakout stars of the art market, with a digital collage by Beeple selling for $69.3mn, making it one of the most expensive pieces ever sold by a living artist. The overall NFT market hit $22bn. In sum, tens of billions of dollars of art and antiquities change hands every year, with little scrutiny, in what many have called the world’s largest unregulated market – until now.
Increasing regulatory focus
Regulators in Europe have already taken notice: since July 2018, the EU’s fifth anti-money-laundering directive has applied to persons operating in the art market or acting as intermediaries in the trade of works of art where the transaction is worth €10,000 (£8,320) or more. The directive, which EU member states were required to implement by January 10 2020, went further than its predecessor, which only targeted similar transactions in cash. Page 2 of 4
The UK implemented the directive through amendments to the UK’s money laundering regulations. The amendments put art market participants (AMPs) into the regulated sector, the same category as financial institutions and estate agents. AMPs include art dealers, auction houses and operators of freeports – but not artists selling their own works.
Since 2003, the Proceeds of Crime Act has required persons in the regulated sector to report any person that they know or suspect is engaged in money laundering. The amendments go further, AMPs must:
- Follow a risk-based approach to prevent and detect money laundering, considering the nature of the business and the level of risk in a particular customer.
- Carry out customer due diligence.
- Undertake ongoing monitoring activities.
- Train their staff to recognise money laundering.
- Prepare policies and procedures on anti-money-laundering.
- Appoint a nominated officer and register their business with HM Revenue & Customs.
AMPs must also verify their customers’ identities for transactions concerning works of art valued at or more than €10,000. HMRC can impose a fine on AMPs if they breach these obligations and in serious cases can result in imprisonment.
In May 2021, the UK’s National Crime Agency issued an amber alert inviting businesses in the regulated sector, such as financial institutions, to file suspicious activity reports related to art and antiquities.
In the US, the enactment of the Anti-Money Laundering Act of 2020 kicked off a suite of measures aimed at cracking down on illicit finance in the US art and antiquities market. The first of these was to amend the definition of “financial institution” in the Bank Secrecy Act to include persons involved in the antiquities trade.
The definition already included a long list of seemingly non-financial businesses, such as credit card companies, pawnbrokers, sellers of cars, planes and boats, and people dealing in real estate. The BSA requires these financial institutions to keep records and file reports with US authorities that assist in preventing and detecting money laundering and financial crimes.
Regulations from the US Treasury Department’s Financial Crimes Enforcement Network are due to be published in the coming days. AMLA also directed that a multi-agency review of the art market be completed by January 2022, which will almost certainly lead to similar regulations.
Fincen and the Office of Foreign Assets Control have also issued guidance reiterating and clarifying existing obligations under the BSA and economic sanctions regimes. Fincen issued a March 2021 notice warning regulated financial institutions to be aware of illicit activity involving art and antiquities within their businesses and requested that they follow specific instructions in filing SARs related to art and antiquities.
Revelations about the Rotenbergs spurred the OFAC to issue an October 2020 advisory on sanctions risk in the art market, reminding participants of the strict prohibitions on engaging with those on the Specially Designated Nationals and Blocked Persons (SDN) List, and highlighting the importance of a risk-based compliance programme. It also clarified that the Berman amendment of the International Emergency Economic Powers Act, which exempts informational materials, including artwork, from sanctions requirements was not a safe haven for transactions with SDNs.Page 3 of 4
What does this mean for advisers?
Financial advisers may generally interact with the art and antiquities markets in one of two ways:
- Art and antiquities as investments, ie high-value collections, individual investment pieces and investments in art funds.
- Art and antiquities as collateral, ie obtaining financing using a client’s existing stored value in art or antiquities.
So, what are the particular risks to advisers given this new regulatory environment?
In the UK, there is no definitive list of entities or persons that fall within the definition of an AMP, but this may include financial advisers acting as intermediaries in the sale or purchase of works of art at or above €10,000, such as insurance brokers, high-end art financing companies, or financial management companies responsible for art collections.
With the exception of registering with HMRC, financial advisers are likely to already be complying with the amendments as part of their regulatory responsibilities, including assessing their exposure to money laundering and terrorist financing, putting in place the necessary policies, controls and procedures to mitigate the identified risk, undertake customer due diligence, and keep records to evidence compliance.
Financial advisers that fall within the definition of AMPs may also be the subject of fines from HMRC and, in serious cases, imprisonment.
Where high-net-worth clients use their art or antiquities collection as a form of collateral, some risk to advisers and their credit departments will inevitably be based on the valuation of the collection – which can be difficult to verify given the market’s lack of price transparency – and who may end up with far less when trying to collect repayment on a delinquent loan if that valuation was wrong.
However, there also may be a lurking money laundering risk as well if, for example, the client had purchased the art or antiquities with the proceeds of crime. By doing almost anything with known or suspected “criminal property” in the UK, financial advisers could commit a money laundering offence and that property could be subject to seizure or forfeiture, with potential jail time for the adviser.
As the US awaits draft regulations, exactly how they will affect the market is unclear. However, it is very likely that advisers operating in the antiquities – and eventually art – market will qualify as financial institutions under the BSA.
This will require them to: establish an anti-money-laundering and counter-terrorism finance compliance programme; identify beneficial owners of customers; and file reports of cash transactions exceeding $10,000.
Many open questions about who and what activities are covered remain:
- What qualifies as “art” or an “antiquity?
- Who precisely are advisers, consultants, dealers, and intermediaries?
- Should monetary thresholds apply?
- What sectors or regions of the market are most vulnerable to illicit activity?
AMLA also included other measures to enhance anti-money-laundering enforcement that will affect covered financial institutions, including by increasing penalties for violations, and, notably for the art market, making clear that the BSA applies to digital currencies.Page 4 of 4
Moreover, the Corporate Transparency Act, passed with AMLA, establishes a national beneficial ownership registry aimed at shell companies that financial institutions will be expected to use in customer due diligence.
These developments form part of a larger drive in the US to curb illicit finance. Last December, the White House issued the first ever US strategy on countering corruption, heralding an expansive all-of-government effort to crack down on international corruption, including through enhanced domestic anti-money-laundering efforts.
The strategy endorsed Fincen’s efforts to regulate the art and antiquities markets and also highlighted the White House’s co-operation with the US Congress to focus on “gatekeepers”, such as in the bipartisan Enablers Act.
The strategy also stated that the US Treasury Department will revisit a 2015 proposed rule that would require AML programmes and SAR reporting for investment advisers who are currently exempt from the BSA. So, financial advisers themselves may be facing additional regulation through other laws, irrespective and in addition to their participation in the art and antiquities markets.
Although most financial advisers are well aware of their existing obligations, they should monitor the expanding scope of regulations around art and antiquities, and the larger backdrop of increasing enforcement against bad actors who take advantage of these markets. Otherwise, they may find themselves subject not only to enhanced compliance, due diligence, and reporting obligations, but at risk of law enforcement investigation or left with abruptly de-valued client investments due to fraud or forfeiture.