Is the U.S. art market the ‘ideal playing ground’ for money launderers?

The international art industry is under the spotlight after a report by the U.S. Senate Permanent Subcommittee on Investigations made a series of damning statements about its integrity following an investigation into the purchase of art from major auction houses by Arkady and Boris Rotenberg, two Russian nationals it described as ‘oligarchs’.

The report, which focuses on a number of high profile art sales, states that there is likely widespread incidence of money laundering within the art market, which it describes as the “largest, legal unregulated industry in the United States”  and argues the issue needs to be addressed by imposing BSA/AML regulation on the industry.

Unlike financial institutions, businesses and individuals dealing in high-value art are not subject to the BSA (Bank Secrecy Act), the U.S. anti-money laundering law. And while some auction houses have voluntary AML policies, there is no legal requirement to confirm the identity of the buyer or seller, and therefore, no legal requirement to ensure that the buyer is not laundering money through the purchase. And those that do have voluntary AML procedures in place will often do their due diligence on the agent or dealer rather than the client, creating a significant AML risk.

But much of this is irrelevant anyway, as most art sales happen through intermediaries, referred to as “art advisors” rather than art houses, and these advisers are under no AML obligation – voluntary or otherwise.

These advisers frequently represent both the purchaser and seller of the art, and often, the purchaser won’t ask who owns the piece of art they are buying, and the seller won’t ask who the buyer is or where the money is coming from. And of course, there is no incentive for the adviser to introduce the two in case they then get cut out of the deal.

This means many advisers are, as one told the committee, ‘relying on their gut’ to spot anything suspicious, while even those auction houses that do have AML procedures in place may not be conducting their due diligence on the actual buyer of the art.

So clearly, the art market is vulnerable, and when you consider that worldwide art sales hit $64.1 billion in 2019, 44% of which was in the United States -  you can see why the committee is concerned about the risks of money laundering within the art world, but particularly in the U.S. This is not just because so many art transactions are done in the U.S., but also because, unlike in Europe where any art transactions of €10,000 or more must comply with AML laws, the U.S. art market remains unregulated, making it a prime target for money launderers.  

The EU/UK brought high-value art under AML regulations in January through the adoption of the Fifth Money Laundering Directive, and the committee is calling for the U.S. to take follow suit mandate that any businesses handling transactions involving high-value art are subject to BSA requirements.

And in my view, this is undoubtedly the right call. The art market needs to be regulated because it has become an ideal playing ground for money laundering, and the only way this can be tackled is by imposing stricter regulations on art dealers, art houses and auction houses.

And, due to the fact that Europe has already mandated that art be a regulated sector, the U.S. has become even more vulnerable as those attempting to purchase art with dirty money may now choose to transact here rather than risk detection under the new European AML laws.

There will, of course, be a reluctance from dealers and auction houses to comply due to the perceived administrative burden.

For example, if art dealers are brought under the BSA it would mean that they would need to establish suspicious activity monitoring programs, risk-based policies, and processes for reporting, and the argument is that small and even mid-sized galleries simply do not have the resources to comply. This would also mean that galleries would have an obligation to train their staff to recognize suspicious transactions and conduct customer due diligence, both on buyers and sellers.  And it is this latter obligation – the requirement to identify the ultimate seller and where the money is coming from – that the sector argues will be the most time-consuming and costly.

While I completely understand these concerns, it is, in fact, this area of compliance – the customer due diligence screening and identification of ultimate sellers and buyers - that can be most easily digitalized, minimizing the administrative responsibility on art galleries and dealers.

Electronic verification and screening solutions not only speed up the process, but are also far more reliable than manual checks, which are open to errors. And, given that the art sector has not come under AML before, most galleries will be starting from scratch in terms of training staff proper customer due diligence, possibly with limited resources, which increases that risk of error even further.

We live in an increasingly digitalized world, and I think we are increasingly going to see technology being used for good. Using technology to improve anti-money laundering processes is undoubtedly  one way in which technology can be used for good, as it enables businesses – like those in the art world - that are keen to do as much as they can to curtail money laundering, to do that without any significant disruption to their business.

 

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