With the rise in awareness of NFTs and their potential use for money laundering, the art world has come back under scrutiny for the exact same reason. While most purchases and sales of art are completely legitimate, there have been numerous cases of oligarchs and criminals acting to hide illicit funds through the purchase of artwork.
Every year billions of dollars are laundered through the buying and selling of art. These works are put into storage for an extended period until they are ready to be resold. Up until that point they can be used as collateral for loans of “clean money”. Regulators are very aware of what is happening and are continuously trying to tailor regulations to curtail the illegal use of the art sector.
This has been going on for a long time and it is a very lucrative market for criminals. According to Deloitte, $-$6 billion is laundered via art every single year. Artworks are faked and sold on the black market, and many terrorist organisations trade cultural artefacts to finance illegal activities. But the art world dis trading and regulations were brought into Europe in 2020 to regulate and help stamp this out.
Dealing in art and antiquities has traditionally been an ideal way to launder money, as purchases can be smuggled across borders, or hidden away in storage facilities like freeports for decades after a sale has been completed. A freeport is a special economic zone designated by the trade and commerce administrations of various countries as open to all traders to encourage economic activity. Technically anything held in a freeport is designated as being “in transit” making it exempt from customs duty and can be exported with no interference from customs authorities. Also, the sale of art and antiquities within a freeport can be conducted without the item ever having to leave.
Why the Art Sector is Attractive to Money Launderers
With global sales reaching $64.1 billion in 2019, the art sector is a vast source of wealth, and very attractive to the criminal element. The reason for this is that it is mostly unregulated, and prices for art can be easily manipulated. Here are some of the main factors that make the art world so appealing to criminals.
Due to the nature of many people who deal in the high art world and their status in their respective societies, privacy has become a staple of the sector.
Historically someone who, for example, needs to sell works of art due to financial troubles, will have their identity concealed by a dealer so as to protect their reputation.
Because this privacy is so well-respected, it is often difficult to trace the path of any given piece of art. This allows criminals to deal with anonymity, obfuscating things for any authority that might want to investigate.
While there may be some objective factors that contribute, the price of contemporary artworks is often driven by incidental factors – the reputation of the artist, their following, the reputation of the dealer or even trends within the art world.
A painting can be bought for $1,000 and then years later, through various circumstances be worth $1,000,000. This subjective nature of the industry means criminals can buy paintings for a low price, and then sell it on at a much higher cost, laundering money AND making a profit on top.
Artworks are easy to move. You can transport a piece of art between countries on a plane, or in a car or a boat, and no one would even notice. You could even fake an invoice to make it seem worth much less than it really is so as to avoid scrutiny.
In 2016, a number of paintings were returned to Brazil from the US, after being smuggled into the country. One of the paintings was worth $8m but the shipment invoice had it labelled as only worth $100. This was let through customs as it was perceived to be of little value and was then hidden in a secure warehouse for almost a decade.
Lack of Regulation
In many locations around the world, art dealers do not have to report transactions nor verify their clients through KYC measures. Even countries like the US do not include art dealers on their list of reporting entities.
In July 2020 it was discovered that two Russian Billionaires from the US had used loopholes in regulation to launder nearly $20 million, even while under sanctions.
This happened because AML regulations remain absent from the US art sector, so auction houses, where the billionaires purchased the artworks, had no responsibility to check the buyers’ identities.
As the world becomes less willing to look the other way when it comes to laundering through art, regulations are being put into place to clamp down on using art to fund and launder illegal enterprises.
There are many requirements listed in the EU’s 5th AML Directive, but these should be applied to any traders and dealers of art who want to protect themselves and their business from money laundering. Here are a few to be aware of:
- Risk-based approach: You must evaluate the money laundering risks your business may be exposed to.
- KYC procedures: Verification checks must be applied for customers and their transactions.
- Reporting: Reporting includes filling out Suspicious Activity Reports if a client’s dealings warrant it, and financial reporting.
- Recording of data: The results of customer verification checks and data on transactions should be recorded in case they are needed later for an investigation.
Going forward, AML regulations and sanctions are likely to get stricter, so it would be prudent for anyone who deals in the art market to adopt a strong AML program now.
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