Treasury identifies art market money laundering as a concern

On February 4, the Financial Crimes Enforcement Network (FinCEN), an agency of the United States Department of the Treasury (the Treasury), released its long-awaited study on the facilitation of money laundering and the financing of terrorism through the trade in works . of art (studies). The Anti-Money Laundering Act of 2020, signed into law on January 1, 2021 (the AMLA), ordered FinCEN to produce the study, along with upcoming regulations implementing the anti-money laundering provisions of the Bank Secrecy Act (BSA ) to dealers. in antiquities.

The impetus for AMLA’s guidance to the Treasury was the perception that the art market, due to its lack of transparency in art sale transactions regarding ultimate beneficial ownership and source of funds, is susceptible to money laundering by malicious international actors. Specifically, the high value of one-time transactions, the ease of transportation of artworks, the culture of privacy, and the growing use of art as a financial asset make the art market vulnerable to money laundering and terrorist financing, or so politicians and private interest groups have argued.

Conclusion of the study

Contrary to what many expected, however, FinCEN concluded that there is little evidence of money laundering and little risk of terrorist financing through the sale of high-value works of art. The infrequent use of cash in high-value art transactions and the regulatory reporting requirements already imposed on financial institutions and commercial enterprises make the high-value institutional art market a poor vehicle for money laundering. illicit cash income. Large, well-known art galleries would not be a preferred location for illicit actors to launder large volumes of funds, as the buyers are likely to be well known to the galleries, which are incentivized to collect identifying information from buyers to preserve their own reputation. ; small and medium galleries generally do not have high enough inventory prices to present suitable targets for money laundering. Freeports, while perhaps vulnerable to money laundering through private transactions, are more likely to be used to take advantage of legal tax advantages than for the purpose of laundering the proceeds of crime.

FinCEN has nevertheless identified some areas of concern. The emergence of the digital art market offers a potential new platform for money launderers. Peer-to-peer transactions of NFT, or non-fungible tokens, without the involvement of an intermediary may or may not be recorded on a public ledger; the ability to transfer NFTs across the Internet regardless of geographic boundaries instantly renders certain digital art transactions susceptible to exploitation by those seeking to launder illicit funds. Complicit professionals – including financial services employees, art advisors, freeport managers, and even interior designers (!) – who abuse their professional positions should be the focus of law enforcement. Squarely in FinCEN’s sights are boutique art lending companies, which provide financing for high-value art, leveraged acquisitions, art-secured loans, and other financial services; they should be subject to anti-money laundering regulation, as they are entities that operate more like banks and other financial institutions, which are subject to compliance under the BSA.

Proposed next steps

FinCEN has proposed a number of regulatory and non-regulatory measures that should be taken to address the concern of potential abuses in the art market by illicit financial actors. Regulatory options include: (1) the use of targeted record keeping and reporting requirements to support the collection of information and analyzes of money laundering activities, and (2) the integration of certain art market participants, such as those mentioned above, as part of the fight against money laundering and their requirement to create and maintain anti-money laundering programs. Non-regulatory options include: (1) updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies, and (2) incentivizing art market players to adopt a program for sharing information with the private sector on ultimate beneficial ownership data in order to encourage transparency in the market. .

What does all this mean?

The findings of the study should not be interpreted as suggesting that art market participants should adopt a laissez-faire attitude towards money laundering. On the contrary, a number of overlapping enforcement regimes are in place, with which art market players have and should continue to comply. The study pointed to the high-profile U.S. Senate report released in July 2020 which found that major auction houses had insufficient safeguards to prevent them from dealing through Russian oligarchs that the Office of Trade Control foreign assets the Treasury had placed on its sanctions list. As the art trade is global in scope, UK anti-money laundering regulations and the EU’s Fifth Anti-Money Laundering Directive impose strict compliance requirements on art market participants similar to those of the BSA. For U.S.-based art market participants, best practice remains the best practice, not only from a compliance but also a reputational perspective, to implement anti-money laundering protocols. money in order to avoid the imposition of significant financial and other penalties resulting from a violation of any of these regimes. Finally, it may be incumbent on art market players to follow FinCEN’s recommendation to adopt a program for sharing information with the private sector on ultimate beneficial ownership, an implicit signal that self-monitoring efforts market would benefit it in the form of less onerous future regulatory measures.

FinCEN said it would prioritize high-risk real estate transactions and bulk currency transfers for anti-money laundering oversight. While the art market may temporarily breathe a sigh of relief, it should view the study as an opportunity to get its voluntary anti-money laundering efforts in order. This is certainly not the last time we will hear from regulators.

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