Responding to concerns that the art market has become a breeding ground for illicit financial transactions, the Treasury Department released a study on Friday that says that while it has identified some vulnerabilities, it does not recommend immediate intervention. government to put in place new regulations.
The study cited evidence of money laundering using high-end art, mentioning, for example, a financier who prosecutors say purchased art with money embezzled from the Malaysian government. And he suggested a number of potential measures that could be instituted in the future, but he concluded that such restrictions were not currently a priority.
“We have found that while certain aspects of the high-value art market are vulnerable to money laundering, there are often larger underlying issues at play, such as the abuse of front companies or the involvement of conniving professionals, so we’re tackling those first,” Scott Rembrandt, a senior Treasury official overseeing the study, said in a statement.
The report will likely be welcomed by art dealers and auction houses, whose major players have spent nearly $1 million over the past two years lobbying federal officials in Washington over this matter and other regulatory matters, according to federal disclosure forms.
Some experts have long worried that the opacity of the art trade, where buyers and sellers are not always identified, even to the parties to a transaction, makes it an easy way to hide money transfers. illicit. Laws recently passed in Europe amid fears that art is being used for illegal activities are forcing dealers and auction houses to determine the identity of their customers and verify the source of their wealth.
The 40-page Treasury study identified aspects of today’s art market that it says make it vulnerable to money laundering. She cites the high prices and ease of transporting the art, as well as a culture of secrecy, the use of anonymous front companies to hold the works, and the use of free ports, storage areas that offer a favorable tax treatment and where, some worry, million-dollar works of art can be bought or sold without the knowledge of the authorities.
But the study concluded that the industry has a low risk of funding terrorism or being used to sell artwork looted from countries like Syria to support terrorist activities. He said expensive works of art are rarely paid for in cash, which likely makes them an unattractive way to launder illicit money. Additionally, the authors found that, as part of their efforts to protect their reputations and businesses, auction houses and major galleries already perform due diligence on customers, providing voluntary safeguards against abuse.
Smaller galleries would not be targets for money launderers, according to the report, because the works they sell are not expensive enough to be effective mechanisms for the surreptitious transfer of wealth.
“It is important to note,” the report states, “that institutions such as galleries and auction houses have market incentives to collect information about the ultimate sellers or buyers of works of art, regardless the identification of potential illicit financing linked to a transaction, and the best practices enacted by most players in the industry are to collect information on all buyers and sellers.
Nonetheless, the study suggests the government could urge art market players to create an information-sharing system that would help identify problem customers. Later, the study says regulators could also consider imposing anti-money laundering programs on “certain art market participants,” requiring them to identify who is buying and selling art. art and publish suspicious activity reports, for example, although it does not specify the conditions that would lead to such an effort.
“While these abuses do not pose a critical national security threat or vulnerability, there is evidence to suggest that criminal actors sometimes purchase high-value works of art with illicit proceeds generated by underworld crime. underlying and then see this art as a way to launder these products,” he said.
Officials said work already underway to make shell companies more transparent would likely help tackle fraud in the art market where anonymous shell companies are sometimes used to buy and hold artwork.
Treasury officials were required to report on the issue of money laundering and terrorist financing in the art market under legislation passed by Congress in late 2020.
The same legislation strengthened oversight of the antiquities market, extending a law that increased federal control of financial transactions to include the trade in ancient artifacts.
This law, the Bank Secrecy Act, requires banks to report cash transactions over $10,000; highlight suspicious activity; and understand who their customers are and where their wealth comes from. Exactly how the new rules will work in practice for antiquities is currently being determined by the Financial Crimes Enforcement Network, an office of the Treasury Department.
Some who have questioned whether auction houses and galleries can police themselves have urged regulators to extend banking laws to the broader art market.
Treasury officials said greater evidence of links between terrorist financing and looted artifacts from cultural heritage sites in countries like Syria and Iraq underpins the greater urgency to regulate antiquities.
John J. Byrne, who advises companies on preventing financial crime and who has called for tougher rules for the industry, welcomed the study and said it suggested to him that greater oversight would eventually come .
“It confirms that this is a problem and will be resolved in time,” he said. “The fact that they have to determine deadlines due to other priorities does not disappoint me.”
The Art Dealers Association of America, whose then-president Andrew Schoelkopf, expressed concern about the possible effect of potential new measures to an industry panel Last year.
“It’s going to be a lot of paperwork and a lot of compliance and I don’t think we’ll eliminate a lot of the problem,” he said.
the association, a trade group representing nearly 190 galleries, paid its Washington lobbyist $190,000 last year, up from $140,000 the previous year, and cited the potential extension of the Bank Secrecy Act to the market of art as an issue on its lobbying forms. But a spokeswoman for the association said the spending covered a wider range of issues.
Maureen Bray, the association’s executive director, said in an interview that the Treasury study “seems to echo the ADAA’s perspective that there is currently no systematic evidence that the art market should be prioritized over other industries currently not subject to the Bank Secrecy Act.”
According to the study, one of the areas of concern was the growth of the market for financial services who employ works of art as collateral. He said that the fact that these transactions are not currently subject to the same anti-money laundering rules that govern banks could allow criminals to circumvent scrutiny and obtain cash from works of art. of high value without disclosing the original illicit source of their funds, and the study points to this as a “potentially significant” money laundering vulnerability.
He cited several specific examples of abuse, such as that of financier Jho Low, who prosecutors say helped siphon off billions of dollars from a Malaysian government fund using a network of bank accounts and shell companies and laundered the money via a spending spree on things like art. (Low has denied any wrongdoing and remains at large.)
He also cited the case of two Russian oligarchs, Arkady and Boris Rotenberg, who Senate investigators say used art to circumvent US sanctions.
Officials stressed that the study was just the start of a process that would involve the report being turned over to House and Senate committees for further work. But he said while high-value art is potentially vulnerable to fraud, problems in bigger sectors like real estate were more pressing.
“Once we have addressed more systemic issues, such as creating a beneficial ownership register to crack down on front companies, we will look at what might be needed to address money laundering risks specific to other industries, including the art industry,” Treasury official Rembrandt said in his statement.