Protecting the Art Market from Financial Crime: The Need for Action Now

“The American art market is a black hole to law enforcement, because it is not required to assist the Federal government with preventing or detecting financial crimes, one consequence of the sector’s avoidance of money-laundering and counterterror laws. Congress or the Treasury department have already applied these rules to every industry of comparable risk and size, including dealers in precious metals, stones and jewels; sellers of cars, boats and planes; and even “ma and pa” pawn shops. Art thus remains the Wild West of the regulatory landscape.” Deborah Lehr, Founder and Chair of the Antiquities Coalition

In the over twenty years since the attacks on the United States on 9/11, it has become eminently clear that misuse of the financial system or the general economy enables terrorism, money laundering, and a whole host of financial crimes. Policymakers both here and abroad have collaborated on creating laws, regulations, and guidance to direct both the private and public sectors on increasing or enhancing requirements to detect, report, and prevent the misuse of anything of value to enable illegal activity.

The AML community strongly believes that there is an ongoing need for reasoned regulation for all those with a financial footprint in the global economy. It is no longer acceptable to refrain from supporting efforts to report suspicious activity if you are benefitting from engaging in financial activity and your products or services can be used to aid terrorists, organized criminals, or fraudsters.

As a career anti-money laundering (AML) professional, I, and many of my colleagues, believe that the time has come (as it has for antiquities sellers and buyers) for the arts community to raise their hands and support their private and public sector partners in combatting financial crime.

1. DEFINING THE MARKET AND THE GLOBAL PROBLEM OF LOOTING AND LAUNDERING OF ART

In addition to Ms. Lehr's strong statement, several organizations and experts in the research community have highlighted the problem of money laundering through the trade in works of art.

For example, a Treasury study released in February 2022 found that “the mere perception that the art market is both vulnerable and unregulated creates incentives for criminals to further abuse the art market.”[1]

While Treasury's study offered a series of regulatory and nonregulatory recommendations and pointed out the need to consider the “cost and benefits” of applying AML/CFT requirements to that sector, delaying further proposed requirements will simply prolong the clear need to cover this industry under the US Bank Secrecy Act (BSA).

In addition, the United Nations Office on Drugs and Crime stated that the underground art market, which includes thefts, fakes, illegal imports, and organized looting, may bring in as much as $6 billion annually. The portion attributed to money laundering and other financial crimes is in the $3 billion range in 2020.

2. THE IMPACT OF DOING NOTHING (ENABLES TERRORISTS, ORGANIZED CRIMINALS, AND FRAUDSTERS)

What do terrorists, transnational and domestic criminal organizations, and fraudsters have in common? They all must have continuous access to money to sustain their operations. They must also find ways to launder their ill-gotten gains and make them more readily accessible in the global financial system. Bad actors are proficient at proactively and aggressively identifying facilitation tools they can exploit to ensure the constant flow of their lifeblood funds. The existential threat money laundering poses to our economy and national security cannot be understated.

Our economic system, ranging from financial institutions and industries conducive to facilitating money laundering, is only as strong as our weakest links. As AML systems in the regulated financial sector have matured and become more robust; terrorists and criminals, reliant on money laundering, have gravitated to industries like the arts and antiquities industries as safe outlets to move and access funds. As unregulated, global, and opaque, the art industry is rife for facilitating fraud and money laundering. The art industry might not be the weakest link; but with limited to no regulatory oversight, it’s an attractive vehicle for nefarious actors to hide and wash dirty money. There are a number of case studies illustrating how arts and antiquities (an industry that the BSA now covers, although we await final regulations) are both exploited by terrorists and criminals to the tune of billions of dollars.

3. THE SOLUTION -- ADDING THE ART MARKET TO THE BANK SECRECY ACT (BSA)

Immediately after 9/11, the US Congress worked swiftly to create and pass the USA PATRIOT Act and add certain entities to the Bank Secrecy Act; a law originally developed to address tax evasion but evolved to address money laundering in the 1980’s.

Before the money laundering laws of that decade were enacted, policymakers clearly encouraged collaborative change.

That was the same theme during the debate on the PATRIOT Act, although it was also clear that additions could occur from decisions from the Secretary of the Treasury, who had broad authority to apply the reporting requirements of 31 U.S.C. 5313 by regulation to any defined “financial institution”, which is defined explicitly to include many non-financial businesses including vehicle sales, real estate closings, the United States Postal Service, and casinos. (31 U.S.C. 5312(a)(2)(T), (U), (V), and (X).)

What enabled a broader application was it also may include any business or agency determined by the Secretary to engage in an activity that is a substitute for any of the activities listed, as “financial institutions,” and “any other business designated by the Secretary whose cash transactions have a high degree of usefulness in criminal, tax, or regulatory matters.” 31 U.S.C. 5312(a)(2)(Z) and (Y). The added provisions in the PATRIOT Act gave “even more comprehensive authority but does not require reports until regulations are issued.”

Entities such as jewelers and precious metal dealers were added under the new authority, a direct parallel to the art market and the recently included antiquity dealers.

4. PARALLELS TO OTHER NON-BANK FINANCIAL INSTITUTIONS (NBFIs) (E.G. PRECIOUS METALS DEALERS)

NBFIs are broadly defined as institutions other than banks that offer financial services. The USA PATRIOT Act defined a variety of entities, including dealers in precious metals, stones, or jewels, as financial institutions.

In the early 2000s, the U.S. Treasury Department issued coverage and basic requirements of an AML program for dealers in precious metals, stones and jewels, which will likely be the same basic requirements for the art market. The elements include:

• Appointment of a compliance officer
• A risk assessment
• A written AML program and policy
• Employee education on money laundering risk and your compliance program
• Periodic testing of the program

The above framework has worked well for dealers in precious metals, stones and jewels, and it is the roadmap that arts and antiquities dealers will likely follow when regulations are finalized. 

5. ANY REQUIREMENTS WILL OCCUR ONLY AFTER PUBLIC NOTICE AND COMMENT

As policymakers grapple with adding new entities to the Bank Secrecy Act, any proposed new group will use every tool imaginable to fight any new requirements. You will hear that there is no need for rules because there are “voluntary” guidelines, the cost of new regulations will crush small businesses, the industry is not the same as traditional financial institutions, and the various operational difficulties of training, detection, and resources.

As a 40-year veteran of the AML and compliance communities, I would like to remind everyone that the process of adding entities to the BSA is lengthy, transparent, and overall -- public.

First, when a law is passed, the regulation would need to be crafted by the Financial Crimes Enforcement Network (FinCEN), which would draft, with input from potential supervisors (most likely the Internal Revenue Service (IRS)), how policies for programs and reporting would be created and eventually examined.

Secondly, the proposal would be published for public comment. During that phase (most likely three to six months), FinCEN would ask a series of questions regarding the proposal that both critics and supporters could weigh in on. This is where it is essential that commenters provide specifics on any challenges and offer alternatives or other rationale as to why a requirement would not accomplish the stated goal.

So, for the opponents of regulating the art world, arguing in favor of the private sector (that offers products and services that can be used illegally) remaining private, will need to make their position public. Faced with the overwhelming evidence of art being misused for illicit purposes, it’s hard to see how a successful defense of this position would realistically materialize.

The debate will be lengthy and public.

6. HOW WOULD ALL THIS WORK?

The Basel Institute on Governance and the Responsible Art Market (RAM) Initiative set forth guidelines for the art industry to combat money laundering and terrorist financing. Eight basic principles:

Guideline 1 – Do a risk assessment of your business and apply risk-based measures;

Guideline 2 – Know and comply with the laws where you are doing business and be alert to “red flags”;

Guideline 3 – Know your customer (KYC) and establish their risk profiles – Check for client “red flags”;

Guideline 4 – Research the artwork, its ownership and provenance – Check for artwork “red flags”;

Guideline 5 – Know the background and purpose of transactions – Check for transaction “red flags”;

Guideline 6 – Keep records;

Guideline 7 – Train staff and monitor processes and procedures; and

Guideline 8 – If grounded suspicions exist, know how to act.

The Basel Institute and RAM guidelines are good precursors to what a regulation would look like. The difference? The regulation would be mandatory and enforceable.

Finally, the Antiquities Coalition Financial Crimes Task Force published a comprehensive report[2] in September 2020 setting forth how the American arts market was vulnerable to money laundering, terrorist financing, sanctions violations and related crimes. The report contains a series of 44 recommendations for arts and antiquities stakeholders to consider in addressing the daunting challenges facing the industry in addressing illicit finance.

7. THE TIME TO ACT IS NOW!

It is no coincidence that in the chaotic year of 2020, Congress found time to pass, with bipartisan support nonetheless, the most dramatic changes to the AML infrastructure in the previous twenty years. There was strong support for including dealers in antiquities under the Bank Secrecy Act and a comparable provision to eventually ensure that art dealers have related requirements - unless there was compelling evidence that art is not a vehicle for money laundering, terrorism, and organized crime.

I am confident the Treasury study should have put that debate to rest.

8. RECOMMENDATIONS

The passage of the National Defense Authorization Act (NDAA) for Fiscal Year 2021 on January 1, 2021, included much-needed and welcomed enhancements to BSA regulations. Notably, the antiquities trade will be subject to compliance with BSA reporting requirements to include establishing and implementing AML programs. In addition, the legislation called for a study of the role of art in money laundering and terrorist financing. Inevitably, art dealers will be required to follow the same steps antiquities dealers will be following to comply with BSA regulations. In 2000, a Staff Report[3] was published by the U.S. Senate Permanent Subcommittee on Investigations detailing how at least two Russian oligarchs exploited the opaqueness of the art world to bypass U.S. sanctions.

The reality is that the arts and antiquities industry facilitates money laundering. Such facilitation poses a threat to national security and the economy. Hence, the inclusion of antiquities, and ultimately art, in the BSA-enhanced legislation is essential.

9. CONCLUSION

Money laundering and terrorist financing pose a serious threat to our economy and national security. Financial institutions and industries conducive to facilitating money laundering and terrorist financing are on the front line in the fight against the illicit flow of funds that jeopardize the economy and national security. To date, the arts and antiquities industry has served as a facilitation tool for money laundering and terrorist financing. The AML community has indicated that the time has come for the arts and antiquities industry to stop being a facilitation tool and join the ranks of the organizations and mechanisms that detect and combat money laundering and terrorist financing, protecting the economy and our nation’s security.

Antiquities requirements await FinCEN’s actions, it is urgent that Art be next!

[1] Section 6110 of the 2020 AML Act directed the Treasury Department “to conduct a study of the facilitation of money laundering and terrorist financing through the trade in works of art…”.

[2] Reframing U.S. Policy on the Art Market: Recommendations for Combating Financial Crimes (https://theantiquitiescoalition.org/developing-implementing-solutions/financial-crimes-task-force/)

[3] The Art Industry and U.S. Policies that Undermine Sanctions, Staff Report, Permanent Subcommittee on Investigations, United States Senate (www.hsgac.senate.gov)