Understanding the Art Market and Anti-Money Laundering Regulations

The world’s largest art markets lack robust anti-money laundering supervision. This exacerbates their appeal as a destination for illicit finance.

In late February, the Financial Action Task Force (FATF) published a report on Money Laundering and Terrorist Financing in the Art and Antiquities Market. The report highlights a series of risk factors that make it appealing to criminals, including widespread secrecy surrounding beneficial owners and transactions, the subjectivity and wide-ranging values of artwork, and the size and global nature of the art market. There is often a legitimate reason for many of these oddities: anonymity prevents bias in the bidding process, and art’s inherent subjectivity means pieces are given the price that they deserve by those who recognise a Pollock in what others may only see as a splash of paint.

These aspects make the market almost tailor-made for criminal abuse. However, among the sectors prone to illicit finance risks, the art market is an area that does not receive the same prioritisation as others. While some people – especially art market participants (AMPs) – may argue that this is appropriate, recent news highlights that a lack of appropriate supervision has serious implications for economic and national security. To ensure that criminals are held to account, stronger national and international responses are needed.

A Missed Opportunity

Despite the vulnerability of the sector, the FATF report fails to be bold, shying away from recommending that AMPs be included under the supervision of designated non-financial businesses and professions (DNFBPs). While the FATF Recommendations broadly require jurisdictions to identify, assess, understand and mitigate risks, they do not specifically ask jurisdictions to take regulatory actions for professionals involved in the art market. Although art dealers are captured in some jurisdictions under reporting requirements for high-value goods dealers (HVGDs), only one category of HVGDs – dealers in precious metals and stones (DPMS) – are included explicitly in the FATF standards. Not recommending a common approach for all HVGDs, including art dealers, and leaving the supervision of this sector as a regulatory add-on at the discretion of each jurisdiction, is a missed opportunity which leaves the market highly exposed to abuse.

Examples of such abuse abound. The US art market, the largest in the world, is still largely unregulated. Just this month, prosecutors in New York demanded that auction houses provide sales information in order to track potentially illicit transactions by sanctioned Russian collectors as part of a crackdown on sanctions evasion networks. In October last year, US authorities also indicted a UK businessman for conspiring to violate and evade US sanctions by allegedly attempting to move artwork owned by a Russian oligarch out of the country. The large number of cases submitted for the FATF report highlight the widespread use of corporate structures – a common money-laundering typology – for disguising ownership and concealing funds laundered in the art market. Other reports also raise concerns about how art is dealt internationally. For instance, an investigation by the International Consortium of Investigative Journalists conducted in early 2022 into the Pandora Papers also revealed the connections between the art market and tax havens, and how many artworks are connected to oligarchs, business tycoons and criminals.

Domestic (but Global) Problems

Even when the art market falls within the scope of regulations, issues abound. For instance, in the UK, national recognition of art market risks led to the inclusion in 2020 of AMPs in the Money Laundering Regulations (MLRs) as a first line of defence against the misuse of art for laundering illicit proceeds. Loosely understood as anyone trading in, or acting as an intermediary in the sale of, works of art worth €10,000 or more in a single transaction or a series of linked transactions, AMPs were given new obligations, including registering with HMRC – the UK’s tax authority and designated anti-money laundering (AML) supervisor for AMPs – conducting due diligence on buyers and sellers to verify their identity, and assessing the risks to which they are exposed based on the nature of their business.

However, questions remain as to whether the inclusion of the art market under the scope of the UK MLRs has achieved the desired outcome of reducing the vulnerability of the market to money laundering. Conversations held by the author with UK experts over the past year highlight that the lack of clarity on the scope of the regulations means that professionals still have practical difficulties in implementing them. These difficulties often apply to the global art market as a whole.

Firstly, there are definitional issues. With so many intermediaries in the chain of art transactions, understanding who an AMP is becomes a complicated task. For instance, the current threshold creates confusion among smaller galleries, who are less fluent in AML language and query the need for HMRC registration for one-time over-threshold sales. Likewise, the definition of ‘work of art’ is pivotal for appropriate supervision. Should antiques, designer items or luxury items be included alongside Picasso’s works and Da Vinci paintings? What about new trends, such as the increasingly popular non-fungible tokens (NFTs)? The FATF report also spends some time over definitions, finally settling on the term ‘cultural object’ to collectively refer to art, antiquities and other cultural objects, including digital art and NFTs. However, when it comes to recommending supervision, it only covers DPMS.

Secondly, experts report that there are different perceptions of the market’s risks. On the one hand, the National Crime Agency assessed it in June 2021 as being at high risk. On the other hand, sector representative groups neither perceive such severe risks nor understand where they sit in the wider financial crime puzzle. Meanwhile, the FATF report recognises the vulnerabilities of the market and the need to take more effective action, but it only encourages countries to be more proactive in tackling these risks.

Lastly, due to the lack of global recommendations, some companies worry that compliance with AML requirements may hinder their business, and that the market may move to a less-regulated jurisdiction. Indeed, while the international nature of art transactions requires a global response, at the moment, UK AMPs are aware that this is lacking. Despite often reluctantly complying with national regulations, many in the UK market do not feel that such obligations are warranted: they agree that there are risks, but not in their gallery – so why should requirements be so stringent and the costs so high? The landscape would appear to disadvantage the UK market in favour of European and US competitors.

How Can We Move Forward?

What is clear is that the FATF report gives voice to a growing problem. What is not clear is how we move forward. At the international level, the FATF should push for the extension of DNFBP supervision to cover HVGDs, thus including art dealers under money-laundering supervision. At the domestic level, following FATF guidance, regulation of the art market should become a standard and be accompanied by clarity in definitions, awareness of new technologies and the risks (and opportunities) that these may bring, and appropriate enforcement of sanctioning powers.

It is also vital to close the gap between the risk perceptions of AMPs, law enforcement and regulators, so as to build the same ‘culture of compliance’ that has been – to some extent – developed among financial institutions. Such a culture in the financial sector was the result of targeted outreach, as well as regulatory fines and interventions. Regulations are needed that are not only followed, but thoroughly understood. This can be achieved by delivering guidance that speaks the same language as AMPs and that is tailored to accommodate the peculiarities of the market. Meanwhile, outreach should be balanced with robust enforcement where egregious wrongdoing occurs.

AMPs, supervisors and law enforcement will need to learn to communicate in order to ensure that illicit finance does not find another venue to prosper, while protecting the market from reputational and economic damage. In a world of beautiful things, compliance can seem an ugly process. Yet, it is remarkably necessary.

The views expressed in this Commentary are the author’s, and do not represent those of RUSI or any other institution.

Article Credit: https://rusi.org/publication/understanding-art-market-and-anti-money-laundering-regulations