What is Art Money Laundering and How Does it Work?

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Art money laundering is concealing the origins of illegally obtained money by the buying and selling of art and antiquities. Laundering money with art is a growing issue for the art market and regulators, who have, in recent years, investigated the best way to impose anti-money laundering regulations on what is historically a regulation-free market. 

 

The Department of the Treasury defines art broadly. Its definition includes items that would traditionally be considered fine art, like paintings, sculptures, tapestries, and photographs. It also includes antiquities, objects of cultural importance, and digital art like NFTs, which we explored in our article about money laundering and NFTs.

 

Unlike many markets for high-value items, the art market offers criminals anonymity—art can be bought and sold without reporting the transaction. Art deals are often conducted via intermediaries, and the seller may never know where the money comes from or who the buyer is.

 

That’s particularly true in the secondary art market. In the primary market, artists and their galleries often want to know who buys their art. However, secondary market participants who resell art are incentivized to get the highest price. Knowing the buyer’s identity is less of a priority. 

 

The factors that make art ideal for laundering money also make it difficult to determine how much money is laundered through the art market. The global art market was worth around $65 billion in 2021. No one knows what proportion results from money laundering activities, although when Mexico introduced identification rules for art purchases, its art market shrank by 60%.

 

 

 

Why is Art Used for Money Laundering?

The art market is attractive to money launderers because it has several characteristics that differentiate it from other markets. 

 

 

 

High-Value Transactions

The art market is renowned for high-value transactions. Works by famous artists can sell for millions, providing an effective means for laundering large sums of money. Launderers can clean substantial quantities of dirty money in a single transaction. 

 

 

 

Subjective Valuation

Unlike more transparent markets like stocks or real estate, the value of art is influenced by factors such as rarity, artist reputation, and trends. The lack of objective valuation allows for significant price manipulation. Prices can be artificially inflated or deflated to justify the movement of large sums of money.

 

 

 

Lack of Transparency and Regulation

Many transactions occur through private sales and auctions where details such as buyer and seller identities, sale prices, and provenance can be concealed. The art market’s opacity provides anonymity and secrecy, a sharp contrast to the stringent transparency and reporting regulations in financial markets.

 

 

 

Global Nature of the Art Market

Art is universally recognized in value and easily transportable across borders so that money launderers can exploit differences in legal and regulatory frameworks across countries. Art’s portability facilitates the cross-border movement of illicit funds, and by moving artworks across jurisdictions, launderers can evade detection and scrutiny.

 

 

 

How Does Art Money Laundering Work?

Art world money laundering employs various techniques to disguise the origins of illicit funds. These techniques often involve overvaluing or undervaluing artworks, using intermediaries for transactions, creating false provenances, or rapidly trading artworks to create a confusing trail of transactions.

 

Let’s see how a criminal could launder illegally obtained funds via the art and antiquities market. 

 

  1. Acquisition: A criminal purchases a high-value artwork using a third party or an anonymous shell company. The transaction occurs at a legitimate gallery or auction, providing an initial veneer of legality.
  2. Free port storage: The artwork is then stored in a free port. Free ports are secure storage facilities located in areas with special customs regulations. Valuable items like art can be stored in a free port indefinitely without incurring taxes or customs duties.
  3. Layering through transactions: The artwork is sold multiple times, often without ever leaving the free port. Cross-border transactions through various intermediaries or shell companies create a complex web of transactions, obscuring the origin of the funds and increasing the apparent value of the artwork.
  4. Advantages of ownership: While the criminal owns the artwork, they may use it as collateral for loans, further integrating the illicit funds into the financial system.
  5. Final sale and integration: Eventually, the artwork is sold to a genuine buyer at an inflated price. Now appearing legitimate, the proceeds from this sale are reintroduced into the economy as clean money.
  6. Exiting the free port: When the artwork leaves the free port for the final sale, it encounters customs and tax regulations. However, by this time, the numerous transactions and inflated value make tracing its illicit origins exceedingly difficult.

 

 

 

Art and Anti-Money Laundering Regulations

The legal and regulatory framework to combat art money laundering continually evolves, encompassing international guidelines, national legislation, industry self-regulation, and specific measures targeting the art market.

 

 

 

International Oversight

The Financial Action Task Force (FATF) sets global norms for combating money laundering and terrorist financing. It recommends due diligence in art transactions, particularly for high-value sales. However, the adoption and enforcement of these standards vary worldwide, leading to a patchwork of international regulations.

 

 

 

National Legislation

In the United States, the Anti-Money Laundering Act of 2020, part of the National Defense Authorization Act (NDAA), extended the provisions of the Bank Secrecy Act to antiquities dealers, requiring them to conduct due diligence on their clients, understand the nature of their transactions, and report suspicious activities to the authorities. 

 

The same act also required the U.S. Treasury to conduct a study of art money laundering. The Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art was published in February 2022 and recommended that AML requirements be applied to some art market participants, including know-your-customer procedures, enhanced due diligence procedures, and suspicious activity reporting. 

 

However, at the time of writing, art market participants are not required by regulation to implement anti-money laundering procedures. Given legislators’ interest in art money laundering, regulations will likely be part of the art market’s future. 

 

In Canada, the luxury goods sector, which includes art and antiques, was identified as having heightened risks for money laundering and terrorist financing by FATF’s 2016 Mutual Evaluation Report. The finding was supported by a 2018 report from the House of Commons Finance Committee. 

 

The Committee recommended dealers in luxury items, including art, be subject to the reporting requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA). This includes the obligation to report large cash transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC).

 

 In 2019, the Criminal Code of Canada was amended to allow the prosecution of financial intermediaries in cases of money laundering. Consequently, art dealers should implement risk-based anti-money laundering programs with transaction monitoring and due diligence for all clients, including enhanced due diligence for high-risk clients.

 

 

 

Industry Self-Regulation

In response to the growing industry, government, and consumer concern about art money laundering, there is an increasing trend toward self-regulation within the art industry. Major players are adopting recordkeeping and compliance measures, including codes of conduct, due diligence processes, and provenance research to mitigate risks.

 

 

 

Challenges in Enforcement

Enforcing these regulations remains challenging due to art valuation’s subjective nature, transaction privacy, and the art market’s global scale. The involvement of intermediaries and the use of entities like trusts and shell companies add complexity.

 

 

 

Future Developments

The push for more robust, cohesive regulations continues, focusing on harmonizing laws and enhancing transaction transparency. In February 2023, the FATF released Money Laundering and Terrorist Financing in the Art and Antiquities Market, a comprehensive study of art money laundering, red flags, and best practices for reducing risk. Further regulation may follow. 

 

 

 

Reducing the Risk of Art Money Laundering

Reputable art dealers, galleries, and other art market participants have recognized the financial, reputational, and potential legal risks of art money laundering. They have adopted a range of anti-money laundering practices and technologies to protect their businesses and clients, such as:

 

 

Alessa is a modular AML compliance and fraud management solution. We can help your business manage art money laundering, compliance, and fraud risks. 

 

Contact our AML experts today to learn how Alessa can help your business’s compliance and fraud prevention programs.

 

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