Treasury Releases Much-Anticipated Study on Illicit Finance in the High-Value Art MarketMarch 11, 2022
In early 2021, Congress amended the Bank Secrecy Act of 2020 (“BSA”) through the Anti-Money Laundering Act of 2020 (the “Act” or “Anti-Money Laundering Act”). In related legislation, Congress also passed the Corporate Transparency Act of 2021. These two measures have been described as the most significant amendments to the BSA since the Patriot Act was passed following the World Trade Center attacks in 2001. Both of these laws are subject to civil and criminal enforcement so that the failure to comply with them could result in both civil remedies and/or criminal penalties.
The Anti-Money Laundering Act amends the BSA to include “persons engaged in the trade of antiquities, including an advisor, consultant or any other person who engages in the solicitation or sale of antiquities” among the financial institutions that are required to report certain business transactions to U.S. regulators at the U.S. Department of Treasury’s Financial Crimes Information Network (“FinCEN”). Section 6110 of the Act requires the Secretary of the Treasury to issue rules to implement its provisions. An Advanced Notice of Proposed Rulemaking (ANPRM) was issued by FinCEN some nine months after the Act was passed, in September of 2021, seeking comment from the antiquities industry and the general public. The period for comment expired in December 2021 and the first set of rules regulating the antiquities trade, or parts of it, have yet to be published. Accordingly, although it will soon change with respect to antiquities, as of today, there are no regulations extant in the United States applying to money laundering or terror financing in the art or antiquities markets
The Anti-Money Laundering Act amended the BSA in 2021 by authorizing regulation of the antiquities trade. Unlike actions taken both by the European Union (“EU”) through its 5th Money Laundering Directive (“5th ALMD”) and the United Kingdom (“UK”) in a similar move in January 2020, which chose to regulate both art and the antiquities trade, the art trade was deliberately omitted by the U.S. effort as an economic sector subject to BSA regulation. It appeared, nonetheless, from those early stirrings for regulation that it would be only a matter of time before the broader art market would be comprehensively regulated to protect against money laundering and terrorist financing. Indeed, the Anti-Money Laundering Act did not ignore the art market completely. Rather than attempt to regulate both the art and antiquities markets right out of the box, Congress chose instead to proceed incrementally. Regulations for the antiquities trade first would be proposed and implemented. Pursuant to Section 6110 (c) of the Act, Congress directed the U.S. Attorney General, the Secretary of Homeland Security and Secretary of Treasury and the FBI “to study how trade in works of art facilitate money laundering and financing of terrorism.” It seemed that Congress wanted more information before it acted, but that the art market too would soon be in the sights of the regulators.
A year later, on February 4, 2022, the proverbial second shoe dropped, but perhaps more softly than expected. The Department of the Treasury issued a forty-page report aptly entitled Study of the Facilitation of Money Laundering and Terror Financing Through the Trade in Works of Art (“the Study”). Significantly, but not surprisingly, the Study finds little evidence of terrorist financing in any sector of the art market and proceeds, almost out-of-hand, to dismiss the risk of terrorist financing in the high-value art market in large part because of the geographical distance between the areas where terrorist activities occur and where high-value art originates and is sold. Moreover, there are easier, safer and quicker ways to finance terrorism than through high-value art. The Study concludes that “TF [Terror Financing] is an area of lower risk in the high-value art market.” Accordingly, it makes no recommendations designed specifically to protect against financing of terrorist activities.
The Study does report evidence of money laundering in the higher-value art market, which it does not specifically define, but which includes entities with a large volume of annual sales and those which regularly engage in high value-transactions. It points to vulnerabilities inherent in the high-value market itself which create opportunities for money laundering, including cross-border transactions, high-value single transactions, an accepted culture of anonymity, use of third-party intermediaries and free ports, easy transportability of most artwork, growth of art as an investment vehicle. The Study also recognizes a particular vulnerability among business which offer financial services, such as art collateralized loans, which are not presently subject to comprehensive anti-money laundering or counter terrorism financing obligations. The Study further recognizes the opportunity for new risks in the emergent digital art market such as the use of non-fungible tokens (NFTs). It also notes steps which have been and could be taken by the art industry itself to mitigate some of the money laundering risks, including voluntary Anti-Money Laundering (AML) and Counter Terrorist Financing (CTF) programs that had been put in place by some institutional market participants, such as larger auction houses and galleries. The Study recognizes, however, that these voluntary AML/CFT programs, which it terms best practices, are not universal, are not compulsory, lack meaningful enforcement mechanisms and can be circumvented or ignored with impunity by illicit actors and complicit staff and other professionals.
At the same time, the Study also recognizes factors that mitigate against the use of the high-value art market to launder the proceeds of criminal conduct. As an initial matter, the high-value art market represents only a small portion of the international art market, some 20% or less of a global market estimated in 2020 to be a $50 billion global industry with 42%, $21.3 billion coming from the U.S. market. Within the smaller high-value market [In addition to the small percentage of the overall art market] there are further deterrents to money laundry. Those impediments include the infrequency of cash transactions, price volatility, subjectivity in pricing and fear of forgeries. Further, because institutional market participants, such as auction houses and galleries, are motivated to protect their reputations and grow their businesses, they have market incentives to gather information about ultimate buyers and sellers of art which, in turn, lend a degree of transparency to some of the transactions. Together with pre-existing regulatory requirements for financial institutions and a number of commercial businesses to report high-value cash transactions, the Study concludes that these factors make the institutional high-value market a poor vehicle generally for laundering illicit cash. Also, small galleries (lower sales volumes and generally lower prices) are not threatened by launderers because the works they sell are not priced high enough to launder funds efficiently. It also notes that the recent Corporate Transparency Act will make ownership of many shell companies, which have been used to buy and hold art surreptitiously, more transparent, further discouraging laundered transactions in art.
Despite the risk of money-laundering in the high-value sector of the market and its threat to the U.S. financial system, the Study concludes that, when considered in the context of other sectors of the broader economy, the art market should not be the immediate focus for the imposition of comprehensive anti-money laundering and counter-terrorist regulations. Before turning its attention to the high-value art market, the Study recommends, instead, that Treasury first complete its ongoing work to close gaps in the existing U.S. AML/CTF regime in sectors of the economy which have been prioritized because they present a more immediate threat for laundering the proceeds of criminal activity (citing specifically real estate and other areas such as investment advisors and non-financial gatekeepers).
Although not calling for immediate action, the Study suggests a few limited regulatory and non-regulatory measures for the Department of Treasury to consider at some point in the future that would further mitigate the risk of money laundering in high-value art transactions. The Study’s non-regulatory recommendations, which are not legally enforceable, include the Department of the Treasury encouraging the creation and enhancement of private sector information sharing programs designed to foster transparency among art market participants and updating guidance training for law enforcement, customs enforcement and asset recovery agencies. The Study suggests that information shared between private entities, in turn, also could be shared with law enforcement during investigations and that shared information, in turn, could also provide art market institutions, such as auction houses and galleries, with better insight into first-time customers and experiences of others in the art market with those customers. The Study also recommends that law enforcement increase its focus on financial crimes involving high-value art in its training programs by incorporating experts on the nexus between financial crimes and the art market in order to alert trainees to opportunities which present special risks of money laundering.
The regulatory measures that the Study proposes, and which would be enforceable by law, include using FinCEN’s record-keeping and reporting authorization to seek more detailed information about activity that is occurring in the institutional high-value art market which would discourage criminals to who would attempt to use the institutional art market to launder funds. These measures could be targeted reporting requirements aimed specifically at high-risk segments of the art market, for example, on the basis of geographic location or transaction size. In a second recommendation the Study suggests applying AML/CTF requirements, including customer identification and Suspicious Activity Report (SAR) protocols, against certain market participants. The Study also recommends that market participants with lending services, including art lending firms and auction houses should also be subject to AML/CFT rules requiring them to establish AML/CFT compliance programs, customer verification procedures and Suspicious Activity Reporting protocols. Unless subject to regulation, art financing may be used to allow customers access to funds secured by the proceeds of crimes.
But again, despite these recognized vulnerabilities in the high-end art market, the Study’s proposals for specific measures are not recommendations for immediate action; they are proposed for the longer term. The Study, however, is only the beginning of the process. It will now be turned over to Congress which will consider its findings and recommendations in determining what, if any, further action will be taken.
This article is a follow up to a previous alert written by Victor J. Rocco, Partner at Herrick, Feinstein LLP, which was adapted from a presentation that he made at the 2021 Art Law Day program by the Appraisers Association of America entitled The Veil May be Lifting: What the Art Market Needs to Know About Current and Upcoming Disclosure and other Regulatory Requirements. Howard Spiegler was a moderator of that panel.