Victor J. Rocco, Partner

Earlier this year the United States enacted two separate laws amending different parts of the Bank Secrecy Act of 1970 (“the BSA”). The BSA originally was designed to aid in the prevention of money laundering and other illegal activities. It establishes requirements for reporting certain transactions to government regulators at the Financial Crimes Enforcement Network or FinCEN, which is part of the U.S. Treasury Department. The BSA was amended in 2001 by the Patriot Act to aid in preventing terrorist financing. The Patriot Act put the BSA on steroids. The BSA has been implemented and administered through a series of regulations that have been designed and vigorously enforced by FinCEN. These new amendments to the BSA will also be implemented and enforced by a new set of regulations which have been designed by FinCEN.

The recent BSA amendments are contained in the Anti-Money Laundering Act of 2020 and the Corporate Transparency Act of 2021, respectively. These two measures are described as the most significant amendments to the BSA since the Patriot Act was passed following the World Trade Center attacks in 2001. On the face of it, these two laws are certainly ambitious, but, as always, the devil is in the details. Without knowing what their implementing regulations will look like, it is hard to say just how significant these two pieces of legislation will prove to be. That said, law enforcement is champing at the bit to add these new arrows to its already formidable quiver in its fight against money laundering and terrorist financing.

The effect of the two recent amendments is double barreled: more companies will be telling U.S. regulators at FinCEN more about themselves, making them and their affairs more transparent to government regulators, and ultimately, to law enforcement authorities. Both these laws permit the regulators at FinCEN to share what is otherwise confidential information in the reports with law enforcement authorities. Both of the new laws are subject to civil and/or criminal enforcement mechanisms so that failure to report required information or reporting false or incomplete information can result in both civil remedies and criminal prosecutions under the Bank Secrecy Act as well a number of other U.S. laws. These are no trifles; they will be enforced vigorously and have to be taken seriously.

These amendments will impact both the U.S. antiquities market and the global antiquities market as well, in part because the U.S. market is such a large part of the world market, but also because the obligations imposed by these laws transcend U.S. borders and will have extraterritorial effect, often reaching conduct outside of the United States.

The AMLA will have a unique and direct impact on the antiquities market; it also foreshadows changes that may soon be coming to the broader art market. The Corporate Transparency Act will require the ultimate beneficial owners of non-public corporations and limited liability companies to be specifically identified to regulators, making it generally more difficult to hide assets. Its impact transcends the antiquities and art market.

The Anti-Money Laundering Act of 2020 (AMLA) amends the Bank Secrecy Act of 1970 to include among the financial institutions that are required to report certain business transactions to U.S. regulators at FinCEN “persons engaged in the trade of antiquities, including an advisor, consultant or any other person who engages as a business in the solicitation or sale of antiquities.” An Advance Notice of Proposed Rulemaking (ANPRM) was issued by FinCEN, the Rule-Maker, earlier this year seeking comments from the industry and the public generally. The period for public comment has expired and the first set of rules are due to be published just a few weeks from now, on December 27th. The provisions of the new law will become effective on the day the new implementing regulations are announced. The rule-makers have been granted significant discretion in fashioning the new rules. We don’t know what those regulations will say, so it is uncertain precisely who will be subject to regulation, the extent of the regulations, or whether the regulations will be the same for all who are regulated.

We can describe generally the kind of rules we can expect. Based on the questions posed in the Advance Notice of Proposed Rulemaking, it looks like people and entities who engage in the trade of antiquities, or at least some subset of them, are likely to be required to establish AML/CFT protocols that at a minimum include: 1) developing internal policies, procedures and controls for compliance with BSA requirements regarding AML/CTF protocols, know your customer and customer due diligence protocols; 2) designating a company compliance officer; 3) implementing an ongoing employee training program; and 4) report in Suspicious Activity Reports (SARs) any suspicious transaction relevant to possible violation of any law or regulation.

FinCEN has the authority to exclude classes of entities and people from the regulations. It has very broad discretion in designing the rules and is required by law to consider a number of factors in their design, which suggests that the new rules may not be a “one size fits all set” of prescriptions. Those factors are: 1) the appropriate scope for the rulemaking, including who should be subject to the rulemaking according to the size, type of business, domestic or international, geographical locations or otherwise; 2) whether thresholds should apply in determining whom to regulate; 3) the degree to which the regulations should focus on high-value trade in antiquities and on the need to identify the actual purchasers of such antiquities, in addition to intermediaries acting for or on behalf such purchasers; 4) whether certain exemptions should apply to the regulations; and 5) the need to identify persons who are dealers, advisors, consultants or other persons who engage as a business in the trade of antiquities.

Believing that the problem of money laundering or violating sanctions is not widespread in the antiquities market doesn’t mean that the risk of it happening is not real. These laws or regulations – call them what you will – will become a permanent part of the market landscape as the government tries to introduce a degree of transparency in the world of antiquities – the same transparency that Congress and FinCEN ultimately will attempt to bring to the art market. Anticipating that very thing, one of the provisions of the AML Act requires the U.S. Attorney General, the Secretaries of Homeland Security and Treasury and the FBI to study how trade in works of art facilitate money-laundering and financing of terrorism. The study will focus on high-value trade in art works, and the need to identify actual purchasers of such works.

As much as people might want this all to go away, that will not happen any time soon – if ever. The World is a smaller place and the days of hiding assets anonymously abroad are quickly coming to an end. As much as one does not want to think about the impact that the new regulations will have on customers, the impact is unavoidable; some customers will try to avoid complying with eh new regulation – but those customers trouble customers. As much as dealers do not want to spend the time and money necessary to train employees to follow new protocols, the time and money spent on compliance training are and should be viewed as a good long term capital investment.

Competitors are in the same spot and have the same problems. Thinking that competitors who try to cheat the system will have an advantage not only a mistake, it is short-sighted. In the long run, it is much cheaper and much wiser to adapt to the new regulatory scheme than it will be to fight it. Acclimatizing to the new regime is what is what produces the competitive advantage – a true competitive, long-term advantage. A good staff and strong training result in a compliant culture that will help dealers avoid the consequences of regulatory missteps – which are always more expensive to cure than to avoid, and in some circumstances can be ruinous: “An ounce of prevention is worth a pound of cure.”

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This article is adapted from a presentation that Victor J. Rocco, Partner at Herrick, Feinstein LLP, 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 moderated the panel and is also on the 2021 Art Law Day Committee.