Author: Ana Pereu, Cyber Security Consultant, UK
The art market has long been a forum where large sums of money can be traded between anonymized parties. Some argue that this anonymity is necessary for a thriving market but overriding concern about criminal exploitation of the art market has recently resulted in substantive regulatory changes in market oversight in the EU, UK and the US.
Understanding these challenges and the changing regulatory environment is crucial in proactively implementing a scaled due diligence program that meets compliance standards. Furthermore, this will better equip art market participants to anticipate additional regulatory changes moving forward.
Historic View of Art Market Anonymity
The United Nations Office on Drugs and Crime reported that the underground art market may be valued at $6 billion annually, with as much as $3 billion being the proceeds of financial crime activity.[1] Art transactions have also been used to circumvent sanctions, with deputy secretary of the US Department of the Treasury stating that “art and luxury goods dealers should be on alert to the schemes of money launderers who hide personal funds in high-value assets in an attempt to mitigate the effects of U.S. sanctions.”[2]
Several factors have made the art market a particularly attractive venue for bad actors to disguise otherwise criminal transactions:
- Emphasis on privacy and anonymity: The art world has historically emphasized privacy in art transactions, to protect the identity of the ultimate buyer/seller. The use of intermediaries, offshore companies and other ownership entities may be used to anonymize the identity of the ultimate owners/sellers, thereby disguising the ultimate beneficiaries of the flow of funds.
- Extensive use of freeports: Art buyers often rely on the use of freeports, government-designated areas that essentially lie outside a country’s borders, to resell or store recently purchased art. Freeports can be a tax haven for high-value works, as they are perceived as being “in transit” and also add a layer of anonymity for owners.[3]
- Increased scrutiny and regulations of other financial transactions: Tightened regulatory environments for real estate investments have made the art trade attractive for financial crime activities.[4]
While the concern over the use of art markets in financial crime is not new, the EU, UK and US have made steps to regulate art transactions like any other financial transaction. And with ultra-high-net-worth individuals predicted to hold $2.7 trillion in art and collectible wealth by 2026, regulatory scrutiny is bound to increase.[5]
New Regulatory Standards
Beginning with the EU in 2018, various European countries, the UK and the US have enacted regulations and recommendations that hold art transactions to compliance standards comparable to other financial transactions.
EU and UK
In April 2018, the European Parliament adopted its 5th Anti-Money Laundering Directive, which, among other things, broadened its remit to include art dealers, who now were required to identify and collect beneficial ownership on buyers and sellers. The EU has even taken legal action against several EU countries for not adequately implementing the directive by the stipulated January 2020 deadline.[6]
In January 2020, the UK implemented the EU Directive into legislation, expanding its anti-money laundering law to include “art market participants.”[7] Under the legislation, “art market participants” could include a firm or individual who “acts as an intermediary in the sale or purchase of […] works of art” when the transaction(s) is EUR 10,000 euros or more, or when it involved a freeport operator storing works of art over EUR 10,000.[8]
Among the various requirements under the new regulations, participants will be required to conduct customer and transactional due diligence and risk assessments of their customer population, as well implement AML compliance protocols and trainings.[9]
US
While similar legislation has not been passed in the US, regulations may be forthcoming, based on the several developments in 2020/2021:
- In July 2020, following a two-year investigation, the US Senate Permanent Subcommittee on Investigations issued a report noting that “the art market is the largest legal, unregulated market in the United States.”[10] The Subcommittee recommended that the art market fall under the compliance standards of the Bank Secrecy Act (“BSA”) for transactions over 10,000 euros, and that standards be implemented for due diligence and beneficial ownership information.
- In November 2020, the Office of Foreign Asset Control (“OFAC”) recommended that due diligence be conducted to determine the ultimate beneficiaries of any art transaction.
- In January 2021, the National Defense Authorization Act (NDAA) broadened the BSA requirements to the antiquities trade, and mandated a study “on the potential expansion of BSA requirements to persons engaged in the art trade.”[11]
Due Diligence: The Human-Led Intelligence Factor
In light of these regulations, participants must implement substantive due diligence procedures to comply. Various players involved in qualifying art transactions may now fall under these new regulatory compliance requirements, and put the onus on “art market participants” to identify and conduct due diligence on ultimate buyers and sellers.
While some of the largest auction houses and galleries may currently use various AML and sanctions screening tools, experts suggest that small and medium sized participants may also need to implement compliance programs, and larger firms will need to evaluate their existing protocols to effectively comply with these regulations.
Art market participants should look to human-led intelligence teams with subject matter expertise in order to ensure compliance. Effective compliance programs will include matter experts with:
- Industry and country specific knowledge, and regulatory expertise;
- Experience in AML and fraud investigations, such as identifying assets and shell companies;
- Robust language capabilities;
- Understanding of risk assessments regarding beneficiaries, parties involved, associates or proxies;
- Access and knowledge of specialized screening tools and proprietary databases.
Robust due diligence procedures will help participants comply with these new standards, as well as identify and mitigate risk factors which could have significant financial, regulatory and financial consequences.
The Evolving Art Market Landscape
As the market adapts to financial regulatory scrutiny, additional technological scrutiny may come into play. Technology’s increasing impact on the art market, particularly in light of COVID-19, raises additional concerns over proper cyber security protocols. Potential trends include:
- A rise in the use of the dark web and underground marketplaces by those wishing to preserve anonymity or conduct difficult-to-trace deals.
- An increase in online auctions for artworks, as the art world has been seen to pivot online throughout the last year, during the various pandemic lockdowns.
- A rise in popularity of digital artwork and NFTs (non-fungible tokens) indicating ownership.
- An increase in the use of cryptocurrency as payment. Cryptocurrency is an evolving regulatory landscape itself, with countries grappling with how to best implement oversight of the market.
The 6th Anti-Money Laundering Directive, scheduled to be implemented by regulated businesses by June 2021, has for the first time included cyber crime as a predicate offense in the context of money laundering, which might have a significant effect on the way financial transactions are carried out online, potentially also affecting art-related transactions.
Aon’s Intelligence Group continues to monitor emerging trends in the art market as well as changes in regulatory environments relating to fraud, money laundering and compliance globally, with team members including seasoned due diligence analysts, certified AML specialists and fraud examiners.
[1] https://www.imf.org/external/pubs/ft/fandd/2019/09/the-art-of-money-laundering-and-washing-illicit-cash-mashberg.htm
[2] https://home.treasury.gov/news/press-releases/sm856
[3] https://www.gov.uk/government/news/freeports-bidding-process-opens-for-applications
[4] https://www.natlawreview.com/article/art-and-money-laundering
[5] https://www2.deloitte.com/content/dam/Deloitte/us/Documents/finance/us-five-insights-into-the-art-market-and-money-laundering.pdf
[6] “Fine threat over money-laundering rules,” The Times, August 10, 2018.
[7] Money Laundering and Terrorist Financing (Amendment) Regulations 2019.
[8] “The United Kingdom Welcomes the Art Market to the Regulated Sector,” Wealth Management, March 26, 2020.
[9] Money Laundering and Terrorist Financing (Amendment) Regulations 2019.
[10] https://www.hsgac.senate.gov/subcommittees/investigations/media/portman-carper-bipartisan-report-reveals-how-russian-oligarchs-use-secretive-art-industry-to-evade-us-sanctions
[11] https://www.fincen.gov/national-defense-authorization-act
