Works of Art: Things to be Admired – or Used and Abused by Criminals and Sanctions Evaders?

The last quarter of 2020 saw the U.S. Treasury issuing an advisory to art market participants alerting them of the high risks to which their industry is exposed – in particular, the risks relating to money laundering and sanctions evasion.

So, what is it about the art market that makes it so attractive to criminals?

Firstly has to be the potential value of the pieces. The subjectivity of value is a massively attractive commodity to anyone wishing to launder money. One large value transaction or many modestly valued transactions could all be undertaken in the art world with the blink of an eye – and potentially with as little attention. Artwork is notorious for the value it can attract at sale, and this value is, by and large, driven by the value the buyer places on it. In fact, according to one research company1, in 2018 the global art market was valued at over $67 billion, with North America holding the highest share of the market and Europe placing second.

The second attractive feature is anonymity and confidentiality. Given the value of the transactions in the art market and the likes of the rich and famous that play in this market, it is largely accepted that anonymity and confidentiality are expected; the rich and famous do not necessarily want the public at large to know where and how they are spending their money – nor that they own valuable works of art, due to the inherent theft risk.

Similarly, criminals do not want the authorities to discover where they are laundering their dirty funds, so when you want to remain anonymous, what better place to be than surrounded by others who also require anonymity?

The third feature of the art market that is attractive to criminals is the lack of regulation. The market is believed to be the largest unregulated industry in the United States and only recently became regulated in Europe following the 2019 transposition of the 5th EU Money Laundering Directive.

So, adding all three elements together results in unlimited monetary transactions undertaken with anonymity in a largely unregulated market – could there be a better cocktail for criminals wishing to launder the proceeds of their crimes than this?

However, money laundering isn’t the only risk here; there is a sanctions risk too. In October 2020, OFAC issued an advisory noticehighlighting “the sanctions risks arising from dealings in high-value art work associated with persons blocked pursuant to OFAC’s authorities, including persons on OFAC’s List of Specially Designated Nationals and Blocked Persons. This advisory describes characteristics of the market for high-value artwork that pose sanctions risks; emphasizes to art galleries, museums, private art collectors, auction companies, agents, brokers, and other participants in the art market the importance of maintaining a risk-based compliance program to mitigate such risks”.

Here we can see that the net is cast not just to capture the involvement of key participants such as galleries and museums, but also to include private art collectors, auction companies, agents, brokers, and other art market participants – and, in fact, insurers should be added to that list too, as they will have their part to play in the buying and selling of art, and the shipping of such between the old and new owners.

Equally, it should not be forgotten that each of these art market participants and any associated insurers will each have a bank, and those banks will also have an obligation in relation to compliance with OFAC and any other sanctions issuing authorities’ orders.

So, if OFAC chose to examine transactions for breaches of its sanctions orders, it could well find upwards of six entities, of whom it shall require answers for the actions (or lack thereof) taken in relation to sanctions compliance.

All of these participants in a transaction have a part to play, and each has a bank that has its own requirements to satisfy in relation to how well it knows its customer, what risk that customer presents, and whether transacting on behalf of that customer will cause the bank to breach a sanctions order. And now, OFAC has issued a warning that it is watching them all.

It is possible therefore, in the eyes of OFAC, that art can easily change ownership, possibly undetected from an economic sanctions order, and be used to fund illegal activities or even acts of terrorism.

In a very simplified example, what is to stop Person A, who is subject to sanctions and therefore unable to use his assets to fund his terrorist activity, from physically giving an acquaintance, Person B, a painting to sell for an undefined amount – quite possibly an over-inflated amount, if the buyer and seller are in orchestra together – and then using the proceeds to fund terrorism through the account of Person B, thus undetected from the sanctions prohibitions?

This would not seem to be an overly complex conundrum for a sophisticated criminal or terrorist cell to work around. Therefore, each party connected to such a transaction must be as sure as they reasonably can be that they know who they are dealing with, what legal and natural person is involved in a transaction, what is known about that person, and whether they, or even their country of residence, operation, or nationality is subject to sanctions.

The purpose of provenance has just grown much wider in scope, with potentially increased consequences for failure reaching new heights in respect of the penalties that can be applied. This, combined with the continued need to identify PEPs, potential fraud exposure, and the regulatory requirements since the 5th Money Laundering Directives came about has placed a much larger spotlight – and burden – on art market participants in Europe and has created consequential impacts worldwide.