Art and AML: Regulators Taking a Broad Brush Approach Using Financial Entity Regulatory Compliance as the Model for the Art World

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K2 Intelligence Investigations · Compliance Solutions · Cyber Defense

What do people see when they look at a piece of fine art—such as a painting by Cezanne, a sculpture by Giacometti, or a three-dimensional combine by Rauschenberg? To a great extent, it depends on who’s doing the looking. An art dealer or curator might see a remarkable alchemy of light and shadow and the innovative application of materials that define movements in art and influence future artists. A financial criminal, on the other hand, sees something else: a useful commodity for laundering money.

As banks and other financial institutions have improved their ability to detect and prevent money laundering, criminals are turning to other avenues to conceal illicit funds—one of which is the trade in fine art and antiquities. As a result, regulators around the world are looking more closely at the global art market; some are already implementing rules with which art businesses must comply.

In May 2018, for example, federal legislators in the U.S. House of Representatives introduced a bill that would extend the Bank Secrecy Act (BSA) to dealers of art and antiquities. Even though the bill, the Illicit Art and Antiquities Trafficking Prevention Act (IAATP), is mainly intended to prevent terrorist groups such as ISIS from selling antiquities to finance their attacks, the IAATP would nevertheless apply broadly to art dealers, galleries, and auction houses.

The European Union also recognizes the art market as an opportunity for money laundering and financing terrorism, with the fifth anti-money laundering directive (AMLD5), issued in 2018, adding specific requirements for art market entities. AMLD5, which becomes effective in 2020, will apply to “persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amounts to EUR10,000 or more” and “persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports.”

Using Financial Entity Regulatory Compliance as the Model for the Art World

Regulations aimed at fighting money laundering and the financing of terrorism do not spell out how to comply with their legally enforceable requirements. They just state the rules. This is an onerous task even for large financial institutions, leaving art market businesses, especially vulnerable since they are not accustomed to assessing AML risks and establishing compliance systems. For instance, many art transactions involve buyers and sellers who are listed as corporate entities, leaving art dealers, auction houses, and galleries, who suddenly must comply with Know Your Customer (KYC) regulations, unsure about with whom they are doing business and uncertain how to find out.

Money laundering is an existential threat to art dealers, galleries, and auction houses. By understanding the circumstances and context for transactions, art businesses can protect themselves, thereby demonstrating they are not willfully ignorant of money laundering and are taking action to prevent it. Certainly, not every art buyer or seller has ill intent, but the regulations are designed to root out criminals.

It important for art market businesses to take stock of their current policies and procedures and understand that there is no one-size-fits-all approach to developing a compliance program. However, there are some key lessons these organizations can draw from banking practices to prepare for AML compliance, depending on their individual business needs.

  • AML risk awareness. Understanding the ways that financial criminals might use the art market to launder money is a critical first step. Art market leaders have already begun to discuss this through organized events, which shows responsibility. However, the laws and regulations surrounding anti-money laundering are complex and require expert analysis to determine how they apply to an art transaction and what steps art market businesses need to take in order to mitigate risk.
  • Knowledge of the customer. The global art market has operated for centuries under a shroud of mystery. While some patrons may have legitimate reasons for preferring to remain anonymous, particularly in high-value transactions, this lack of transparency can also have a dark side: it facilitates the concealment of criminals’ identities. Banks and financial institutions have well-established KYC programs and processes in place to investigate the beneficial ownership of financial accounts. Art businesses cannot comply with AML regulations without similar customer due diligence. Implementing a robust but tailored KYC program is the first line of defense to ferret out individuals looking to launder funds by uncovering illicit activity, tax fraud, or even the looting of cultural heritage. A group of U.S. senators has introduced draft AML reform legislation that, among other things, would direct the Financial Crimes Enforcement Network (FinCEN) to establish a beneficial ownership database. Such a database would make complying with reporting requirements on beneficial owners much easier for organizations of all sizes.
  • Provenance of funds. The art industry has long understood the role that provenance plays in the value of a piece of art. The time and research required to vet the authenticity of a given work is a strong foundation for the need to dig deeply to understand the flow of funds associated with art.
  • Expert resources. Financial institutions rely on partners that have the expertise and tools to combat increasingly sophisticated criminals. Regulators have expressed their intentions to bring transparency to the art market as a way to reduce the risk of money laundering. The best time for businesses that must comply with AML requirements is before such rules go into effect. Partnering with those who have expertise in both financial regulatory compliance and the art world will accelerate compliance.

Consequences of even unwittingly accepting laundered funds can be swift—including having bank accounts closed, which could then make it harder to establish a new banking relationship. While compliance with financial regulations may seem like a daunting task, art market businesses have the benefit of using highly regulated industries as their guide to developing programs, policies, and procedures that will ensure their transactions are transparent and legitimate. As we have seen in the banking industry, those who take proactive steps to comply with the law are less likely to end up on the wrong side of it.

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