For all the changes that have taken place, such as the European Union's fifth AML directive, there remains a lack of scrutiny in art transactions from a compliance viewpoint. That's the argument of the present author.

The intersection of the art world and compliance remains an important topic. Here is another insightful article on such topics from Angelika Hellweger, who is legal director at Rahman Ravelli. (See a previous example from her here.) Hellweger argues that there has been a lack of scrutiny of art transactions. 

The editors are grateful for these insights and invite readers to jump into the conversation. The usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com


For a business sector that does so much to promote beauty and creativity, the art market is becoming the focus of many who believe that more needs to be done to tackle its dark side. More specifically, the use of art in the practices of money laundering and sanctions evasion.

The concerns, to some degree at least, are justified. The art market is, apart from in the EU (1) and the UK (2), unregulated in large parts of the world – even in jurisdictions where it would be assumed that such regulation has been in place for a number of years. 

We can place the US in this category, even though it is recognised as one of the world’s most significant nations for art buyers. In the US, money laundering has been a crime since 1986, and it was one of the first countries to make such activity an offence. The United States Department of the Treasury is fully dedicated to combatting all aspects of money laundering, prosecuting money laundering crimes is the responsibility of the Department of Justice, and the Federal Bureau of Investigation, the Drug Enforcement Administration, US Secret Service and a number of other agencies regularly conduct money laundering investigations. 

Yet the enforcement of the country’s anti-money laundering (AML) and sanctions rules – of which there is no shortage – is limited. To take one example, the Bank Secrecy Act authorises the Department of the Treasury to impose reporting and other requirements on financial institutions and other businesses to help detect and prevent money laundering. Yet these measures do not apply to art transactions facilitated by art dealers or auction houses. Recent efforts to implement stronger rules were rejected by the US Senate, despite the fact that the US is generating 45 per cent of the global art market value (3).
 
But it should be said that the US is not alone in taking this stance. Anti-money laundering provisions do not apply to art transactions in many other jurisdictions. Switzerland, for example, is another  significant art hub where dealers and auction houses are not yet subject to its AML laws. And Switzerland imposes anti-money laundering obligations exclusively on cash transactions above SFr100,000 ($109,257) – although that may be subject to change next year, if proposed new reforms to tackle money laundering and sanctions evasion are introduced. 

But at present, we have a situation where a lack of AML provisions in two of the five main art selling nations means that neither the purchaser nor the seller are obliged to verify the identity of the other. As the US and Swiss art markets handle many of the largest and most notable art sales, this is a far from ideal set of circumstances. In addition to the lack of AML rules, a significant number of art sales take place via the use of intermediaries or shell companies. Such practices enable the seller and buyer to conceal their identity, making it easy to conclude anonymous deals. Nobody needs to paint a picture to illustrate quite how appealing that must be to the money launderer.

It should, however, be noted that various sanctions regimes have been imposed which are wider in their scope than AML regulations, as sanctions apply to all entities. They are not only relevant to the art market and its participants, but for every business that wishes to enter into a transaction with a sanctioned individual or entity.

Yet we remain in a position where art sales totalling millions – if not billions – are going ahead free from scrutiny. The authorities have, at times, sought to bring action. The US and UK’s targeting of high-profile art collector Nazem Ahmad – over allegations that he used his art collection to launder money for the Lebanese group Hezbollah – is arguably the most high-profile example of this. But this is just one action – and a hotly-contested one at that – and could arguably be the exception that proves the rule. Many are looking at the art. Too few are looking at the wealth behind it.

Footnotes:

1,  The EU extended the application of its AML directive to those carrying out transactions relating to art where the value of the transaction is €10,000 or more in 2018. The amendments also extended its application to the trading and storing of art in freeports.

2,  The UK’s Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 covers ‘art market participants’. Those who deal in the sale, purchase or storage of works of art above a value of €10,000 ($10,541) are required to register with HMRC, nominate a person responsible for AML compliance, train staff in AML, report suspicions and keep records – with a failure to do so inviting legal consequences.

3, https://www.statista.com/statistics/885531/global-art-market-share-by-country/