The Panama Papers—referring to the 2016 leak of 11.5 million files from the Panamanian law firm Mossack Fonseca—detailed the ways in which offshore shell companies are used to store and transfer assets outside of legal regulations. One of those assets at issue? Art. The Panama Papers demonstrated the extensive secrecy around the true ownership of art, and the possible use of fine and cultural art as an asset to evade taxes and launder money. The legal definition of money laundering is a financial transaction that aims to conceal the identity, source, and destination of illicitly-obtained money. 18 U.S.C. 1956. Despite efforts at reform, the art market is renowned for its secrecy in both its transactions and ownership of art. Indeed, the Panama Papers revealed, in one such example, that a collection of modernist works assembled by Victor and Sally Ganz and sold at Christie's for a landmark price in 1997 was not actually sold by their family, but rather by British financier Joe Lewis, who had secretly bought the collection months prior. Scott Reyburn, What the Panama Papers Reveal About the Art Market, The New York Times (April 11, 2016). Art advisers believe that members of the public bid such a high price because they were swayed by the provenance of the reported collectors, which provided its own indicia of authenticity. There are many more examples of how art transactions are helping to shield sources of funds, which of course are accompanied by questions of the more nefarious use and sources of those funds.

The European Union undertook the first effort aimed at combatting the art market's potential for money laundering and terrorist financing last April when the European Parliament voted to adopt the Fifth Money Laundering Directive (5AMLD). 5AMLD builds on the previous Directive (4th AMLD), enacted in June 2015, which aimed to counter the use of the financial system for money laundering or terrorist financing. Proposal for a Directive of the European Parliament and of the Council amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing and amending Directive 2009/101/EC, European Parliament and the Council of the European Union (Dec. 19, 2017). The new Directive makes the reporting requirements previously required of banks and other financial institutions applicable 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 €10,000 or more.” Anti-Money Laundering Europe, Agreement on 5th Anti-Money Laundering Directive (December 2017), 26.

The United States has proposed similar legislation. The Illicit Art and Antiquities Trafficking Prevention Act (HR 5886) was introduced in the U.S. House of Representatives and referred to the House Committee on Financial Services in May 2018. The bill seeks to apply the Bank Secrecy Act (BSA), officially titled “The Financial Recordkeeping and Reporting of Currency and Foreign Transactions,” which make up its two parts, to dealers in art or antiquities. (31 U.S.C. 5311 et seq.). The BSA, adopted in 1970, establishes program, record keeping, and reporting requirements for national banks, federal savings associations, federal branches, and agencies of foreign banks. It is aimed, among other things (inter alia), at money laundering and terrorist financing investigations. According to the BSA, banks must: establish effective BSA compliance programs; establish effective customer due diligence systems and monitoring programs; screen against Office of Foreign Assets Control and other government lists and; establish an effective suspicious activity monitoring.

The BSA has been updated many times, most recently in 2001 with the enactment of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act (known as the USA Patriot Act) in response to the terrorist attacks of September 11. Just like the EU legislation, the Bank Secrecy Act requires that banks report cash transactions greater than $10,000 to the Treasury Department, in addition to Currency Transaction Reports and Suspicious Activity Reports, all in service of a documented paper and audit trail. The inclusion of art dealers among those responsible under the Act would also require dealers to ensure that any potential clients are not being sanctioned by the Office of Foreign Assets Control (OFAC).

While it would seem to be good public policy to enact legislation that will prevent money laundering, terrorism, and fraud, art market leaders are concerned that money laundering in art transactions is not a big enough issue to justify the regulatory burden. Andrew Schoelkopf, the President of the Art Dealers Association of America (ADAA), argues that “money laundering is simply not something that's pervasive in the art market.” Margaret Carrigan, US anti-money-laundering bill could reappear early next year, The Art Newspaper, Dec. 11, 2018. Although the United Nations Office on Drugs and Crime estimates that laundered money makes up 2-5 percent of the global GDP annually, there is no clear data that demonstrates how much the art market contributes to that total, and at the present time, there have been no convictions for money laundering solely stemming from the art trade. Rather, when art is involved, it usually plays a role as part of a larger criminal enterprise. That number may not be the strongest factor, however, as the sponsor of the bill, Congressman Luke Messer (R-IN), stated that the aim of the bill was to “counteract terrorist financing and crack down on terrorist organizations like ISIS.” Id. The media and academics have long expressed their horror at ISIS's fundraising through looting and trading in antiquities, estimating its payout in the billions of U.S. dollars. Nancy C. Wilkie, in her capacity as President of the U.S. Committee of the Blue Shield (USCBS), referenced the UN Security Council's 2017 Resolution 2347, which confirmed that the looting of archaeological sites in Iraq and Syria by ISIS and Al-Qaida has helped to fund terrorist activities in the Middle East, in her letter of support for the bill on behalf of the USCBS. Letter from Nancy C. Wilkie, President, U.S. Committee of the Blue Shield, in support of H.R. 5886 (May 29, 2018) (published on USCBS website). The Security Council had expressed its concern about “the links between the activities of terrorists and organized criminal groups that, in some cases, facilitate criminal activities, including trafficking in cultural property, illegal revenues and financial flows as well as money-laundering, bribery and corruption.” S/Res/2347 (2017) Preamble. Notably, the IAATP is the first regulation in the U.S. that proposes to affect the entire art market, from fine art to antiquities, and it does not discriminate between sellers of different types of art depending on their potential for money laundering. Eileen Kinsella, US Art Dealers May Soon Be Subject to Government Financial Regulation, artnet news (May 2, 2018).

The biggest concerns for art dealers, in addition to the additional scrutiny of their practices this bill will bring, include the high administrative burden, the responsibility to “know your customer,” and a potential chilling effect on the art market. In addition to the previously noted reporting requirements, dealers would also need to establish suspicious activity monitoring programs and processes for reporting. This high administrative burden is especially problematic for small and even mid-sized art dealers, who do not have resources comparable to the financial institutions already being regulated. While the BSA does enumerate certain “persons” who routinely use currency and may be exempt from the filing requirements, which would ultimately lessen the administrative burden, none of those listed would apply to art dealers or the purchasers or sellers of art. The major auction houses, primarily Sotheby's and Christie's, already have anti-money laundering protocols in place, boosted by their robust legal and compliance departments. Christie's' program includes “client, transaction and artwork due diligence, monitoring, record keeping and independent audits,” and it enforces “strict cash payment limits” and a no third-party payment policy. Buying at Christie's, Christie's. Both Christie's and Sotheby's have a history of lending money and using art as collateral, putting them in a different risk category than other dealers. The major auction houses have been forced to follow the call for more transparency in the art market, after multiple lawsuits concerning Holocaust looted art and looted antiquities and a greater emphasis on provenance, so in some way the IAATP but is one more step in a continuing trend to demystify the market for the public.

In addition to the burden on the art dealer, the IAATP may be a burden on art purchasers as well, leading to a chilling effect on the whole market. Conversely, the legislation may help sales because awareness of the stringent reporting requirements with which art dealers must operate could add credibility to those sales, in the same way that a work of art with a well-established provenance helps increase the work's value.

The IAATP is currently dead following the November mid-term elections, although many experts speculate that the bill will be reintroduced to the new Congress to keep pace with the global trend in anti-money laundering activities. The bill must still pass through the House's legislative process and the committee process in the Senate, a long road for a Congress currently embroiled in other security concerns.

Lauren Bursey is an associate in the dispute resolution group at Withers. Dean Nicyper is a partner in the firm's litigation and arbitration team.