Art Transactions, Anonymity & AML

In August, discussions in the private client community largely focused on the use of potential money laundering through art sales.

• Of late, the art industry has been enjoying a boom – even during the COVID-19 pandemic – and investors have taken note.
• Last month, the Permanent Subcommittee on Investigations for the US Senate released a detailed report titled "The Art Industry and U.S. Policies That Undermine Sanctions." The report was not issued in a vacuum; rather, it was written in part to spur legislative action.
• The report analysed a well-investigated case of money laundering of high-end art through several of the world's top auction houses (Sotheby's, Christies's, Phillips, Bonhams) and generally reviews the houses' internal Anti Money Laundering practices.

 Anonymity

• The report investigates a case that came to light via the Panama Papers, revealing money flowing into several auction houses and exiting via extremely high value art.
• The money is shown to have likely originated with Russian oligarchs, who were, at the time, on the sanctions list with the US. The oligarchs employed an "art advisor" to purchase the art.
• In a typical transaction, a purchaser may not ask who owns the piece of art they are purchasing; the seller may not ask for whom it is being purchased or the origin of the money. And in general, an art advisor would be reluctant to reveal the identity of their client for fear of losing the business. One auction house claimed that "questioning the source of funds would be considered contrary to industry standards and norms" regarding privacy and discretion.
• As a result, US auction houses treat the individual purchasing the art (the art agent, in this case) as the principle purchaser and performs due diligence on said agent, instead of identifying and evaluating the undisclosed client. This creates a "significant AML vulnerability."
• There are voluntary AML programmes in place for art houses to engage in, in the US, but they are not required by law to do so. Regardless, the report views these voluntary codes as insufficient because the auction houses consider the art advisors to be the principal purchaser.

Recommendations

• The report identifies the art market as "an ideal playing ground for money laundering." This assertion rests in part on the level of anonymity provided by the market, as well as the fact "that other channels for money laundering have been narrowed by tighter regulation" in recent years.
• Recommendations include:
  • Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art, similar to the European Union's recent steps in this area. Although the Bank Secrecy Act of course includes requirements for other industries for reporting, customer identification, and due diligence, these requirements do not currently apply to the art industry. The Report also notes that insider-trading rules, while applicable do the commodities market, do not apply to the art market – so collectors may buy art based on privileged information.
  • Congress should require the Treasury Department to collect beneficial ownership information for companies formed or registered to do business in the US.
  • The Treasury Department should maximise its use of Suspicious Activity Reports, or SARs, filed by financial institutions.

• Meanwhile, under the EU's 5th Anti-Money LaunderingDirective, the EU requires businesses selling art to verify the identity of seller, buyer, and ultimate beneficial owner involved in art transactions of €10,000 or more. Will the US follow suit?