The Dark Art of Money Laundering

Art is an increasingly attractive avenue for money launderers, and legislators have taken notice

Deep in the night at a major European port, a high-end security company guard is on his shift in a warehouse watching over multi-million-dollar art pieces held in storage. Unbeknownst to him, one of the artworks has just changed hands right under his nose, without ever moving a millimeter.  The transfer of ownership could be legitimate, but it could also be a money-laundering scheme and the guard watching over the art would have no inkling that a crime had been committed.

Loosely regulated with business conducted under a veil of anonymity, it’s easy to understand why art is an attractive avenue for money launderers.  The high value of art and ability to easily manipulate real values makes it a prime avenue for cleaning dirty money, especially as more conventional types of ML outlets, such as real estate, are increasingly regulated by Financial Action Task Force (FATF) guided regulations.

The art trade industry respects the need for client secrecy, also commonly utilizing freeports around the world for storage “in transit.”  Once there, normal tax and customs rules do not apply, and items can be resold without ever leaving the port. 

As a result, high-end art and antiquity trading are moving higher on the global radar of regulators working to combat money laundering and terrorist funding.  

To complicate things further, when the global art market took a hit at beginning of the COVID-19 pandemic, dropping from an annual market value of more than $65 billion to some $50 billion, the industry pivoted to adapt to a world of online commerce to compensate for the lack of in-person transactions.  The number of annual global transactions is 31.4 million, according to the data.

Online sales doubled in 2020 compared with 2019 reaching a record high of $12.4 billion. The figure represented a record 25% share of the market’s total value, according to a survey by the Art Basel and UBS Art Market Mid-Year Review 2021 published in September.

An estimated $3 billion of the annual art trade is linked to money launderings every year, with the total crime value including thefts, fakes and illegal imports as high as $6 billion, according to a report published by the International Monetary Fund. 

New regulations requiring compliance

As governments move to regulate the art trade, new Anti-Money-Laundering (AML) laws to combat money laundering and terrorism financing will require art dealers to establish the identity of buyers and sellers, as well as report transactions to authorities.  

In January 2020, the UK enacted legislation aimed to curb illegal activity in the art and antiquity trade by “art market participants”, subjecting transactions over €10,000 or more to be registered with the tax agency and dealers to identify the ultimate beneficial owner” — meaning both seller and buyer — before entering into a transaction. Furthermore, guidelines spell out that multiple sales by galleries to single customers must be accumulated and are also subject to threshold rules.

In the United States, forthcoming regulations also aim to counter money laundering in the antiquity and art trade. In December 2020, Congress already voted to classify antiquity dealers as financial institutions. Now, Congress is considering the Illicit Art and Antiquities Trafficking Prevention Act that would require “dealers in art and antiquities” to establish anti-money-laundering programs, including making background and identify checks, keeping records of cash purchases, and reporting suspicious activity and transactions exceeding $10,000. The bill is pending in the House Committee on Financial Services.

As Anti-Money-Laundering (AML) laws extend to the art trade, due diligence and risk assessment also become a collective responsibility of financial institutions.

Correspondent banks are liable to unwittingly become a part of a chain of transfers to transfer illegal funds to a bona fide art dealer or auction house. Transactions made online reduce interaction and exposure to customers, creating new vulnerabilities for money laundering and other financial crimes.

Ultimately financial institutions monitoring suspicious cross-border transactions and risks of illegal financial activity, will become subject to compliance with these new regulations  in the art trade, including filing suspicious activity reports (SARs) to authorities.

Connecting the dots

Connecting the dots takes on new meaning with online trade in the art market.

Faster and in real-time, the speed of ecommerce is good for the customer, but a lot more difficult for compliance teams working to fulfill KYC requirements along with suspicious transaction monitoring.

An additional complexity when dealing with financial transactions made in the art world is the practice of purchases made through third-party agents representing a client that is unknown, even to the dealer himself.

Cross-border transfers serving the art trade, therefore, make it especially difficult for financial players to know their customers and identify suspicious cases and abnormal financial activities.

In this ever-complex global trading environment, financial service providers and banks can benefit from sophisticated monitoring tools that can uncover anomalous behavior taking place in multiple steps in correspondent banks.  AI-based solutions can automate the job of connecting the dots to create a clearer picture of a transaction.

As global enforcement tightens around the art trade, banks and financial payment providers will have to boost efforts to comply with these regulations and secure international networks from this area of money-laundering. Indeed, like the security guard in the freeport warehouse, banks and financial service providers can be unbeknownst witnesses to financial crimes in the art trade if illegal transactions go unnoticed.