Thursday, February 25, 2021

Posted in anti money laundering, AML, know your customer,, KYC

The US Art Market is Largely Unregulated, but New AML Legislation Means We’re In for a Reckoning

How anti-money laundering laws will take shape in the American art world.

Byline: Melissa Banigan

It was like something out of a movie. In the early 2000s, Brazilian banker Edemar Cid Ferreira embezzled funds from the bank he founded, Banco Santos — and he needed a way to hide the money. He did this by laundering between $30 million and $40 million into a 12,000-piece art collection, including Hannibal, a painting by Jean-Michel Basquiat. Although the painting was appraised at $8 million, when it arrived at New York’s Kennedy Airport, the customs declaration form slapped over its crate did not identify the artwork and only listed the value at $100. 

While most collectors probably aren’t criminals, a lack of anti-money laundering regulation in the art market has led to a lack of transparency as enormous cash flows between various parties. 

In 2021, new regulations that initially targeted the US antiquities trade may be extended across much of the art market. These regulations might sideswipe unprepared art industry professionals, as anti-money laundering programs can be difficult or expensive to implement. 

Many professionals won’t know where to begin, but to avoid breaking the law or potentially having their business go bust, compliance is key.

 

How Money-Laundering Works in the Art World

No one knows exactly how much money is laundered through art collected by high-net-worth individuals, but it’s estimated the number could grow from about $1.62 trillion in 2016 to $2.7 trillion in 2026. 

In the movies, it’s always savvy criminal masterminds like Ferreira who come up with complicated, cunning plans to launder money. But most of the time, laundering money in the art world is a stunningly simplistic endeavor. Let’s say someone buys a painting at auction for $2 million. They could then move the painting to one of many international Free Trade Zones, or freeports, which are areas either at an airport or seaport where goods are stored free of taxes and customs duties. 

There are no restrictions on who may use a freeport — a wealthy banker is just as likely to use one as a Russian oligarch or an anonymous shell company. It’s estimated that the value of art and collectibles held in freeports could be hundreds of billions of dollars

And then there’s the laundering that occurs simply because dealers and other art industry professionals neglect to collect the documentation necessary from high-net-worth collectors to prevent money laundering. This is largely because anti-money laundering compliance regulations are either murky or simply don’t exist.

 

Cracking Down on Money-Laundering

In 2018, a bill called the Illicit Art and Antiquities Trafficking Prevention Act (IAATP) was introduced in the US House of Representatives to expand the Bank Secrecy Act (BSA) to art and antiquities dealers. Passed into law in the 1970s, the BSA established reporting and record-keeping requirements for a number of entities, including national and foreign banks and their agencies. The addition of the IAATP would also require art and antiquities dealers to follow new reporting and record-keeping requirements. 

The IAATP bill didn’t pass, but on January 1, 2021, the US Senate passed into the law the Anti-Money Laundering Act of 2020 (AMLA). The new act will have a profound impact on financial institutions and many other types of businesses that involve money or goods changing hands, including those that exist in the art industry.

Whereas art and antiquities dealers previously avoided regulation under the the BSA, one of the AMLA’s requirements involves identifying and registering the owners of limited liability companies — this is bad news for high-net-worth collectors or would-be embezzlers who used shell companies to hide their identities when purchasing art. 

The AMLA has also mandated several governmental agencies to create a report for Congress to consider which policies antiquities dealers must implement. New regulations could soon extend to the general art market — a study is currently being conducted to help the Senate determine whether the same laws that apply to antiquities dealers also apply to other art dealers. 

 

New AML Legislation is Already Making Waves

Anti-money laundering (AML) regulations have already impacted the global art world. In 2012, the Mexican government passed an AML law that limited the use of cash in sales and required businesses to give more information to the government about their customers. The law caused art sales to drop 70 percent in less than a year — a sign, perhaps, that the Mexican cartel was one of the biggest purchasers of art in the country. 

 

In 2020, a new AML law in the UK also made waves in the art world. A recent report by Arcarta showed that 1 in 24 art buyers were either sanctioned or deemed susceptible to bribery or corruption. 

 

The consequences of not adopting these regulations and continuing to accept laundered funds — even unintentionally — could mean the difference between a dealer sinking or swimming. Bank accounts could be closed, businesses could be shuttered, reputations could be irrevocably altered, and trust between stakeholders could be damaged. 

 

Dealers in both Mexico and the UK have been forced to adopt the new regulations, but it hasn’t been easy. In Mexico, some dealers have needed to buy new computers to access or use forms from the government or they’ve had to completely overhaul how they invoiced. In the UK, the new legislation required dealers to establish the identity of a potential buyer before making a sale. 

 

How to Prepare for New Regulations 

Rather than wait for the US Congress to establish further AML provisions in 2021, dealers can immediately start developing their own compliance programs. But where to begin? 

Understanding, let alone establishing risk profiles for clients can feel overwhelming — after all, the AMLA includes sweeping provisions that impact many industries. Technology, however, can be used to automate and facilitate AML compliance. For example, tools can be used to establish know your customer (KYC) procedures that screen and verify clients, manage operational risk, document a clear history of ownership and provenance, and quickly scan names and entities across many networks. These tools can even be used to help conduct a risk assessment of a business.

In other words, while the new AML regulations are complicated, automated compliance can be made simple. 



Melissa Banigan is a journalist, author, and content strategist whose work on art, technology, business, government, and Franco-American and Caribbean cultures appears in The Washington Post, CNN, the BBC, NPR, The Independent, and the Chicago Tribune, among many other publications. Her two most recent books, Developing a Strategy for a Political Campaign and Working with the Community in a Political Campaign, were released by Rosen Publishing in 2020. Also a trained art historian (Columbia University), Melissa curates exhibitions. Her last exhibition was with the American Jewish Joint Distribution Committee (JDC) at the Polish Consulate in NYC (in the Joseph Raphael De Lamar House). 

 

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