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Writer's pictureVioletta Skittides

Money Laundering 101 (Art Edition)

Violetta Skittidi



Artworks have long been described as the trojan horse for large cash transactions; in other words, money laundering. This is due to the secretive and deregulated nature of the art world, allowing buyers of expensive artworks to remain anonymous.


How does money laundering operate in the art world? If for instance, Mr. X has $15 million in cash, he could buy a Picasso at an auction in Geneva and transport the painting immediately to Geneva’s ‘freeport,’ or a high-security storage space near the airport. So long as the artwork is held in a freeport it’s considered to be in transit, and thus tax is avoided. The painting could be then anonymously sold, and the new buyer would have the artwork retrieved from the same freeport.


“In 2013, the Economist found that the Geneva freeport may hold $100bn worth of US art, hiding in a freeport which acts as a tax haven.”


An artwork stored in the freeport could alternatively be transported to a specific destination through different countries by invoicing low values. Transactions via multiple countries make the job even more complicated for regulatory bodies. This is what happened with Jean Michel Basquiat’s Hannibal. The artwork was transported to the US from Brazil, via the Netherlands, with false shipping invoices stating that the contents of the shipment were worth $100. The owner of the artwork effectively avoided a lot of taxes by transporting the artwork through all these countries.



An interesting case further illuminates how money is laundered through art as a result of minimal regulation. Two Russian oligarch brothers have exploited high value art purchases to evade US sanctions imposed on them in 2014 (as a response to Russia’s illegal invasion of Ukraine and annexation of Crimea). The brothers reportedly purchased more than $18 million in art through a complex network of shell companies, lawyers, art advisors, auction houses, and intermediaries in the US and abroad. According to the Senate subcommittee, the Rotenbergs’ transactions went through thanks to lax U.S. laws, policies, and practices of auction houses and art dealers. It is clear that the system favours secrecy in the art world; unearthing the buyer’s true identity and source of funds in art transactions is not prioritised.


What is the current law against money laundering?

US

As a result of the above events, the US has taken a firmer stance in tracking money laundering in the art world. On January 1 2021, the US House and Senate voted through a bill to extend the 1970 Bank Secrecy Act intending to cover the art market. The bill intends to enhance the anti-money laundering battle by toughening rules on identity disclosure, by requiring collectors to identify an ‘ultimate beneficial owner’.


EU

The latest US government bill is largely influenced by the 2018 EU legislation which was implemented in 2020. The latest EU directives affecting collectors residing in or buying from the EU and U.K. jurisdictions are called AMLD5 and AMLD6 (published in 2018). These documents are only now being implemented across the EU but national governments are required to set a timeline for their implementation.


AMLD5 addresses virtual currencies, high-risk third-party countries, identification of beneficial ownership, and the harmonization of national ownership registers across borders. AMLD6 expands on AMLD5 by widening the scope of criminal intentionality, with the possibility of attaching criminal liability to art buyers for money laundering. The directive outlines that “the acquisition, possession, or use of property, knowing at the time of receipt, that such property was derived from criminal activity” will be punishable as a criminal offence.


UK

Since the Brexit withdrawal agreement was reached in January 2020, AMLD5 has been implemented into UK law which made it effective that month. This means that art market players should register their AML compliance with the HMRC before June 10, 2021. Jerry Waters, FCS Compliance’s managing director, added that “The U.K. has some of the most stringent AML legislation in the world, but is still known as ‘the money laundering capital of the world’ [because] the legislation is not being enforced stringently enough.”


Future implications for the art world?

The new AML regulations should in theory make the art market more transparent. Art market participants are expected to implement screening processes for sanctions and money-laundering risks. They would also be expected to form standard contracts between them including confidentiality and non-disclosure agreements, or at the very least, reveal their identities to each other’s legal advisors, who can conduct sanctions-list screening.


Despite the recent strict AML regulations passed in the UK, few experts have voiced their concern about how some businesses may have misunderstood a key part of the regulations, and could potentially be violating them.


The UK implementation of the AML regulations are already in effect and apply to all art transactions between art market participants. These participants have been told to register with the HMRC as art market participants by January 2021. However, due to the ongoing pandemic, the UK government extended the registration deadline to 10 June 2021.


Unfortunately, some in the industry have conflated the extension of the HMRC registration deadline with the postponement of the UK's AML regime's implementation date. This misunderstanding is concerning since, under the new UK AML framework, the government has the authority to undertake AML compliance audits in the same manner that the Inland Revenue does tax audits. In other words, overlooking the AML Regulations is no longer an option in the UK since January 10 2021 - it’s simply one of those things you have to do, like paying your taxes.


The principal money laundering offences could lead to a maximum penalty of 14 years’ imprisonment and an unlimited fine. Additionally, those individuals offending the AML Regulations may be punished with a maximum penalty of two years imprisonment and an unlimited fine. A legal entity would need to pay an unlimited fine and be punished by a maximum penalty.


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