Gallery of Illusions: The Intersection of Art and Money Laundering

Special Edition with Guest Student Authors from the Schar School of Policy and Government at George Mason University (https://traccc.gmu.edu/)

I have been honored to be an Adjunct Professor at GMU’s TraCCC (The Terrorism, Transnational Crime and Corruption Center) for several years. Many AML/Sanctions experts have joined me as guest lecturers as we work with graduate students either in or contemplating a career in our community. This past summer, in my International Money Laundering, Corruption, and Terrorism class, the challenge was to educate and stay current with the plethora of changes occurring in the US and internationally.

The students were required to submit a final paper on a topic related to the vast areas covered in class, and I have selected several papers that I know will be of interest to many.

         John Byrne

         Chair, AML RightSource Advisory Board

Introduction

The art market, shrouded in secrecy and anonymity, stands apart from other markets due to its unique characteristics. Its limited regulation, use of cash transactions, subjective pricing, and the ease with which art can be concealed make it appealing to those looking to launder money.[i] In 2018, the legitimate art market was valued at an estimated $67.4 billion, while the underground art market, according to the United Nations Office on Drugs and Crime, generated up to $6 billion annually. Out of that, $3 billion was linked to money laundering.[ii] This issue is of significant importance to law enforcement, art dealers, and policymakers, as understanding the connection between art and money laundering is crucial for developing effective regulatory measures. This paper aims to explain the intersection of art and money laundering and examine the existing regulatory framework and its challenges. It will outline the methods used for money laundering within the art market, present relevant case studies, and discuss the current regulatory landscape, highlighting the challenges and limitations that persist.

Methods for Money Laundering in the Art Market

Overview

To ensure clarity, it is necessary to define art and the art market. Art is a complex term that is subjective and difficult to define. This is especially true when it comes to courts and the law defining the term.[iii] For this paper, art will be defined as products originating from “the conscious use of the imagination in the production of objects intended to be contemplated or appreciated as beautiful, as in the arrangement of forms, sounds, or words.”[iv] It will also include artifacts and antiques, or antiquities, for simplicity. The art market can be defined as a dynamic and multifaceted system where art is traded, with both primary and secondary markets playing crucial roles in determining the value and price of artworks.[v] There are a variety of methods bad actors use to launder illicit funds through the art market. Common methods include overpricing and underpricing, the use of shell companies, the use of free ports and private warehouses, and trade-based money laundering.[vi]

 Overpricing and Underpricing

The subjectivity of art and lack of stable and predictable pricing create a unique situation that some individuals look to take advantage of.[vii] One way of doing this is by overpricing and underpricing, which involves art pieces being bought and sold at manipulated prices in order to facilitate the transfer of illicit funds. By inflating the value of an artwork, sellers can disguise the movement of large sums of money and, in doing so, are able to launder money through the sale. Conversely, underpricing allows buyers to acquire valuable assets at a fraction of their true worth. Following this, buyers can resell these assets at their market value as a legal business transaction, thus legitimizing the proceeds. This manipulation exploits the opaque and unregulated nature of the art market, where the true value of an artwork is often subjective and can be influenced by factors such as place of origin, artist reputation, and market trends. Consequently, these practices not only distort the market but also provide a convenient mechanism for money laundering activities, posing significant challenges to authorities attempting to regulate and monitor financial crimes within the art world.[viii]

 Use of Shell Companies

A shell company is “a company that does not itself do or own anything but is used to hide a person's or another company's activities, sometimes illegal ones.”[ix] Within the art market, these entities primarily function as channels for transferring illegal funds while concealing the true owners' identities. The U.S. Department of the Treasury states that shell companies can anonymously acquire high-value art, making it difficult for authorities to track the source of the funds and the ultimate beneficiaries of the transactions.[x] The Financial Action Task Force (FATF) points out that the anonymity offered by shell companies, combined with the often opaque nature of the art market, enables criminals to launder money through seemingly legitimate art purchases and sales.[xi] Additionally, academic research underscores how easily shell companies can be established in jurisdictions with lenient regulatory oversight, making them an appealing tool for money launderers seeking to exploit the art market's weaknesses.[xii]

 Free Ports and Private Warehousing

Free ports and private warehouses are often used in the art market to facilitate money laundering. These storage facilities are located in tax-free zones and offer high levels of secrecy and security, which makes them ideal for concealing valuable art pieces away from regulatory scrutiny. Free ports allow art collectors to store their assets without incurring customs duties or taxes, effectively making these locations "black holes" where artworks can change hands multiple times without detection.[xiii] Private warehouses provide similar benefits by ensuring confidentiality and reducing the traceability of transactions. Because these facilities store art under the radar, and transactions can occur secretly, the origin and ownership history of the pieces are almost impossible to ascertain. This makes it much easier for individuals to launder money. The lack of transparency and regulatory oversight in these zones exacerbates the problem, allowing criminals to exploit these safe havens to legitimize illicit funds through art transactions.[xiv]

Trade-Based Money Laundering

Art transactions can be used as a method to disguise the origins of illicit funds through international trade. This method is even used by terrorist organizations as a means to fund their operations. The Wall Street Journal reports that terrorist groups like ISIS have used looted art to finance their operations, selling these artifacts in international markets and laundering the proceeds through a series of complex transactions.[xv] The subjective nature of art pricing allows for the manipulation of values, facilitating the transfer of large sums across borders. As noted by the FATF, the lack of transparency and regulation in the art market creates an ideal environment for these illicit activities, enabling criminals and terrorists to integrate dirty money into the legitimate financial system.[xvi] Additionally, the U.S. Department of the Treasury highlights that the art market's inherent opacity and the use of anonymous transactions complicate efforts to track and prevent money laundering and terrorist financing through art.[xvii]

Case Studies

A notable historical example of money laundering in the art world is the "Medici Conspiracy" involving Giacomo Medici, a notorious Italian antiquities dealer. In the late 1990s, Medici was implicated in a massive scandal where he laundered money through the illegal trafficking of ancient artifacts. Medici used a network of smugglers, art dealers, and auction houses to sell looted antiquities to prominent museums and collectors worldwide. He did this while inflating the prices in order to launder the illicit funds.[xviii] This case underscores how the art market's lack of transparency and regulation can be exploited for criminal purposes. It demonstrates how complex it can be to trace the origin of artworks and the ease with which illicit funds can be integrated into the legitimate financial system through art transactions. This example highlights the ongoing need for stricter regulatory measures and enhanced due diligence to combat money laundering in the art sector.

A more recent study involves 1Malaysia Development Berhad (1MDB) scandal, which is currently ongoing. Jho Low is a Malaysian businessman who used funds embezzled from the Malaysian state investment fund 1MDB to purchase high-value artworks by artists such as Jean-Michel Basquiat and Claude Monet through shell companies and private sales, making it difficult for authorities to trace the illicit funds. This case was part of a bigger scheme to launder billions of dollars misappropriated from 1MDB, which resulted in several high-profile legal battles and the seizure of numerous assets, including artworks, by authorities in multiple countries. This ultimately prompted calls for greater transparency and regulation in the art market to prevent similar abuses.[xix] This case shows that even thirty years after a significant money laundering case involving art transactions, there is still a need for improvements in regulation to minimize the risk of money laundering.

Regulatory Framework

The global concern about the art market’s vulnerability to illicit financial activities has led to changes in the regulatory framework in recent years. In the United States, Congress passed the Anti-Money Laundering Act of 2020 (AMLA) in which Section 6110(a)(1) amends the Bank Secrecy Act (BSA) to include a person that is engaging in the trade of antiquities within the definition of a “financial institution.”[xx] This would require such persons to incorporate anti-money laundering (AML) programs such as due diligence procedures, customer identification, and reporting of suspicious activities. Additionally, the Financial Crimes Enforcement Network (FinCEN) released a notice in 2021, further emphasizing the need for art and antiquity dealers to adhere to AML programs.[xxi]

The European Union (EU) and the United Kingdom (UK) have also strengthened their regulatory frameworks to address money laundering in the art market. The EU's 5th and 6th Anti-Money Laundering Directives (5AMLD and 6AMLD) require art dealers to conduct customer due diligence for transactions over €10,000, report suspicious activities, and maintain transaction records. Also, new EU measures, such as Regulation (EU) 2019/880 on the import of cultural goods, aim to prevent illicit trade by requiring documentation for the lawful export of cultural goods.[xxii] Similarly, the UK’s Money Laundering Regulations 2017 mandate customer due diligence and enhanced scrutiny for high-risk transactions.[xxiii] Both regions emphasize the role of financial institutions in implementing robust AML programs and conducting enhanced due diligence, ensuring the art market is not exploited for illicit financial activities.

On the international level, FATF released a 2021 report on the art and antiquities market that outlines global risks and provides recommendations for countries to improve their regulatory framework. Recommendations include due diligence procedures, monitoring transactions, and promoting international cooperation.[xxiv] Individual countries also have their own AML regulations that often align with the FATF recommendations but are more specific to their local context. In addition to this, the United Nations Office on Drugs and Crime supports international efforts and works to facilitate cross-border collaboration to combat money laundering in the art sector.[xxv]

Challenges and Limitations

Despite the developments in regulatory measures centered on the art market, there are still many challenges and limitations. Of note, further research into the regulations showed that upon review of the FinCEN Notice of Proposed Rulemaking (NPRM) released on July 3, 2024, the specific wording of antique (or art) dealer is not mentioned within the definition of financial institutions included within the “program rules,” which are the AML/Counter the Finance of Terrorism (CFT) programs for financial institutions. Additionally, the NPRM fails to mention Section 6110 of the AMLA.[xxvi] Based on these findings, while antique dealers were added to the definition of financial institution within the BSA, it is unclear whether the newly released NPRM includes them as financial institutions. This, in turn, raises questions about exactly how strict regulations will be enforced regarding such persons and their abidance by the AML/CFT program rules.

In line with that issue is the role of art intermediaries, such as galleries, auction houses, and art advisors, who often facilitate transactions without stringent regulatory oversight. While these intermediaries play a crucial role in the art market, their involvement can obscure the origin of the artwork itself, the money used in transactions, and the final ownership of the artwork. This is particularly concerning when intermediaries fail to conduct adequate due diligence, either due to a lack of legal obligation or to preserve client confidentiality. In some cases, art intermediaries can be complicit in facilitating money laundering by neglecting to verify the source of funds or the legitimacy of the buyer and seller. Enhancing regulatory measures to include mandatory due diligence and transparency requirements for all art market participants, including intermediaries, would significantly strengthen the fight against money laundering in the art sector. [xxvii]

Outside of this, there are several challenges and limitations that persist in effectively combatting money laundering. The high level of anonymity and lack of transparency in the art market, often proliferated by the methods previously mentioned, makes it difficult for authorities to track the true ownership of artworks and the origin of funds used in these transactions. Even if art dealers were required to operate as financial institutions, it would be difficult to discern the beneficial owner of artwork due to this anonymity. Enforcement of AML regulations is also complicated by regulatory gaps and limited resources among regulatory bodies and law enforcement agencies.[xxviii] Additionally, technological advancements such as digital art and non-fungible tokens (NFTs), present new challenges that allow for new avenues for money laundering that are harder to trace compared to physical artworks.[xxix] Overall, while progress has been made in updating the regulatory framework to combat money laundering in the art market, numerous challenges and limitations remain. Addressing these issues requires ongoing international cooperation, continuous adaptation of regulations to emerging risks, and enhanced resources and expertise among regulatory and enforcement bodies.

Conclusion

The art market generates billions of dollars per year and continues to remain an attractive avenue for money laundering. The inherent secrecy and lack of transparency in the art market, along with the use of shell companies, free ports, and evolving digital technologies like NFTs, continue to provide ample opportunities for individuals looking to take advantage. Recent changes to the regulatory framework seem to be a step in the right direction. However, further examination of the most recently released FinCEN Notice of Proposed Rulemaking brings the effectiveness of these changes into question. Additionally, gaps in regulations across different countries, limited enforcement resources and expertise in the subject, and the complexity of international jurisdiction further complicate such efforts to combat these illicit activities. In conclusion, there needs to be a sustained commitment to international collaboration, continuous regulatory adaptation, and the allocation of adequate resources and expertise to effectively mitigate the risks of money laundering in the art world and ensure a more transparent and accountable market. However, this is ultimately easier said than done and it remains unclear when such reforms will materialize. For now, in a market where prices are subjective and secrecy is the norm, cleaning dirty money seems to remain easier than cleaning a paintbrush.

[i] Pogacar, Charlie. “How Money Laundering Works in the Art World.” Art & Object, August 4, 2023. https://www.artandobject.com/news/how-money-laundering-works-art-world.

[ii] Mashberg, Tom. “The Art of Money Laundering – IMF F&D.” IMF, September 1, 2019. https://www.imf.org/Publications/fandd/issues/2019/09/the-art-of-money-laundering-and-washing-illicit-cash-mashberg.

[iii] Dr. Derek Fincham, How Law Defines Art, 14 J. MARSHALL REV. INTELL. PROP. L. 314 (2015).

[iv] “The American Heritage Dictionary Entry: Art.” American Heritage Dictionary Entry. Accessed July 30, 2024. https://www.ahdictionary.com/word/search.html?q=art.

[v] Spieth, Darius. “Art Markets.” Oxford Art Online. Accessed July 30, 2024. https://www.oxfordartonline.com/page/art-markets.

[vi] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023. https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Money-Laundering-Terrorist-Financing-Art-Antiquities-Market.pdf.coredownload.pdf.

[vii] “Money Laundering and Terror Finance.” Department of the Treasury, February 2022. https://home.treasury.gov/system/files/136/Treasury_Study_WoA.pdf.

[viii] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023.

[ix] “Shell Company Definition | Cambridge English Dictionary.” Cambridge Dictionary. Accessed July 30, 2024. https://dictionary.cambridge.org/us/dictionary/english/shell-company.

[x] “Money Laundering and Terror Finance.” Department of the Treasury, February 2022.

[xi] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023.

[xii] Hufnagel, Saskia and Colin King. "Anti-Money Laundering Regulation and the Art Market." Legal Studies 40, no. 1 (03, 2020): 131-150. doi:https://doi.org/10.1017/lst.2019.28.

[xiii] Pogacar, Charlie. “How Money Laundering Works in the Art World.” Art & Object, August 4, 2023.

[xiv] Saleeby, Cates Grier. “How Free Should a Freeport Be?: Reducing Money Laundering in the Art Market through Freeport Regulation.” Vanderbilt Journal of Entertainment and Technology Law 25, no. 1 (2023).

[xv] “The Men Who Trade Isis Loot - WSJ.” The Wall Street Journal, August 6, 2017. https://www.wsj.com/articles/the-men-who-trade-isis-loot-1502017200.

[xvi] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023.

[xvii] “Money Laundering and Terror Finance.” Department of the Treasury, February 2022.

[xviii] Watson, Peter, and Todeschini, Cecilia. The Medici Conspiracy: The illicit journey of looted antiquities from Italy’s tomb raiders to the world’s Greatest Museums. New York: PublicAffairs, 2007.

[xix] “U.S. Reaches Settlement to Recover More than $700 Million in Assets Allegedly Traceable to Corruption Involving 1MDB.” United States Attorney’s Office, Central District of California, April 8, 2022. https://www.justice.gov/usao-cdca/pr/us-reaches-settlement-recover-more-700-million-assets-allegedly-traceable-corruption.

[xx] “Anti-Money Laundering Regulations for Dealers in Antiquities.” Federal Register, September 24, 2021. https://www.federalregister.gov/documents/2021/09/24/2021-20731/anti-money-laundering-regulations-for-dealers-in-antiquities#citation-12-p53022.

[xxi] “Anti-Money Laundering Regulations for Dealers in Antiquities.” Federal Register, September 24, 2021.

[xxii] “New EU Measures against Money Laundering and Terrorist Financing: News: European Parliament.” European Parliament, March 28, 2023. https://www.europarl.europa.eu/news/en/press-room/20230327IPR78511/new-eu-measures-against-money-laundering-and-terrorist-financing.

[xxiii] “Money Laundering Regulations.” FCA, December 23, 2019. https://www.fca.org.uk/firms/financial-crime/money-laundering-regulations.

[xxiv] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023.

[xxv] “Money Laundering, Proceeds of Crime and the Financing of Terrorism.” United Nations: Office on Drugs and Crime. Accessed August 1, 2024. https://www.unodc.org/unodc/en/money-laundering/index.html.

[xxvi] “Anti-Money Laundering and Countering the Financing of Terrorism Programs.” The Federal Register, July 3, 2024. https://www.federalregister.gov/documents/2024/07/03/2024-14414/anti-money-laundering-and-countering-the-financing-of-terrorism-programs.

[xxvii] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023.

[xxviii] Adams, Andrew. “Anti-Money Laundering: Regulations and the Art Market.” Center for Art Law, December 6, 2023. https://itsartlaw.org/2023/12/06/aml-comparative-study-first-edition-2023/.

[xxix] “Money-Laundering-Terrorist-Financing-Art-Antiquities- ...” FATF, February 27, 2023.