Money Laundering Issues in the Art Market

In February 2023, the Financial Action Task Force (“FATF”), the global standard-setter on Anti-Money Laundering policy, issued a report describing the financial crime risks in the art and antiquities market, as well as good practices to tackle them.

The art, antiquities and cultural object market is a complex landscape with a global value of USD 65.1 billion in 2021¹. Some of the anti-money laundering ("AML") and combatting the financing of terrorism ("CFT") risks that 
arise are:

• In classical cash-based money laundering, an art or antiquities store could be abused in the same manner as any cash intensive business, as it will be difficult to track the source of the cash; 
• In terms of high-end money laundering, valuable arts and antiquities can function as an effective store of value that can be transported cross-border (e.g., a picture, a coin, or a small statue); 
• The art market has a history of privacy and discretion and the use of intermediaries and legal persons in the buying and selling process is relatively common in the market. This can obscure the ultimate seller or purchaser, who may be part of an organized crime group or subject to economic sanctions. In 2020, a report by the US Senate's Permanent Subcommittee on Investigations identified that approximately USD 18 million in artwork had been purchased for the benefit of two individuals under sanctions²;
• There is a risk that an art market participant handles or facilitates a sale of an artwork that is itself stolen, or an antiquity that was looted. There is also a risk that the art or antiquity was purchased using funds representing the proceeds of crime, or linked to the financing of terror;
• Art might be stored in free trade zones or free ports (which have their own broader AML risks). Storage facilities are often used due to the special conditions required to prevent damage or for security reasons, and free trade zones offer advantages that include reduced taxes to facilitate trade and also good links to transport hubs. This can lead to the possibility of the assets being kept out of the reach of law enforcement and allowing anonymous sales; 
• Terrorist organizations can pillage archaeological sites in relation to cultural objects and use sales proceeds or taxes levied on diggers to generate funds; and
• The use of high-value art as a method for bribery.

The art market not only has a diverse set of vulnerabilities, but it also contains different types of firms, like:

• Dealers, such as galleries, antiquity stores and art fair organizers;
• Auction houses;
• Storage facilities (some of them, in free trade zones or free ports);
• Art advisors (those helping value pieces, transfer title of works, or manage art collections); and
• Art finance (a financial activity, although not always conducted by financial entities).

However, a lot of other firms facilitate trade in the art market, including banks, payment firms and law firms.

Brief Background on FATF

FATF is an inter-governmental group hosted by the Organisation for Economic Co-operation and Development in Paris, France. With 39 members, it is the global standard-setter regarding financial crime, with a focus on AML, CFT, and against financing the proliferation of weapons of mass destruction.

FATF issues AML/CFT standards (known as "Recommendations") subsequently adopted by states around the world, imposing AML/CFT obligations on states and gate-keepers to the financial system, e.g., financial firms and casinos, real estate agents and trust and company service providers. 

Importantly, FATF also assesses countries' AML/CFT regimes and their overall compliance with the Recommendations. Should countries fail to comply with the FATF Recommendations, or if they show a lack of effectiveness in their AML efforts, they may be added to the FATF "grey list." Jurisdictions on the "grey list" are subject to increased monitoring by FATF, being deemed to have deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing. This can have a considerable impact on commercial enterprises conducting cross-border business into or out of the grey-listed country. It also impacts the country's ability to trade in the goods and services sectors, and it may affect the country's chances of getting loans from international banks, not to mention negatively impacting a country's commercial reputation.

What does the report cover?

The FATF Report on Money Laundering and Terrorist Financing in the Art and Antiquities Market is intended to help countries better understand the money laundering and terrorist financing risks in that market. The guidance is also helpful to firms operating in the art market, or otherwise dealing with it.

The approach that FATF takes is to look at vulnerabilities and threats (some are referred to above) and then identify best practices to mitigate the relevant risks. The report contains a large number of case studies, which provide interesting context and insights. 

The report helpfully identifies some of the challenges that arise in terms of addressing money laundering and terrorist financing in the art and antiquities market. Some of the vulnerabilities include:

• Difficulties in tracing the origin of cultural objects;
• A history of privacy and use of third party intermediaries in the sector;
• Inadequate measures, or none at all, to identify and verify customers; and
• A low number of suspicious activity reports filed with Financial Intelligence Units (such as the National Crime Agency in the UK or FinCEN in the US).

FATF also identifies investigative challenges, including:

• A lack of prioritization of investigations in this area;
• Limited resources, awareness, and expertise by operational authorities; and
• Difficulties with cross-border investigations.

The report notes that to address these challenges, some states have:

• Required certain participants in the art market to put in place an AML/CFT program (including undertaking customer due diligence and reporting suspicious activity);
• Established specialized units and investigative training programs focused on the art and antiquities markets; and 
• Developed databases and promoted cooperation with experts and archaeologists to help trace, identify, investigate and repatriate cultural objects.

What does the future hold?

The vulnerabilities in the art market are clear, and the trend is toward greater regulation with states putting in place regimes that place AML and CFT obligations on various participants in the art market. For years, many of the global auction houses had a dedicated AML and CFT program in place, prior to any requirement under law. However, this drive for regulation means that many more participants in the art and antiquities market will be obliged to put in place an AML/CFT program. This will make it harder for bad actors to abuse the market and promotes a greater flow of intelligence, in the form of suspicious activity reports, to law enforcement.

From a law enforcement perspective, it is more likely that wider investigations will touch on the art market (whether bribery, sanctions, money laundering or terrorist financing related) rather than there being resources dedicated to uncovering crime specifically in the art or antiquities market.

_{1 FATF (2023), Money Laundering and Terrorist Financing in the Art and Antiquities Market, FATF, Paris, France, https://www.fatf-gafi.org/content/dam/fatf-gafi/reports/Money-Laundering-Terrorist-Financing-Art-Antiquities-Market.pdf.coredownload.pdf.
2 United States Senate Permanent Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs, The Art Industry and US Policies that Undermine Sanctions, July 29, 2020. https://www.hsgac.senate.gov/wp-content/uploads/imo/media/doc/2020-07-29%20PSI%20Staff%20Report%20-%20The%20Art%20Industry%20and%20U.S.%20Policies%20that%20Undermine%20Sanctions.pdf.}

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_{This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.}

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