The dark art of money laundering

The art business is not only lucrative but also a target for unscrupulous individuals that seek to launder illegally-attained money. In 2018, the business had an estimated turnover of $67.4 billion making it one of the most thriving global businesses. Additionally, the art wealth that ultra-high-net-worth individuals (UHNWIs) hold was about the U.S $1.62 trillion in 2016 and the value will rise to about the U.S $2.7 trillion in 2026.

The transactions of the art business are often private and anonymous making it easy to launder money: an international financial crime. Additionally, smuggling, organized looting, theft and sale of fakes are among the most common crimes in the art business, and the illegal transactions raise an estimated annual revenue of $6 billion.

What is the contribution of law to anti-money laundering efforts in the art world? There are a series of loopholes that exist in the art world regulatory framework. To begin with, no requirement compels art sellers either to report large transactions to any authority or to report any suspicious business activity to the U.S Treasury Department. The art dealers can also conceal the names of the sellers and buyers. The said limitations of the law hamper any anti-money-laundering (AML) effort in the art business.

The existing laws are insufficient to stem out money laundering activities in the art world. For example, the U.S Bank Secretary Act (BSA) does not apply to art-auction houses and art fairs, but only to financial institutions. It is for this reason that the House Financial Services Committee proposed three bills that seek to codify reform ideas relating to the AML and Bank Secretary Act (BSA), and combating the financing of terrorism (CFT) laws.

The Basel Institute on Governance has in place AML Standards that regulate the transactions of the art business. However, the standards are non-binding making it hard for their enforcement. The institute encourages art dealers to report any suspicious activities to the obligated entities. A similar scenario applies to The Responsible Art Market Standard that seeks to stem out laundering in the art world.

The E.U has already established a directive that will govern the art business of the member countries. The implementation of the Fifth Anti-Money Laundering Directive in 2020 will compel art dealers to apply collective effort in vetting customers, and exhaustively and reasonably discern the purpose of large, secretive and unusually complex transactions, especially those exceeding €10,000. Notably, the directive only becomes binding when a member country adopts it in its national law. Subsequently, Brexit will not have any effect on countries that will have absorbed the Fifth Anti-Money Laundering Directive in their national laws.

In the U.S, the congress has followed suit and proposed the Illicit Art and Antiquities Trafficking Prevention Act as an expansion of the BSA. The Act requires art and antiquities dealers to come up with anti-money laundering programs, record cash purchases, and report cash transactions exceeding $10,000, as well as any suspicious activity. The dealers should also investigate the background of a client and assess whether the sales and purchases contain any evidence of tainted money. The moves seek to employ the Know Your Customer (KYC) concept as part of the application of Enhanced Due Diligence (EDD) in the art world.

The regulations seek to improve the operation efficiency of the art world. The resultant transparency will tear the veil that protected money launderers thus encouraging responsible practices in the art business. However, some players in the market, such as the Art Dealers Association of America (ADAA), are against the regulations terming them costly to implement and unfair to small traders.

Given the inefficiencies of the existing legal framework, the fight against money laundering in the art world will become more effective with the adoption of new technologies, such as advanced analytics and blockchain, which provide customer intelligence. The technologies can assess art pieces and sources of information, and identify whether an activity is legitimate or questionable. Other technologies, such as Art-360 from Deloitte, can assess the risk exposure to an entity that transacts or holds a piece of art.

From a bank’s perspective, the adoption of cloud-based technologies with better data sources and faster processes will help mitigate the risks involved.

In the current art world that exposes dealers and financial institutions to various risks, such as money laundering implications, technology will not only enhance data-driven compliance but also give rise to a more resilient and profitable art market that is devoid of any unforeseen perils.