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The release of the Pandora Papers once again showed how the art and antiquities markets can become a mechanism for money laundering, fraud, and the illicit transfer of goods and wealth.
In this latest iteration, it was revealed that Douglas Latchford, a prominent UK-based antiquities dealer who was indicted by U.S. authorities before his death last year, used offshore trusts to shield substantial assets, much of which were accumulated from trafficking in looted Cambodian artifacts. Other investigations have shown art purchases and sales used to evade sanctions and launder money from drug trafficking, antiquities in war zones looted to finance terrorism, and stolen art traded on the black market for organized crime collateral.
While the scale of the problem is unknown, experts agree that a number of factors make the art and antiquities markets particularly susceptible to financial crime. Primary among them is a culture of discretion, or what market participants would call trust but market regulators would call secrecy: common practice is for sellers, buyers, and in some cases dealers to not know the identity of other parties to the transaction. It is populated by intermediaries who act as experts and advisers who often shield the identities of their clients. It is global, with transactions, auctions, and objects crisscrossing continents and traveling across national borders. It is characterized by high-value transactions, with pieces frequently selling for tens of millions of dollars. And it is also enormous: the art market alone was valued at well over 60 billion USD in both 2018 and 2019, with the U.S. accounting for over 40% of the global total. In sum, tens of billions of dollars of art and antiquities change hands every year, with little scrutiny, in what many have the called world's largest unregulated market.
It should be of little surprise that U.S. authorities are finally taking note. The Anti-Money Laundering Act of 2020 ("AMLA") became law on January 1, 2021, kicking off a series of measures aimed at cracking down on illicit finance in the U.S. art and antiquities market. The first of these is to amend the definition of "financial institution" in the Bank Secrecy Act of 1970 ("BSA") to include persons "engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities…." The BSA requires financial institutions to keep records and file reports with U.S. authorities that assist in preventing and detecting money laundering and financial crimes.
The measure would take effect once implementing regulations have been promulgated, something which AMLA tasked to the Financial Crimes Enforcement Network ("FinCEN"), a division of the U.S. Department of the Treasury (“Treasury”). FinCEN concluded a notice and comment period on October 25, 2021 and is to propose regulations by December 27, 2021.
The addition of "antiquities dealer" to "financial institution" is less unusual than it might otherwise seem to outside observers. The current definition of financial institution includes a long list of seemingly non-financial businesses, including credit card companies; insurance companies; dealers in precious metals, stones, and jewels; pawnbrokers; travel agencies; sellers of cars, planes, and boats; persons dealing in real estate; and casinos. All of these industries have been regulated under the BSA for decades, and all of them similarly facilitate transactions where high-value items change hands. Yet as with any new set of regulations, there are questions of how and to whom they will apply: who will count as an "advisor"? What qualifies an object as an antiquity?
This definitional problem (what is art?) may be why Congress punted on regulating the art market. AMLA has not yet placed art dealers under the purview of the BSA, but instead directed the Secretary of the Treasury, the Director of the Federal Bureau of Investigation, the U.S. Attorney General, and the Secretary of Homeland Security to undertake a study of money laundering and terrorist financing through art. This multi-agency review is to be completed in January of 2022, and will almost certainly lead to further regulation. It will examine, among other things, the extent of the problem; the need to identify ultimate beneficial owners; monetary thresholds and definitions; and what information would be useful in potential regulatory, tax, and criminal matters.
A few measures have already been set in motion by FinCEN and Treasury’s Office of Foreign Assets Control ("OFAC"). FinCEN issued a notice in March that notified the public of the pending AMLA measures, warned financial institutions to be aware of potential illicit activity, and requested that financial institutions follow specific instructions when filing suspicious activity reports related to art and antiquities.
OFAC issued an advisory last October that highlighted sanctions risks associated with the art market, and described prominent examples of individuals and groups who have used the art market to evade sanctions. It reminded market participants of the strict prohibitions on engaging with those on its List of Specially Designated Nationals and Blocked Persons and highlighted the importance of a risk-based compliance program. It also clarified that the Berman Amendment, which provides a general exemption for informational materials, including artwork, did not allow such transactions with blocked persons.
Two of the sanctions evaders discussed in the OFAC Notice are Arkady and Boris Rotenberg, Russian oligarchs who were the subject of a 147-page congressional report that detailed how they were able to continue accessing the U.S. market by purchasing over 18 million USD of art from prominent auction houses through shell companies and intermediaries. The report illustrates the justifiable concern that the U.S. art and antiquities market may be used as a mechanism for illegitimate organizations to access funds and the U.S. financial system and underlined the potential for increasing focus – by both regulators and enforcement authorities – on this space.
Linklaters will continue to monitor these developments and provide updates here.