UK’s National Crime Agency Suspects Auction Houses Are Being Used To Evade Sanctions
In late July 2022, it was reported that the UK’s National Crime Agency (“NCA”) had arrested at least 10 individuals suspected of helping “corrupt elites” to evade sanctions and that more arrests are expected. According to an anonymous NCA enforcement official, speaking at a virtual briefing to journalists on 21 July 2022, auction houses were singled out for using high-value artwork as collateral to issue loans to sanctioned persons (i.e., a person designated on the UK’s Consolidated List of Asset Freeze Targets). Once a person or entity has been designated, their funds and economic resources will be frozen. This is to prevent them from enjoying the benefits of their assets. Under UK sanctions laws it is generally prohibited to make funds or economic resources available to a sanctioned person.
It is no secret that certain Russian oligarchs have deep roots in the art industry and have in the past used high-value art to circumvent sanctions and to launder money. By way of example, Arkady Rotenberg and his brother Boris Rotenberg have been sanctioned in the United States since they were placed on the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”)’s list of Specially Designated Nationals in 2014 in response to Russia’s annexation of Crimea. However, according to a U.S. Senate report, they were subsequently able to continue participating in the U.S. art market through a series of intermediaries and shell companies, including through fine art purchases worth over $18 million and transactions over $91 million. Boris Rotenberg has recently been added to the UK’s Consolidated List, while Arkady Rotenberg was designated in 2014.
Under UK sanctions laws, it is an offence for a person to intentionally participate in activities knowing that the object or effect of them is to circumvent sanctions. Both trading in high-value artwork or using it as collateral are ways in which art could (and is) being used to do just that. High-value artwork is an asset ripe for exploitation. Art is mobile and the art market’s global nature, high value and intrinsic privacy makes it easy to conceal ultimate beneficial owners.
This is particularly so for digital art non-fungible tokens (“NFTs”). Sales in digital art are rising rapidly. NFTs are usually paid for using digital currencies (such as Bitcoin and Ethereum) and are easy to transfer making them ideal vehicles for money laundering, tax evasion and circumventing sanctions. Please see our previous blog post here for more information on how NFTs are being used in this context.
What steps can be taken to avoid the art market being used to circumvent sanctions?
The regulatory regime in place in the UK
Since July 2018, the EU’s Fifth Money Laundering Directive has applied to persons operating in the art market or acting as intermediaries in the trade of artwork where the transaction is worth €10,000 or more. In the UK, the Directive was implemented through amendments to the UK’s money laundering regulations which came into force on 10 January 2020 (the “Regulations”). Art market participants (“AMPs”) caught by the Regulations are required to, among other things, maintain a range of anti-money laundering policies, controls and procedures, carry out customer due diligence, and verify the identity of clients, which will include identifying the beneficial owner. The Regulations also apply to any business operating in the regulated sector, which includes financial institutions.
Once a client’s identity is known, this can be cross checked against the UK’s Consolidated List to identify whether the client is a designated person. Such screening can be carried out manually or automatically, depending on the size and risk profile of the auction house (or financial institution), and usually forms part of a broader sanctions policy. Typically, a sanctions policy covers, among other things, who is subject to sanctions screening, when screening takes place and which sanctions lists are screened (in addition to the UK, other authorities, such as the US and the EU, maintain sanctions lists).
Whilst the Regulations only apply to certain AMPs, to avoid dealing with a sanctioned person, any parties (including financial institutions) engaging in the high-value art world should consider putting in place robust systems and processes to (i) identify who the client is (including any ultimate beneficial owners) and (ii) screen clients against all applicable sanctions lists globally. Having such systems in place will also guard against potential money laundering risks.
What about the U.S.?
In the U.S., the enactment of the Anti-Money Laundering Act of 2020 kicked off a suite of measures aimed at cracking down on illicit finance in the U.S. art and antiquities market. The first of these was to amend the definition of "financial institution" in the Bank Secrecy Act ("BSA") to include persons involved in the antiquities trade. The BSA requires financial institutions to keep records and file reports with US authorities that assist in preventing and detecting money laundering and financial crimes. The U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) and OFAC have also issued guidance reiterating and clarifying existing obligations under the BSA and economic sanctions regimes. In 2021, FinCEN issued a notice warning regulated financial institutions to be aware of illicit activity involving art and antiquities within their businesses and requested that they follow specific instructions in filing a suspicious activity report related to art and antiquities.
In the current environment, and when increasingly more creative ways are being found to evade sanctions and launder money, it is even more important for auction houses and financial institutions who may be holding art as collateral to ensure that clients are properly identified, and that high-value art is considered within the framework of robust policies and procedures related to anti-money laundering and sanctions.