Anti-money laundering regulation and the art market

Abstract

Following concerns that the art market is being used to launder criminal money and fund terrorist activities, measures have recently been introduced to subject the market to the anti-money laundering (AML) regime – such as the EU 5th Money Laundering Directive (2018) and the US Illicit Art and Antiquities Trafficking Prevention Bill (2018). The expansion of the AML regime to include art dealers has been attributed to the failure of regulation and the vulnerabilities inherent in the market to laundering. This paper considers vulnerabilities to money laundering and examines the types of regulation that apply in the art market. The paper then goes on to analyse the application of AML criminal law and preventive measures in the UK context, demonstrating that art dealers can be criminally prosecuted for engaging in normal commercial activities. Even if dealers do comply with AML reporting rules, such compliance can significantly impact upon their business. These are important considerations given the government's emphasis on striking a balance between the burdens on business and deterring money laundering activities. Drawing upon the AGILE analytical framework, we remain sceptical about the continued expansion of the AML regime.

Give art market regulation a chance

“…16 Examples for placement in the art market are the exchange of illegal drug proceeds for art 17 or its acquisition with misappropriated funds by politically exposed persons (PEPs). 18 The possibility, at least until recently, to do business discreetly in the art market eases the use of illicit proceeds to purchase art, thereby kicking off the laundering cycle. 19 The art market has proven to be an ideal environment also for layering operations.…”

“…Also, since art lends itself well to operations of artificial price setting, it seems particularly suitable also to more complex schemes of trade-based money laundering (TBML), such as customs misrepresentation in the layering phase. 21 The particular difficulties in assessing the highly 'speculative' value of art, the lack of adequate training of customs agents in order to determine such value and the unavailability of data and resources allowing to establish the 'fair market price', usually allow over-or under-invoicing operations to go through without raising suspicion. 22 Like the over-and under-invoicing of goods, the false description of goods is particularly valuable to those who use art to launder their money, as quality and type of the art object are often not easily assessed without the necessary expertise.…”

“…What distinguishes art laundering from money laundering through art and other 'traditional' forms of money laundering are its predicate offences, which are offences against art, like art theft or looting, and its object: art itself. 47 Art laundering can be defined as a crime against art for two reasons. First, the criminal activity in question has art as its direct object.…”

“…56 Additional confusion is usually obtained by shipping stolen artworks and looted antiquities to free ports in market-transit states. 57 The privacy granted by only limited oversight over goods entering free ports and transactions carried out there allows for uncomplicated entry even for artworks and looted antiquities of dubious provenance 58 and for further ownership transfers and commixture with items of legal collections, 59 as in the case of the Etruscan antiquities trafficked by Giacomo Medici out of Italy to a Geneva warehouse. 60 In the same warehouse a Modigliani painting, Seated Man with a Cane, which had been taken from a Jewish Parisian art dealer during the German occupation, 61 resurfaced after being lost for decades.…”

“…78 Moreover, as self-regulation instruments are not legally binding for auction houses, art dealers and galleries, they are often watered down when implemented, or not implemented at all. 79 This gap was filled by the Fifth AML Directive, which extends anti-money laundering rules also to the art market. This section identifies (at 3.A) the core stakeholders concerned by the Fifth AML Directive and, against this backdrop, gives an overview (at 3.B) of the changes that the AML and CTF rules bring along for these art market actors and discusses (at 3.C) when customer due diligence or enhanced due diligence measures (at 3.D) must be applied.…”