Art market poses money laundering risks, but Treasury opposes regulation for now

Big-dollar transactions and a culture of privacy leave the glamorous world of high-end art vulnerable to money laundering, according to a new report from the US Treasury Department. But officials are not yet recommending comprehensive regulations that would reduce the threat.

The Treasury published on Friday a study on money laundering and the financing of terrorism in the art market. The study, which was mandated by Congress under an anti-money laundering reform law passed last year, takes a mixed view of the danger posed by illicit funds in the money laundering industry. several billion dollars.

The report also examines the emerging world of digital art, including the risks posed by the spread of non-fungible tokens, or NFTs. Treasury officials noted that the rapid growth of NFTs could present new opportunities for money laundering, but said there was currently little evidence that criminals misused digital artwork.

Experts and lawmakers have been concerned for several years about the lack of regulation of the art market. Global art sales were valued at around $50 billion in 2020, according to an industry report from Swiss bank UBS Group HER

and organizer of the Art Basel art fair. Treasury officials said Thursday they were unable to estimate how much of that sum came from illicit activities.

Despite concerns, the Treasury report found little evidence of a terrorist financing risk in the high-end art market. And while the secrecy that often protects art buyers and the ease with which works can be transported can make it vulnerable to money laundering, other aspects of the art market could make it a poor vehicle for illicit funds, according to the Treasury.

Cash is rarely used to buy art, the Treasury found. And if so, pre-existing rules on high-value cash transactions may compel financial institutions and other business enterprises to report them, the agency said.

The Treasury said it interviewed dozens of art market participants for the study, ranging from auction houses to small galleries and financial institutions. Many market participants are already taking precautions, such as due diligence on buyers and sellers, to protect their reputations, the Treasury said. But the agency’s report added that these measures, while considered best practice, are entirely voluntary and could be suspended or circumvented in some cases.

The Treasury report made several recommendations to address the risks posed by the art market. He recommended that market participants share information to encourage transparency, and that law enforcement and regulatory officials receive up-to-date advice and training on financial crimes related to art.

The agency said the US government could also consider requiring targeted record keeping and reporting, or enforcing more comprehensive anti-money laundering rules. But he said the art market need not be an area of ​​immediate focus for such regulations, given the higher risks posed by other sectors.

The Treasury’s conclusions may surprise those who have pushed for greater regulation of the art market. Cultural tropes and high-profile examples of abuse have made the industry seem like an easy target for criminals looking to hide money. In recent years, European countries have imposed stricter know-your-customer requirements on art dealers.

Jonathan TD Neil, associate professor of art business at Claremont Graduate University, said the push for more regulation of the art industry has come from people who have little understanding of how it works. Setting a higher bar on buyer due diligence would be too burdensome for galleries that operate on low margins, he said.

“At a time when everyone seems to be asking the federal government to fix their problems, it’s refreshing to see the Treasury not taking the bait,” Neil said.

A 2020 report by the US Senate Committee on Homeland Security and Governmental Affairs called the art market the “largest legal and unregulated market” in the United States. The report revealed that many art sales are made through intermediaries called “art advisers” who generally would be reluctant to reveal a customer’s identity.

Although major auction houses such as Christie’s and Sotheby’s have voluntary anti-money laundering programs, they often limit their due diligence to these advisers, whom they view as the primary buyer, according to the report from the Senate.

Senate investigators in the report focused on two Russian oligarchs, Arkady Rotenberg and Boris Rotenberg, who they say appeared to have used high-value art to evade US sanctions imposed on Russia following the annexation by the country of the Ukrainian region of Crimea. A representative for the Rotenbergs at the time of the Senate report called the allegations “completely absurd” and said the brothers had never used any tools, including art, to launder money or circumvent sanctions. .

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Friday’s Treasury report cited the Rotenberg case and a number of other examples of alleged money laundering in the art market, including the purchase of tens of millions of dollars worth of artwork through a shell company by Malaysian financier Jho Low, who has been accused by the Justice Department of helping to embezzle billions from Malaysia’s sovereign wealth fund. Mr. Low has repeatedly denied wrongdoing and remains at large. In 2019, he reached a civil settlement with US prosecutors under which he agreed to forfeit over $700 million in assets.

The report released by the Treasury is part of a series of changes the agency has been tasked with implementing in an effort to close loopholes in the US financial system.

Under the bill passed last year, the department’s anti-money laundering office is drafting rules that would require certain corporations to disclose their beneficial owners. Lawmakers hope the rules will help prevent the use of anonymous shell companies by bad actors.

Regulators are also extending anti-money laundering requirements to the antiques market, which law enforcement officials say has been exploited by terrorist groups such as the Islamic State of Iraq and in the Levant, also known as Daesh.

A senior Treasury official said on Friday the agency was choosing to remain focused on a broader set of reforms, rather than specific art market regulation. Speaking to reporters on a call on Friday, the official said developing beneficial ownership rules was the “most important regulatory reform we’re focused on.”

Write to Dylan Tokar at [email protected]

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