Money Laundering in the World of Fine Art

Criminals remain relentless in their quest to stay one step ahead of the law. The connection between money laundering and the rarified world of fine art is a perfect example of their nefarious creativity.

While no one knows how much money is laundered through art, art and collectible wealth held by ultra-high net worth individuals (UHNWIs) alone are predicted to grow from an estimated US$1.62 trillion in 2016 to US$2.7 trillion in 2026. Most art clients aren’t fraudsters and seek privacy for legitimate reasons such as personal security, divorce or estate planning. The art market, however, is particularly vulnerable to exploitation by money launderers due to its secrecy, subjective prices, large transaction sizes, and cash friendliness.

The European Union’s Fifth Anti-Money Laundering Directive (5AMLD), which went into effect in January 2020, brought renewed focus on the art market as a prime target for money laundering. 5AMLD brings art dealers into the scope of anti-money laundering (AML) regulations in Europe. For works sold at 10,000 EUR or more, the new rules require dealers to register with the government, officially verify client identities, and report any suspicious transactions.

How Financial Institutions (FIs) can strengthen defenses

While the new rules apply to art dealers, FIs can contribute to anti-money laundering in the art market by following best risk practices in their dealings with clients who are individual buyers and sellers of art, art dealers, auction houses or galleries. Not only can these practices help limit the FI’s risk exposure, but they can also help the clients themselves from being unknowingly used as vehicles for money laundering.

First, FIs should ensure that their Know Your Customer (KYC)/Know Your Customer’s Customer (KYCC) programs are equipped to fully understand the occupations and business practices of customers involved in buying and selling high-value art. FIs should adopt a risk-based approach to evaluating and documenting art market participants that involve the following:

• Consideration of how long the person or business has been a customer and how long they have been in business
• Heightened scrutiny of politically exposed persons (PEPs) engaging in art transactions
• Validation of occupation, with risk scoring based upon factors including whether the person or business publishes sales (more likely with auction houses than with art dealers or private galleries), the state of their AML compliance program and the type of artwork being traded4
• Use of graph analytics capabilities to help identify the Ultimate Beneficial Owner (UBO) of a shell company, showing whom that person does business with and providing information about the riskiness of those business associates
• A focus on jurisdictions that are at higher risk for art-related crimes. Residence in or art acquired in such countries increases risk.
• Assessment of a wide variety of sources, including information from the dark web. The FI’s KYC vendor could provide access to this data
• Special attention to the source of wealth (SOW) and source of funds (SOF)

Besides, FIs should proactively work with dealer, gallery, and auction house clients to ensure they have a KYC program in place. This is an essential step toward protecting their business and ensuring that art market operators provide transparency in their transactions.

How to Verify SOW and SOF

The SOW encompasses the activities that comprise the total net worth of a person, while the SOF includes the particular funds or monetary instruments that are used for the transaction between the FI and the client.

Client advisors are required to record information about the SOF when they open an account. If the SOF is the sale of a piece of art, they should gather receipts or a paper trail. Relevant information sources include:

• Mentions of the sale in news accounts
• The auction catalog description for the art, including the correct name of the family in the provenance and the listed sale price—which should be connected to the amount in the financial account
• Auction sales records for pieces by the same artist, to look for price volatility
• Accepted documents for verification of purchased, inherited, or gifted artworks, including sources for verification of the monetary value
• A written evaluation of an expert, if verified
• A check of online databases, including Interpol’s Stolen Works of Art Database and the FBI’s National Stolen Art File (NSAF)

How to Monitor Transactions

In addition to a strong KYC program, FIs should closely monitor transactions to mitigate their risk of facilitating money laundering through art sales. Transaction monitoring rules can filter for keywords specific to the art market or large auction houses as payment recipients. Guidelines and credible sources should be defined for the investigation into alerts and cases triggered by transaction monitoring rules.

In addition, AML professionals can undertake a critical review of all art-related invoices to determine whether the transactions are reasonable and make economic sense. They should review other documents as well, such as gallery portfolios and bank confirmation documents. AML professionals also should parse unstructured data. For example, wire transaction details could contain bank-to-bank instructions, invoice and remittance information, and other details that can help identify the purpose of a transaction and be used to build risk-scoring models and graphs. Graph analytics can be employed to look for patterns and people trying to hide in plain sight.

AML professionals also can investigate whether the price of the artwork appears reasonable. The bank can request an invoice for the transaction, but a financial criminal may provide a fake one. The investigator should carefully scrutinize the invoice for any inconsistencies that may indicate potential misconduct. Resources such as art databases and the Art Loss Registry can assist with these efforts.

A Note About Training

FIs should consider providing targeted training to AML professionals about the art market and various tactics, techniques, and procedures used by art criminals, so they are in a better position to recognize inconsistencies and suspicious activity. For example, AML professionals will want to understand the independence and reliability of art market reports, the type of artwork traded and its origin (i.e., stolen/looted, import/export legal), and the type of dealers and supporting paperwork used to acquire the art.

Special Considerations in the United States

In the United States, the Bank Secrecy Act applies to dealers in precious metals, stones, and jewels, requiring them to file suspicious activity reports and comply with other AML obligations, but no such rules apply to U.S. dealers of art.

Legislative efforts to apply the BSA to the art and antiquities market have stalled, although a bill known as the Counter Act passed the House and is with the Senate.

Absent law or regulation in the United States that specifically applies to the art market, FIs must be mindful that they are asking clients and financial advisors to do them a favor by providing additional information about their business dealings and sources of funds, and that these people may push back. PEPs often don’t want to send further documentation. Regardless, FIs must prioritize positive customer experience, especially for valuable high net worth clients, by not asking them for the same information multiple times.

Governments worldwide are taking steps to regulate the art market to prevent money laundering. FIs have a unique role – and responsibility – to prevent money laundering while minimizing their financial risk. The guidelines presented here can help FIs fulfill their obligations.