Money laundering (ML) and terrorism financing (TF) in the art market is a hot, new topic for governments around the world, specifically the US, United Kingdom (UK), and the European Union (EU). Why? The art market is a largely underregulated, highly profitable industry, with 2020 sales totaling an estimated $50 billion alone, whose culture is entrenched in secrecy, subjective pricing, and speedy transactions. This new wave of ML regulations comes from government perceptions of art markets as easy targets for criminal abuse, that “the high-dollar values of single transactions, the ease of transportability of works of art, the long-standing culture of privacy in the market, the increasing use of art as an investment or financial asset,” create an attractive atmosphere for criminal actors and terrorist organizations to conceal proceeds of crime or transfer funds secretely. However, states have shown little evidence to support claims of rampant misuse of art transactions for ML or TF, aside from rare, extraordinary cases like the Rotenbergs. The lack of evidentiary foundation has not stopped the explosion of laws and regulations cracking down on art market participants by the world’s largest art trading nations. A recent US Treasury report shedding light on the art market being at low risk of ML and TF may change that. The report represents solid evidence that perceptions of a criminally abused art market, which has driven the push for regulations, are not based in reality, which could lead more nations to move away from extensive requirements, as hyper-regulations like the UK’s 5AMLD are proving to be more harmful than helpful.
The US’s Efforts to Regulate the Art Market
The US has been slow to attach regulatory guidelines and laws to the art market, only recently applying existing ML regulations to art participants in December 2021. The government’s hands off attitude is peculiar given the American art market has been a highly profitable sector in the international arena, holding the title of largest art market in the world for seven decades, with the exception of 2011 when China took the prestigious position. Although the US art market has held a place of prominence since the end of World War II for conducting high-value, global art transactions, the first legislative attempt to widen the reach of the Bank Secrecy Act (BSA) to art and antiquities sellers was only brought to the House of Representatives in 2018 and failed to pass. Art dealers’ inclusion in the BSA would have subjected them to reporting requirements, compliance measures such as monitoring systems, and risk-averse policies seen as “overly burdensome” by industry professionals. A July 2020 Senate Subcommittee report raising concern of the art market’s “circumvention” of ML laws got the ball rolling again. OFAC Guidance soon followed, “encouraging caution” for art market participants handling “high-value” art transactions, which is any sale estimated at $100,000 or more. “The Anti- Money Laundering Act of 2020” (AML Act) passed in 2021 as part of the National Defense Authorization Act, finally including only antiquities sellers as “financial institutions” under the BSA. Even though art dealers were not added to the BSA, they were not off the hook just yet. The AML Act additionally directed the Department of the Treasury to, “study the facilitation of money laundering (ML) and terror finance (TF),” through art transactions. The report’s release last month grants a sigh of relief to art market participants and poses a question of necessity to nations with extensive regulations.
The Treasury report surprisingly downplayed the risk of money laundering and terrorism financing in the high-end art market. The high-value art market was specifically analyzed because sanctioned or criminal individuals would largely seek out high-value goods to attempt to launder their proceeds of crime. This limits the pool of transactions significantly as, “according to the UBS and Art Basel report, in 2020, less than 20 percent of works sold internationally by art dealers had values over $50,000.” The report concluded that there was only some evidence of ML risk and little evidence of TF risk when evaluating, “market indicators and case studies of misuses,” to assess the high-value art market’s attractiveness to criminal actors. The report further admitted that there are traits that make the art market an undesirable place for potential launderers, such as the infrequency of cash purchases and institutional reporting requirements for high-value purchases. Most importantly, Treasury concluded that the high-value art market should not be the primary target for regulations compared to other sectors with higher risk factors, such as real estate. It further recognizes the due diligence already voluntarily conducted by art market participants and the inherent risks of implementing regulatory measures. Overall, this study represents a turning point in the effort to regulate the US art market, acting as an evidentiary basis for those advocating against art market regulations. If this report will cause other nations to invest in research to reassess the need for regulations is unclear. What is clearly evident is the negative effect of extensive regulations on art markets’ prosperity, specifically in the UK.
Hyper-Regulation of the Art Market and its Consequences
In 2018, the EU’s 5th Anti-Money Laundering Directive (5AMLD) marked the beginning of a hyper-regulated art industry across all Member States. 5AMLD was enacted to combat terrorist financing and money laundering by enhancing the cooperation, information sharing, and transparency of relevant institutions participating in art market transactions. The directive expands the reach of regulatory and administrative requirements to art market participants, including “dealers, galleries, freeports, and other intermediaries” as obliged entities. The EU’s comprehensive requirements set a precedent that was quickly followed, as the UK adopted the directive into law in January 2020. Previously exempt participants in the EU and UK are now responsible for, “financial crime compliance recordkeeping, reporting and registration requirement,” before entering into transactions as low as €10,000. The UK’s implementation of 5AMLD is, “the broadest in scope in Europe, and possibly the world,” as it applies the same requirements beyond its borders, attaching non-UK branches and subsidiaries of UK companies. UK and EU market participants were vocal critics of these new regulations, given the lack of convictions in ML and TF transactions using art. Industry professionals in the UK specifically were afraid of these new restrictions driving business towards nations with no requirements, like the US. The Annual Report by Art Basel and UBS, which reports nations’ total value share of the global art trade, confirms these fears.
As of March 29, 2022, the Report states the UK lost 3% of total value share of the global market trade in 2021 compared to 2020. This downward trend is significant given that this year the global art market returned to pre-pandemic levels, generating $65.1 billion, making it unlikely the drop was pandemic-related. There is a basis for the theory that customers are being driven to un-regulated markets, given that in 2021 the US saw an increase in art sales by 33 percent as well as China by 35 percent. The likelihood these numbers sway UK legislators’ opinions on the necessity of art market regulations is up for debate. As of now, the UK seems to be watching the US, as the UK announced it is receiving public comments on including the antiquities market in its expansive regulations shortly after the US announced its expansion of financial institutions under the BSA to include such antiquities market participants. With the US taking a step back from the art market and committing to antiquities market regulations, only time will tell if the EU and UK react.
There is a distinct need for research on the amount of ML and TF that actually occurs through the art transactions in the EU and UK. While some may argue proof of high-rates of crime are not necessary for regulations to be enacted, given the high burden and economic stress that extensive regulations have put on art market participants, it seems sufficiently reasonable for nations to conduct a risk assessment similar to the US’. Concrete facts, not flimsy perceptions of vulnerability, should govern what the government chooses to regulate. Hopefully, nations will continue to reassess the need for art market regulations against ML or TF as more data comes to light. For now, art market participants wait patiently for their governments’ next move.
Author Biography: Jaclyn Corbo is a Moderator of the International Law Society’s International Law and Policy Brief (ILPB) and a J.D. candidate at The George Washington University Law School with a Double Concentration in International & Comparative Law and Business & Finance Law. She has a Bachelor’s Degree in History from The College of New Jersey.Tweet