Anti-Money Laundering Regulation in the Art MarketPosted on Apr 22, 2020
The global art market, valued at over $67.4 billion, is notoriously known for its secrecy and its insistence on anonymity. In contrast to ordinary course of dealings in other business sectors—such as real estate—when an artwork is sold at an auction, the identity of the consignor (seller of the artwork) is often concealed. Significantly, as there is no registration of artwork ownership, the location of artworks, along with the identity of their owners, are often unknown. As such, money laundering, defined as “the process by which criminals disguise the original ownership and control of the proceeds of criminal conduct by making such proceeds appear to have derived from a legitimate source,” has long been a thorn in the side of this prestigious market. In fact, one observer has proclaimed “[t]he art market is an ideal playing ground for money laundering.” Artworks can sell for exorbitant prices, are easily hidden, and transactions are often conducted in private, all of which make art prime for money laundering. While the precise extent of the money laundering issue in the art market is almost impossible to determine, it is estimated that around $3 billion is laundered through art annually. In response to these issues, the European Union, and importantly, the United Kingdom, have adopted an anti-money laundering (“AML”) framework which could have broad implications on the industry as a whole, and may potentially affect the art market and its regulation in the United States.EU & UK AML Regulations
The European Union’s 5th Money Laundering Directive was adopted by the European Parliament on April 19, 2018 as an update to the EU’s AML framework. The mandate required all 28 EU member states to implement these requirements into each countries’ native laws by January 10, 2020. As such, the United Kingdom, the world’s second largest art trading nation, recently passed “The Money Laundering and Terrorist Finance Amendments Regulations 2019,” transposing the EU directive into UK law. Under the regulation, “art market participants” are now required to register with the government’s tax authorities. Furthermore, before entering into any transaction greater than 10,000 euros, dealers and auction houses must first conduct due diligence on potential clients. Due diligence in turn requires discovering the identity of the “ultimate beneficial owner,” applicable to both buyers and sellers, and individuals and corporations alike. In practice, due diligence will likely entail verifying legally certified photographic identification, including the client’s date of birth and their most recent address.Industry Response
The new regulations are seen as a necessary reform to an industry in great need of stricter regulation. Although seemingly modest in their reach, many are hopeful that these laws will fundamentally regulate the market, and will result in a level of transparency that a great number of art market stakeholders and regulatory authorities have longed for. The hope is to update the art market AML standards to fall in line with the current banking (and other regulated industries’) AML requirements. As one legal professional commented, “[t]his is very serious. It could potentially change commonly accepted market practices.”
However, many dealers and auction houses point to the paucity of convictions for dealers or collectors laundering money through art, to illustrate that the problem is not nearly as severe as some have claimed. Furthermore, many industry insiders believe that these regulations will cause more harm than benefit. There is a fear that these new restrictions will disadvantage the British art market, as clients will turn to the United States, which currently lacks such industrywide regulation. UK dealers and auction houses are wary that clients who are not accustomed to providing such personal information will feel uncomfortable doing so, and might choose to transact in other jurisdictions to bypass these requirements. In fact, Mark Stephens, chairman of artists’ rights body DACS and a partner at the London-based law firm Howard Kennedy, predicts that, as a result of the EU directive, more art transactions will take place outside of the EU, in countries that “are not going to impose the same obligations.”
Furthermore, UK art dealers argue that these regulations place a heavier burden on smaller dealers. It is important to note that many of the new AML practices have already been in place in the larger auction houses and dealerships. In contrast, smaller shops have not previously implemented such AML policies, often due to economic constraints. A small art dealer might possess only a few key clients, who may not want their identities revealed. As a consequence of the new regulations, many of these clients will likely flock to larger dealers as the incentive to stay with the smaller dealers has been largely eliminated. Additionally, complying with these new regulations will cost dealers and auction houses both time and money, which will be particularly burdensome on smaller dealerships with minimal staff and resources.
Despite viable money laundering concerns, in reality, there are oftentimes valid reasons for protecting clients’ identities. A dealer might fear that if they produce their client’s identity to a specialist, the specialist could respond by stealing the client. Furthermore, sellers of artworks are often well-known individuals who want to hide their identities for privacy and security reasons rather than for dubious or suspect motivations. As such, while stricter AML regulations are viewed favorably, there are legitimate arguments to be made against more rigorous AML laws in the art market.Will the United States Follow Suit?
Currently, there are no laws requiring reporting art sales or suspicious activity to any regulatory authority in the United Sates. Sellers can keep the names of their clients confidential, as the Bank Secrecy Act (“BSA”) does not apply to art dealers and auction houses. Although the United States, the world’s largest art market, has considered enacting legislation to extend the Bank Secrecy Act to the art market, those efforts have failed.
In May 2018, the Illicit Art and Antiquities Trafficking Prevention Act (“IAATP”) was introduced in the House of Representatives. IAATP was intended to extend the BSA to art and antiquities dealers. This proposed bill would have required dealers in art and antiquities to set up due diligence frameworks and AML programs. Additionally, sellers would be required to alert government authorities of suspicious activity, report transactions, and keep records of all sales above $10,000. Lastly, IAATP would require dealers to conduct due diligence on potential clients before agreeing to transact. Despite its promise to reform the US art market, the bill has since stalled.
On October 22, 2019, the House passed a broad anti-money laundering and anti-terrorist financing bill, “The Corporate Transparency Act of 2019”. The bill is currently pending a Senate vote. If enacted, the bill will extend the BSA to the covered markets and industries. Crucially, the final version that the House passed applies only to dealers in “antiquities,” and removed reference to the broader category of "art." While section 211 focuses on antiquities, it includes the need to further study “[t]he facilitation of money laundering and terror finance through the trade of works of art or antiquities.” Therefore, even if the bill ultimately passes the Senate, it will likely fail to cover art dealers and auction houses. The Antiquities Coalition, an organization focused on preventing antiquities looting, issued a statement, in which it blasted this version of the bill as “a major missed opportunity, as antiquities are just one part of a much larger art market.”
As it now stands, the U.S. art market is free from AML regulations, and will likely stay that way in the near future. However, it is possible that in the long term, the U.S. regulatory system will ultimately respond and enact legislation that will extend the BSA to the art market. It will be interesting to follow the global art market response to the EU and UK legislation, and specifically, to see whether these laws will hinder sales in the regulated markets
 S. Lock, Art Market – Statistics & Facts, Statista (Nov. 1, 2019), https://www.statista.com/topics/1119/art-market/ [https://perma.cc/68MN-4M8E].
 See Graham Bowley & William K. Rashbaum, Has the Art Market Become an Unwitting Partner in Crime?, N.Y. Times (Feb. 19, 2017), https://www.nytimes.com/2017/02/19/arts/design/has-the-art-market-become-an-unwitting-partner-in-crime.html [https://perma.cc/QGR5-2PGB].
 Jan Dalley, Can the Art World Clean Up Its Act?, Fin. Times (Feb. 21, 2020), https://www.ft.com/content/a5beb8e2-5334-11ea-90ad-25e377c0ee1f [https://perma.cc/TA7W-A7YB].
 What is Money Laundering?, Int’l Compliance Ass’n, https://www.int-comp.org/careers/your-career-in-aml/what-is-money-laundering/ [https://perma.cc/FBB7-U5K4].
 Bowley & Rashbaum, supra note 2 (quoting Thomas Christ, a board member of the Basel Institute on Governance).
 See Peter D. Hardy, Art and Money Laundering, Nat’l L. Rev. (Mar. 20, 2019), https://www.natlawreview.com/article/art-and-money-laundering [https://perma.cc/JED6-VUMG].
 See Tom Mashberg, The Art of Money Laundering, 56 Int’l Monetary Fund Fin. & Dev., no. 3. 2019, at 32, https://www.imf.org/external/pubs/ft/fandd/2019/09/pdf/the-art-of-money-laundering-and-washing-illicit-cash-mashberg.pdf [https://perma.cc/EG6U-6AHC].
 Kenneth Mullen, Tough UK Anti-money Laundering Law Comes Into Force Tomorrow—Here's What You Need to Know, Art Newspaper (Jan. 9, 2020), https://www.theartnewspaper.com/news/ready-or-not-tough-uk-anti-money-laundering-law-comes-into-force-tomorrow-here-s-what-you-need-to-know [https://perma.cc/8KDM-UYLT].
 Jana S. Farmer & Jacqueline M. Bertelsen, UK Introduces Money Laundering Regulations to the Art Market and Other Headlines, Nat’l L. Rev. (Jan. 24, 2020), https://www.natlawreview.com/article/uk-introduces-money-laundering-regulations-to-art-market-and-other-headlines [https://perma.cc/HK7V-ARBH].
 Scott Reyburn, Britain Moves to Regulate Its Art Trade. Bring Your ID., N.Y. Times (Jan. 10, 2020), https://www.nytimes.com/2020/01/10/arts/design/uk-art-money-laundering.html [https://perma.cc/DTG7-ZYHQ].
 See Jordan Arnold & Thomas Bock, Art and AML: Regulators Taking a Broad Brush Approach Using Financial Entity Regulatory Compliance as the Model for the Art World, JD Supra (July 29, 2019), https://www.jdsupra.com/legalnews/art-and-aml-regulators-taking-a-broad-33349/ [https://perma.cc/PV4L-WUZC].
 Id.; Cf. Lawrence M. Kaye & Howard N. Spiegler, The Art Market: Would More Regulation Spoil All the Fun?, Herrick (Oct. 2016), http://www.herrick.com/publications/the-art-market-would-more-regulation-spoil-all-the-fun/ [https://perma.cc/2CPJ-GC8L].
 See Mashberg, supra note 7, at 33.
 See Reyburn, supra note 10.
 See Dalley, supra note 3.
 Naomi Rea, UK Dealers Are Scrambling to Make Sense of ‘Burdensome’ New Anti-Money Laundering Regulations Quietly Passed Over the Holidays, Artnet (Jan. 10, 2020), https://news.artnet.com/market/anti-money-laundering-regulations-uk-1749087 [https://perma.cc/2DFN-XLTM].
 See Dalley, supra note 3.
 See Reyburn, supra note 10.
 Rea, supra note 18.
 The Dark Art of Money Laundering, Arachys (Nov. 12, 2019), https://www.arachnys.com/the-dark-art-of-money-laundering/ [https://perma.cc/VTZ9-YJ55].
 Farmer & Bertelsen, supra note 9.
 Arnold & Bock, supra note 12.
 Five Insights into the art market and money laundering, Deloitte, at 5 (2018), https://www2.deloitte.com/content/dam/Deloitte/us/Documents/finance/us-five-insights-into-the-art-market-and-money-laundering.pdf [https://perma.cc/9A3W-8E5Y].
 Arachys, supra note 22.
 See Dev Odedra, Art: In the Frame for Money Laundering, RiskScreen (Feb. 3, 2020), https://www.riskscreen.com/kyc360/news/art-in-the-frame-for-money-laundering/ [https://perma.cc/ZZ9E-Z9ZL].
 Eileen Kinsella, A Bill That Aims to Fight Money Laundering Through Antiquities Sales Is Making Its Way Through Congress. Some Dealers Are Quaking, Artnet (Nov. 12, 2019), https://news.artnet.com/art-world/art-dealers-congress-new-restrictions-1701399 [https://perma.cc/ZZ9E-Z9ZL].
 H.R. 2514, 116th Cong. (2019).
 See Kinsella, supra note 28.