On January 1, 2021, Congress passed the Anti-Money Laundering Act of 2020 (AMLA) which expanded the definition of “financial institution” to impose anti-money laundering (AML) requirements on persons “engaged in the business of antiques, including an adviser, consultant or other person who engages as a business in the solicitation or sale of antiques. AMLA also directed the Secretary of the Treasury, in coordination with the FBI, Attorney General, and Homeland Security Investigations, to initiate a study to identify potential money laundering risks in the broader market. ‘art.
On February 4, 2022, the Treasury Department released its findings on the money laundering risks associated with high value art and recommended regulatory and non-regulatory practices to address these risks. The study found that the high dollar values of one-time transactions, the ease of transportation of artworks, the longstanding culture of privacy in the marketplace, and the use of art as an investment could make the market ripe for money laundering. Cash purchases, lack of transparency in private transactions, price subjectivity and the use of shell companies further increase vulnerability to money laundering. The Treasury Department has noted three common patterns of money laundering that may affect the high-value art market: (1) offering and accepting art as payment to get illicit proceeds into the system financial; (2) buying works of art with illicit income, keeping them for long periods of time and then reselling them for a profit; and (3) using art as collateral for loans to disguise the original source of funds.
The study assessed the vulnerabilities of different market players including auction houses, galleries, art fairs, online marketplaces, museums, universities, non-profit organizations, intermediaries third parties, art financiers, banks and art storage facilities. The study recognized that each type of market participant faces different levels of risk. For example, some institutional participants like art auction houses and galleries that have due diligence procedures to identify potential buyers have a lower money laundering risk than art market participants. online, such as exchanges that host digital art transactions. The Treasury Department has recommended that financiers and art intermediaries adopt similar procedures to identify the buyer in a transaction to reduce the risk of money laundering.
Significantly, the study found that the emerging online art market creates new money laundering risks. After the onset of the pandemic, online art sales soared to $12.4 billion in 2020, more than double the previous year’s online sales, via gallery and dealer websites, online art fairs and viewing rooms, and social media platforms. The virtual nature of the marketplace creates more barriers to verifying the identity of the buyer, strains the resources of smaller institutions, and makes it difficult to regulate peer-to-peer transactions in third-party marketplaces. Additionally, technological innovations in the digital art space, such as non-fungible tokens (NFTs) based on blockchain technology, are creating unique and unprecedented challenges for AML practices. In the first three months of 2021, NFTs generated $1.5 billion in transactions and grew 2,627% from the previous quarter. Direct NFT peer-to-peer transactions and the ability to instantly transact across borders make the digital art market open to tapping without associated costs that would typically raise regulatory flags. The study acknowledged that fraudsters could use illicit funds to purchase an NFT, engage in multiple resales among themselves to project legitimacy and artificially inflate the price of the NFT, and possibly sell the NFT to a buyer for cash. clean money. Differences in the structure and operation of NFT platforms make it difficult to implement standardized due diligence protocols and identify these types of transactions.
To address money laundering risks in the traditional and digital art markets, the Department of the Treasury has recommended several regulatory and non-regulatory measures to market participants and government agencies, including:
- Market participants could create information-sharing programs to enable buyer transparency and allow government access to information in investigations.
- Government agencies could focus more on financial crimes involving high-value works of art in guiding and training law enforcement to better understand how to identify and investigate these transactions.
- FinCEN could request more detailed information from institutional market participants in order to deter criminals from laundering funds through this market or to impose comprehensive AML measures on certain art market participants.