Other discussions at the plenary centered around:

• Changes to the grey list
• The suspension of Russia’s FATF membership 
• Enhancing beneficial ownership transparency 
• Identifying and disrupting the financial flows from ransomware
• The FATF Vice Presidency (2023-2025)

Digital Art and NFTs

The FATF’s report features a section on digital art and non-fungible tokens (NFTs). While 2021 saw a sharp increase in digital art sales associated with NFTs – the sector’s potential market value reached $44.2 billion compared with $106 million in 2020 – blockchain analysis firm Elliptic found that over $100 million worth of NFTs were publicly reported as stolen through scams between July 2021 and July 2022. 

While the regulation and supervision of NFTs remains incipient or nonexistent in many jurisdictions, the FATF has identified market vulnerabilities of NFTs related to money laundering. These include:

• The ease of transferability of ownership
• The lack of transparency
• Subjective pricing
• The absence of a need to physically transfer the art
• The possibility of exploiting the flaws in smart contracts used by an NFT platform in thefts or other illicit activities
• High-value transactions
• The lack of monitoring of NFT wallets and the concealability of underlying VA transactions
• The inherent exposure to online theft
• Wash-trading
• The range of market participants that facilitate their exchange

However, the FATF also noted that some of these vulnerabilities may be mitigated if policies and operational techniques were developed to improve the ability of law enforcement to track the transfer of NFTs between parties. 

Money Laundering Risk Indicators for the Wider Art Market

The guidance also includes a non-exhaustive list of risk indicators relating to money laundering and terrorist financing in both the public and private sectors of the art and antiquities market. These include:

• The use of shell companies, trusts, or third-party intermediaries, including art dealers, brokers, advisers, or interior designers, to purchase, hold, or sell cultural objects
• Cash transactions, in particular using large amounts of cash
• The use of large-denomination banknotes
• Sales or purchases of art involving purchasers who do not appear to be concerned with paying a substantially higher price than the notional value of the work
• Sales or purchases of art where a client is not interested in the provenance, history, style, genre, or artist of an object
• The unwillingness of a customer to provide identification information to receive an art-collateralized loan, or early repayment or use of cash to pay such a loan
• Transactions involving art market participants (AMPs) without expertise in concluding high-value purchases or sales 
• Transactions involving politically exposed persons (PEPs) or their family members or close associates

The FATF reminds compliance staff that while a risk indicator may demonstrate or suggest the likelihood of suspicious activity, a single indicator concerning a customer or transaction may not alone warrant suspicion. Rather, firms should use the risk indicators to prompt further monitoring and examination, where appropriate. 

AML Requirements for UK Art Market Participants 

In February 2023, the British Art Market Federation also issued updated guidance on AML requirements for UK AMPs and how they can be implemented. This guidance builds on the initial guidelines that were published in August 2022. Approved by HM Treasury, the advice aims to provide a detailed explanation of the new requirements outlined in the European Union’s Fifth Anti-Money Laundering Directive (5AMLD), which came into force across all member states on January 10, 2020. 

The main amendments to the guidance center around legislative updates and a clarification on the obligations of AMPs to report inconsistencies in company information that come to their attention. Specifically, the updated guidance reflects the following:

• Artists selling their own work are no longer subject to AML requirements, but artists selling works on behalf of other artists must register as an AMP and follow appropriate customer due diligence (CDD) procedures
• In addition to assessing the risk of money laundering and terrorist financing, AMPs must now also assess the risk of proliferation financing when analyzing the risk profile of their business and customers
• From April 1, an AMP must obtain full details of beneficial owners when the customer is an unlisted company, registered trust, or limited liability partnership
• AMPs must report to HM Revenue and Customs (for registered trusts) and Companies House (for companies) any discrepancies in the information they have received regarding beneficial owners of customers, such as:
  • Different names
  • Incorrect date of birth
  • Inconsistent nationality
  • Different correspondent address

For further guidance on obtaining beneficial ownership information, compliance staff should look out for upcoming guidance from the FATF due to be published in March 2023. 

To learn more about the key takeaways from February’s plenary session, read our coverage here.

The post New FATF Report Highlights NFT & Art Market Money Laundering Risks appeared first on ComplyAdvantage.

While the guidance offered by the British Art Market Federation is not mandatory for AMPs to implement, departures from the guidelines must be documented along with the rationale for doing so. According to the document, “AMPs may have to stand prepared to justify departures to HMRC and the courts.” 

5AMLD and the art trade

5AMLD introduced changes that brought AMPs into the scope of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs). Under the rules, AMPs must implement the same anti-money laundering and combatting the financing of terrorism (AML/CFT) measures that apply to banks, real estate agents, notaries, and other financial institutions. 

In addition to providing added clarity on specific terminology, the guidance confirms that under 5AMLD, AMPs must do the following:

• Register with HMRC – applicable to AMPs that facilitate sales where the value of a transaction, or a series of linked transactions, amounts to €10,000 (£8,600) or more
• Carry out a written AML risk assessment
• Maintain a written prescribed range of policies, controls, and procedures  
• Carry out customer due diligence (CDD) measures before a transaction is concluded 
• Appoint a nominated officer  
• Train staff appropriately  
• Submit suspicious activity reports (SAR) to the authorities  
• Keep appropriate records of CDD and transactions

Intermediaries 

The Money Laundering Regulations 2017 apply to and define AMPs as traders or “intermediaries” in the sale or purchase of works of art valued at €10,000 (£8,600) or more. In the updated guidelines, the previously undefined term “intermediary” is clarified as  “someone who, by way of business, actively transacts in the sale or purchase of works of art on behalf of a seller or buyer under whose authority they act.” Through this definition, the guidelines confirm that an intermediary can refer to art dealers, agents, auction houses, art galleries, and online sales platforms that conduct relevant activity by selling to UK customers.

The guidance also confirms that any person who does not actively participate in purchasing or selling a work of art, such as framers and shippers, is not an intermediary.

AMP risk assessment guidance

Two days before the British Art Market Federation issued this guidance, HMRC released guidance on understanding money laundering risks in the art sector and how AMPs should take action against these risks following a money-laundering risk assessment. 

Some of the critical risks identified that all AMPs should be aware of include:

• Anonymity: Anonymous trades are advantageous to those seeking to launder money as they can hide their involvement and their source of funds 

• Remote sales: Transactions made online, over the phone, or via an intermediary decreases effective identification and increases vulnerability to money laundering and terrorist financing 

• • Unusual sales or purchase activity: Anything that is not consistent with the standard practice for the type of business concerned is a key risk indicator

• High-risk jurisdictions: The purpose and nature of any transaction with businesses from high-risk jurisdictions should be carefully considered

Key takeaways

Compliance staff should ensure they read HMRC’s risk assessment guidance in conjunction with the AMP guidance and other relevant documents, such as the National Risk Assessment 2020 and guidance produced by the Financial Action Task Force (FATF).

The post Updated Guidance on Anti-Money Laundering for UK Art Market Participants appeared first on ComplyAdvantage.

With anti-money laundering (AML) regulations continuously being updated and tightened, traditional money laundering vehicles such as real estate are becoming less attractive to criminals. Art money laundering, however, continues to be an attractive avenue as the industry’s price fluidity and traditional use of free ports can be used by criminals to anonymously abuse the system for nefarious activities. 

How does art money laundering work?

In an effort to turn “dirty money” into “clean money”, art money laundering involves the buying and selling of high-valued artwork to further disguise the origins of illegally obtained funds – a process called layering. 

Due to a lack of authorized regulatory oversight regarding the process of art valuation, the pricing of art is a highly subjective practice that can allow criminals to launder huge sums of money, particularly through art auctions. Buyer anonymity is another advantage at this stage as it is not uncommon for art market operators to refuse to disclose their clients’ identities in order to protect the integrity of the transaction.

Ultra-secure freeport warehouses are commonly used to store purchased artwork. In these locations, merchandise is classed as “in transit” and is exempt from customs duty, making it a tax haven for legitimate buyers as well as oligarchs and drug kingpins with money laundering intentions. Artwork stored in freeports can also technically change ownership multiple times through selling and reselling, putting further distance between the latest transaction and the origin of the illicit funds in play. 

Art & Antiquities AML Regulations

Read our full guide to Anti-Money Laundering in the art and antiquities markets around the world.

Learn more

How is anti-money laundering in art regulated?

Regulators across the globe are aware that art money laundering activities are ongoing and are working to set forth new regulations to curtail illegal activities within the art and antiquities market. 

Art money laundering in the US

The Anti-Money Laundering Act of 2020 (AMLA 2020) brought antiquities dealers under the same AML regulatory framework that previously applied to US financial institutions under the Bank Secrecy Act (BSA). Becoming law in January 2021, AMLA 2020 requires antiquities businesses to identify beneficial owners; train staff on appropriate record keeping; keep provenance and transaction records; adopt appropriate compliance policies; report obligations, and audit their recordkeeping and compliance measures.

Since AMLA 2020, the US Treasury published a report in February 2022 on the facilitation of money laundering and the financing of terrorism through trading high-value artwork. The study found that while the art market is vulnerable to money laundering, further regulations are not required until “we’ve tackled more systemic issues, like creating a beneficial ownership registry to crack down on shell companies”, says Scott Rembrandt, Deputy Assistant Secretary for Strategic Policy in the Office of Terrorist Financing and Financial Crimes.

Art money laundering in Canada

The Financial Action Task Force’s (FATF) 2016 Mutual Evaluation Report of Canada identified the luxury goods sector as an area with increased money laundering and/or terrorist financing risks, including luxury automobiles, art, and antiques. A subsequent report issued by the Standing Committee on Finance of Canada’s House of Commons in 2018 reiterated this, recommending that “the Government of Canada require companies selling luxury items to be subject to reporting requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and report large cash transactions to FINTRAC if those transactions are not already reported through other means.”

In June 2019, an amendment to the Criminal Code of Canada came into effect, which broadened the possibility of financial intermediaries being prosecuted for money laundering offenses if they are “reckless as to the source of those funds”. If the recommendations in the FATF and finance committee reports are implemented, each high-value sector dealer will need to implement a rigorous risk-based AML program to avoid such prosecution. This includes conducting due diligence for clients, conducting enhanced due diligence for clients in high-risk jurisdictions, and monitoring and reporting suspicious activity.

Art money laundering in the EU

The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) came into effect on January 10th, 2020. Expanding the scope of previous legislation, 5AMLD requires art businesses within EU member states – including agents, dealers, galleries, auction houses, warehouses, and any other individual or firm involved in the buying, selling, or storing of art – to implement risk-based AML/CFT programs. 

The Sixth Anti-Money Laundering Directive (6AMLD) followed a year later and is regarded as the EU’s toughest set of measures to deter money laundering to date. 6AMLD essentially made Anti-Money Laundering (AML) screening and Customer Due Diligence (CDD) compulsory for all participants in the art market and provided harsher penalties for any violations moving forward.

Laundering drug cash through art 

A prominent example of art money laundering hit the headlines back in 2015 when local Philadelphian art dealer, Nathan “Nicky” Isen, was charged with money laundering and fined $15,000 for advising an undercover cop on how to launder her “drug money”. 

Isen had been introduced to the police by Ronald Belciano, a convicted drug dealer and previous customer of Isen’s who had been caught buying artwork to launder his illicit funds. When Belciano’s house was raided in 2011, vast amounts of high-value artwork were found alongside $2.5 million that was hidden in a secret compartment under a fish tank.

While Isen denied knowing about Belciano’s money laundering scheme and was not convicted, he was charged four years later on account of his conversations with a wired undercover agent.

Art Dealers and Money Laundering: What AML Policies Are Needed?

HM Revenue & Customs in the UK published guidance on understanding money laundering risks and taking action for art market participants in June 2021. The guidance highlighted five cross-sector risks for all art market participants, including off-record sales, anonymity, face-to-face sales, unusual purchasing activity, and high-risk jurisdictions. 

Due to these risk indicators, regulators around the world will likely continue to issue new guidance relating to the buying and selling of artwork and antiquities. However, some questions remain:

• Which markets and market participants will be subject to regulations?
• Who in the art trade will be covered by the regulations?
• Will the requirements apply only to high-value works of art?
• How are “antiquities” and “art” to be defined?

The post How does art money laundering work? appeared first on ComplyAdvantage.

Importance of the non-financial sector 

The perpetrators of these crimes know that they can bypass the banking sector and still effectively launder money. Cash-intensive businesses such as restaurants and betting shops, the purchase and export of luxury goods and the use of informal money mules are all common vehicles.

Money laundering at scale through financial institutions has been the primary focus of German legislators, with a view to preventing criminals from legalizing their illegitimate income, and assuming influential positions in the social and political life of Germany.

However, the importance of the non-financial sector for money laundering activities raises questions about the responsibilities of public authorities in this area and of the administrative structures in place outside the financial sector to combat money laundering. 

Allocation of responsibilities under section 50 of the Money Laundering Act

Section 50 of the Money Laundering Act sets out which firms are covered by the regulation based on whether they belong to a financial or non-financial sector of the German economy. 

However, these two categories are not defined in more detail in the Money Laundering Act. Instead, it is the responsibility of the Financial Intelligence Unit (FIU) set up at the border customs office to evaluate suspicious activity reports (SARs) and divide companies based on whether they belong to the financial or the non-financial sector.

Which firms are in the financial sector?

Accordingly, the entire banking industry, including financial services institutions and e-money companies, are classified as part of the financial sector. On the basis of the provisions set out in Section 50, money laundering supervision for the entire financial sector is in the hands of the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). 

Which firms are in the non-financial sector? 

According to the classifications set by the FIU, the following companies subject to money laundering regulations (Section 2 AMLA) are to be assigned to the non-financial sector: 

• Insurance intermediaries
• Lawyers, tax consultants, auditors and notaries public
• Trustees
• Real estate agents
• Gaming operators
• Freight traders

The fact that these companies belong to the non-financial sector initially means that money laundering supervision by BaFin is out of the question. As there are no other assigned federal authorities, money laundering supervision of these companies falls within the administrative competence of the states (Länder).

The supervision of the non-financial sector

Non-financial sector organizations typically belong to a chamber of commerce or other form of professional organization who will supervise their activities alongside local authorities. 

As a general rule, this means the same authority that is responsible for ensuring compliance with hygiene regulations in the restaurant business or with food preservation regulations in  supermarkets is also responsible for monitoring jewellers and car dealers. 

The task of monitoring money laundering in the non-financial sector is therefore spread over hundreds of local authorities. Some of these may struggle with access to relevant expertise, staff and the wider industry awareness necessary to supervise firms effectively. 

One measure of the disparity between financial and non-financial businesses can be seen in SAR filings. In 2020 104,325 SARs were filed by the financial sector. Just 2,854 SARs were filed by non-financial companies in the same period. Of these limited SAR filings, only around 400 were filed by goods traders nationwide (source: Bafin Annual Report 2020, page 17). 

Focus on the banking sector

For years, the federal government has given high priority to the fight against money laundering. This has most recently been demonstrated by the tightening of Section 261 of the Criminal Code, which goes far beyond all European legal requirements in its definition of money laundering, including even petty offenses in the circle of predicate offences, as well as the increasingly far-reaching allocation of control tasks to banks. 

A look at the non-financial sector, however, makes it clear that administrative structures have so far not been able to keep pace with political objectives. It has been known for years that the non-financial sector accounts for a significant proportion of criminal money laundering offenses. In this area, administrative tasks aren’t centralized, and the inadequate staffing and technical resources of local authorities mean that effective monitoring of money laundering may not always be guaranteed. 

Further reading

Redefining money laundering in Germany: The Implications of Section 261

Raids Across Germany Target Network Suspected of 140m EUR Money Laundering

Anti-Money Laundering In Germany

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Banking and investment transactions have become highly scrutinized, making traditional financial transactions less conducive to pass money through the financial system for illicit purposes. Legislators and regulators have strengthened anti-money laundering regulations in the US, Canada, and Europe. Nevertheless, there remain significant concerns in these geographic areas regarding laundering money through the use of transactions in art, antiques, and other high-value merchandise. The value of the global art market has reached $67.4bn, with the US and UK currently the two largest markets, according to a recent report by Art Basel and UBS. Regulators have asserted that the volume of activity in the global art market makes it susceptible to potential misuse.

Despite the fact that most purchases and sales of antiquities and works of art are legitimate, there have been documented cases of oligarchs and drug kingpins acting through agents to hide criminal proceeds through the purchase of art works. These are then shipped to warehouses to be stored for an extended period until they are put up for sale. While art works are in storage, they can be pledged as collateral for loans of fresh, clean money. Regulators are aware that these types of activities are ongoing, and are working to set forth new regulations to curtail the illegal use of these markets.

Transactions in art and antiquities have historically been ideal methods to launder money, as objects can be smuggled across borders and hidden or stored in ultra-secure warehouses in freeports for years or decades after the sale. A freeport is a special economic zone designated by the trade and commerce administrations of various countries as open to all traders to encourage economic activity. Technically, merchandise stored in a warehouse in a freeport is defined as being “in transit” and is exempt from customs duty and may be able to be exported without the intervention of customs authorities. Also, sales of art or antiquities in freeports can also be arranged without ever moving the item from the warehouse.

Transparency International, a non-governmental organization, publishes an annual Corruption Perceptions Index that ranks countries “by their perceived levels of public sector corruption, as determined by expert assessments and opinion surveys.” Despite the fact that Western Europe is the highest-scoring region on the Corruption Perceptions Index, it is exposed to considerable risks. Regulators have identified vulnerabilities related to the use of high-value goods, including art, antiquities, and other luxury items to conduct trade-based money laundering. In response, the European Union (EU) has made significant efforts to strengthen anti-money laundering and anti-corruption legislation.

Some of the identified AML vulnerabilities related to sales of art and antiquities are due to subjective sale prices. The popularity of private transactions means transactions don’t always match market prices. Historically, dealers and intermediaries met face-to-face with clients and developed professional relationships with them, but changes in technology have resulted in more transactions taking place online.

According to a January 2021 Barron’s magazine article, “Online-only auctions grew exponentially in 2020 as the Covid-19 pandemic had a severe impact on the traditional art market…”

Barron’s reported that “Global online-only auction sales, which encompass the three top auction houses, Sotheby’s, Christie’s, and Phillips, surged 524% year-over-year to $1.05 billion, breaking through the $1 billion mark for the first time.” According to information provided to Barron’s, “The three [top] auction houses organized 644 online-only auctions throughout 2020, most of which took place in the second half of the year” and “the average lot price of online-only sales increased 150.6%” as compared to 2019.

In addition to dealers and art markets conducting a large number of transactions with buyers and sellers online,  business is conducted through one or more intermediaries such as advisors, dealers, and auction houses. In response to these potential issues, regulators in some jurisdictions have modified AML regulations to apply to art market participants as well as dealers in antiquities and other high-value goods.

Changes in US Regulation

The US adopted the Anti-Money Laundering Act of 2020 (AMLA 2020), which amended the definition of “financial institution” to include “a person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities.” This definition was written to be broad enough to include not only the antiquities dealers themselves but also the intermediaries involved in the sale and purchase of such items.

AMLA 2020 requires antiquities businesses to have reasonably-designed programs for Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT). Wealthy art collectors are still able to maintain anonymity through agents, brokers, advisors and other intermediaries hired to represent the buyers and/or sellers at auctions but it is likely that participants in the US art markets may also become subject to AML regulation in the near future. Regulators have focused on enacting additional rules that would apply to the art markets as a way of closing additional gaps in financial system controls.

In July 2020, the US Senate authorized the Senate Permanent Subcommittee on Investigations to conduct a study and issue a paper regarding the art industry and US policies that undermine AML sanctions. The study found that the art market is the largest legal, yet unregulated, market in the US. The study also found that all of the major auction houses administer voluntary AML programs, however, they generally treat the client’s representative as the party to the transaction. Often, the auction house staff do not know or ask the identity of the actual client or, in the case of an entity, the ultimate beneficial owner. The Senate investigation found that private dealers generally do not have documented AML controls in place as they are not required by regulation to do so.

The Senate subcommittee report recommended that the US amend its AML regulations to include art dealers and transactions in high-value art to help ensure that art dealers are not doing business with sanctioned individuals. The subcommittee also recommended that art dealers be required to determine and document ultimate beneficial owner information and use that information to conduct due diligence on the actual parties to the sale. The report further recommended that, when imposing sanctions on individuals, the government include members of the individuals’ immediate family and make the sanctions effective immediately upon their publication.

As a prelude to regulation, FinCEN issued a notice on March 9, 2021, to inform financial institutions that have existing Bank Secrecy Act obligations of certain AMLA 2020 provisions related to trades in antiquities and art. The notice describes new AML Act measures, provides information about existing illicit activity in the antiquities and art trade, and provides specific instructions for filing suspicious activity reports related to art and antiquities.

The notice reminds financial institutions that the amended definition of “financial institution” now includes persons “engaged in the trade of antiquities,” and that the federal government intends to perform a study of the facilitation of money laundering and the financing of terrorism through transactions in artworks. FinCEN also emphasized that “Crimes relating to antiquities and art also may include money laundering and sanctions violations, and have been linked to transnational criminal networks, international terrorism, and the persecution of individuals or groups on cultural grounds.”In addition to the FinCEN notice, the US Department of the Treasury Office of Foreign Assets Control (OFAC) issued an Advisory and Guidance on Potential Sanctions Risks Arising from Dealings in High-Value Artwork in October 2020 to highlight the risk of conducting art sales to persons on US sanction lists. The guidance states that “US persons are generally prohibited from engaging in transactions, directly or indirectly, with persons on the SDN [sanction] List, other blocked persons, and those covered by comprehensive country or region embargoes.” The advisory was issued to provide guidance and does not have the force of law but delivers a warning that, based on strict liability, OFAC will impose civil penalties to anyone deemed to violate US sanctions. The standard of “strict liability” is civil liability even if an individual did not know, or have reason to know, that it was engaging in prohibited conduct.

In accordance with AML standards, a suitable risk-based approach to AML for art dealers and art marketplaces should focus on three major risk categories: the client’s identity; the provenance of the art object; and the origin of the funds used to purchase the item. Other important factors include the country in which the sale is conducted; the background of the dealer(s); the location of contracting parties; the background and purpose of the transaction; the method of financing the purchase; and the assessed value of the object. Depending on the nature and value of the transaction, the geographic location of the parties, among other factors, enhanced due diligence may be appropriate.

Until the US government adopts specific rules later this year to provide details and clarification, there remain some questions regarding the definition of an antiquity and what type of parties to the sale of antiquities are subject to the regulation. It is not yet clear whether the US rules will include financial advisors, attorneys, accountants, museums, or foreign entities that sell into US markets. The Department of Treasury is required to propose new regulations by December 27, 2021. However, OFAC has made it clear that even though the law doesn’t specifically cover art market participants, they expect all persons to comply with US sanctions.

Regulatory Proposals in Canada

The most recent FATF Mutual Evaluation Report for Canada, published in 2016, identified dealers in high-value goods, including auction houses, as highly vulnerable to potential money laundering and terrorist financing. The high-value goods sector includes luxury automobiles, art, and antiques.

In 2018, the Standing Committee on Finance of Canada’s House of Commons issued a report titled, ‘Confronting Money Laundering and Terrorist Financing: Moving Canada Forward’,  which included 32 recommendations regarding modifications and additions to Canada’s Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA).

The report states that at the time of publication, dealers in precious metals and stones were subject to AML regulation in Canada, while other dealers of high value and/or luxury goods were not. The report contains a wide-ranging set of suggested measures that could result in a significantly expanded AML/ATF regime in Canada. The report recommends that “Federal, provincial, and territorial governments should collaborate to close the loophole regarding the transaction of sales between parties who are not subject to PCMLTFA reporting requirements, which creates vulnerability for money laundering to occur.” It also argues for amending the PCMLTFA to establish sanction orders relating to high-risk geographic jurisdictions, similar to the orders enacted in the United States.

Furthermore, the Canadian government authorized the creation of the Trade Fraud and Trade-Based Money Laundering Centre of Expertise within the Canada Border Services Agency (CBSA), Canada’s customs service. The centre was operational as of April 2020 and is mandated to enhance the CBSA’s capacity to identify, preclude, and investigate complex trade fraud and to refer cases to the Royal Canadian Mounted Police. By establishing a multi-disciplinary team of intelligence analysts, trade specialists, and criminal investigators, the CBSA is now better positioned to identify and investigate anomalous trade transactions indicative of trade-based money laundering.

If the recommendations in the FATF and finance committee reports are implemented, each dealer in high value and/or luxury goods will need to implement a risk-based AML program, conduct due diligence for clients, conduct enhanced due diligence for clients in high-risk jurisdictions, and monitor and report suspicious activity.

European Union AML Directives

Effective January 2020, the EuropeanCommission adopted The 5th Anti-Money Laundering Directive to strengthen the controls against money laundering and terrorist financing. The directive noted that it was enacted, in part, in response to the terror attacks that occurred within EU member states over the past few years namely in Britain, France, and Belgium.

The 5th Anti-Money Laundering Directive

The 5th Anti-Money Laundering Directive (5AMLD) expands coverage by regulating persons trading in art, acting as intermediaries in the trade of art, storing art in freeports, or carrying out transactions via freeports if the value of the transaction or a group of linked transactions equals EUR 10,000 or more. The regulation also covers transactions in high-value goods including oil, arms, precious metals, tobacco, historical, cultural, and archaeological antiquities, and artifacts. Several smaller transactions that are linked may exceed the threshold and trigger AML requirements including customer verification, which previously only applied only to transactions in cash, but now extends to all payments. Customer verification includes obtaining photo identification, birth dates, and information about their business activities and source of wealth.

5AMLD also compels dealers and other obliged entities to disclose the ultimate beneficial owners of companies, foundations, trusts, and other legal entities. The term, “obliged entity” is defined as credit and financial institutions, as well as regulated service providers from the non-financial sector. 5AMLD explicitly lists freeports as “obliged entities”.

The directive permits EU member states to enact rules requiring companies that have dealings in countries with deficient AML and CTF regimes to conduct regular and enhanced due diligence checks on the transactions and clients in these countries. One of the aims of 5AMLD is to harmonize enhanced due diligence measures across member states.

In accordance with the regulation, Financial Intelligence Units (FIUs), law enforcement, and other authorities will be provided with centralized automated systems, such as central registries or central electronic data retrieval to identify clients in a timely manner. FIUs, which are responsible for receiving, processing, analyzing, and disseminating information relating to suspicious financial transactions have the authority to obtain the information they need from any obliged entity, even without a suspicious transaction report.

The directive expands the types of individuals, entities, and assets covered by the legislation. All covered businesses are required to conduct risk-based AML/CFT programs that include:

• Customer due diligence (CDD) and enhanced due diligence (EDD) checks
• Determining whether a client is a politically exposed person
• Screening clients against published sanctions lists
• Monitoring adverse media to detect information relating to their clients
• Monitoring and reporting potentially suspicious activity

The 6th Anti-Money Laundering Directive

While the focus of 5AMLD was to increase transparency, 6AMLD seeks to harmonize the approach that EU member states use to combat money laundering by defining the criminal offenses that are to be considered “predicate offenses” with regard to money laundering, setting forth minimum sanctions, and extending criminal liability to legal entities in addition to liability for individuals.

6AMLD regulates obliged entities that trade in art, act as a third-party in the art trade, or store art in freeports. If the transaction value or linked transactions in works of art total EUR 10,000 or more, the parties must be verified. In effect, 6AMLD has made Anti-Money Laundering (AML) screening and Customer Due Diligence (CDD) compulsory for all participants in the art market. In addition, the scope of money laundering has been expanded to include accessory offences such as “aiding and abetting”, “attempting” and “inciting”. 6AMLD also contains provisions to improve cooperation between member states and provide harsher punishments for AML/CFT violations.

UK Regulations

The UK adopted the European Union’s Anti-Money Laundering Directives and, upon exiting the EU, the country amended The Money Laundering, Terrorist Financing and Transfer of Funds Regulations Act 2017 to include the provisions applicable to the art market. Further amendments to the regulations were made in 2019, effective January 10, 2020.

On January 24, 2020, the government issued “Guidance On Anti Money Laundering for UK Art Market Participants”, approved By Her Majesty’s Treasury. The guidance states, “From 10 Jan 2020, art market participants who deal in sales, purchases and/or storage of works of art… with a value, for a single transaction or a series of linked transactions, of 10,000 euros or more, will be subject to further anti-money laundering obligations, under the Money Laundering Regulations 2017.” These obligations include the requirement for obliged entities to register with Her Majesty’s Revenue and Customs, establish and maintain anti-money laundering procedures, nominate a person responsible for anti-money laundering compliance, conduct training for the entity’s staff, report suspicions, and keep applicable records.

One of the core principles in the government-issued guidance is a requirement that art market participants identify the l person with whom they are dealing in any transaction or, when dealing with an entity, the person or persons who control that entity. Art dealers and intermediaries who conduct transactions that meet or exceed the monetary threshold are required to conduct risk-based due diligence on their clients. The regulation requires verifying the client’s identity, carrying out customer due diligence checks on the customer, the source of funds, and identifying and reviewing any potentially suspicious instructions or payments from the client.

Because the AML requirements are “risk-based”, the obliged entities must identify and understand the level of risk related to the client and the type of transaction and assess the corresponding level of risk. High-risk transactions include those relating to “cultural artifacts and other items of archaeological, historical, cultural and religious importance…” and require enhanced due diligence to be performed. This requires a greater awareness of the client’s identity, background, and the purpose of the transaction in order to evaluate the risk.

A subsequent consultation paper issued in July 2021 sets out the government’s approach and plans for amending the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 and aims to, “provide further clarity to the art sector with regard to an amendment to the current definition for Art Market Participants…” and is intended to clarify the government’s position that would exclude artists from the current definition for Art Market Participant as well as other proposed changes to the regulation.

Enhanced Disclosure to Provide Transparency

Participants in the art and antiquities markets understand the potential for money laundering and terrorist financing through purchases of high-value art, antiquities, and other high-value goods. Many dealers and market participants have established – or are establishing – appropriate procedures to review and investigate the background of the parties to such sales and the details of the transactions.

Art auction houses, dealers, financiers, and insurers have begun to conduct money laundering risk assessments to understand potential exposures, some of which are unique to the art trade. Based on these risk assessments, art market participants can design, implement, and maintain internal controls to mitigate exposure to financial crimes and thwart the financing of illegal activity and potential sanctions. Predicting the total impact on the art and antiquities markets is challenging, in part because governments are still in the process of determining and enforcing the final regulations.

Various regulators will likely continue to provide guidance regarding controls relating to antiquities and works of art but, until then, some questions remain:

• Which markets and market participants will be subject to regulations?
• Who in the art trade will be covered by the regulations?
• Will the requirements apply only to high-value works of art?
• How are“antiquities” and “art” to be defined?

The introduction of new AML regulations pressures the art market to become more transparent. Since many art market participants, including galleries and dealers, have already implemented customer due diligence and screening processes for sanctions, buyers and sellers may no longer be able to hide their identities behind advisors or other intermediaries.

Although rules regarding ultimate beneficial ownership are in the process of being adopted, the names of buyers and sellers will likely not become public. Dealers on both sides of a transaction may be required to reveal the identity of their client to each other. They may enforce this with standard confidentiality and non-disclosure agreements or could observe industry practices regarding confidentiality and privacy. If these changes are enacted, dealers and auction houses would be better able to determine who they are dealing with to help prevent abuses of the system, avoid dealing with sanctioned individuals and entities and be able to respond to inquiries from regulators or law enforcement.

Regulators’ attention to the threat of art- and antiquities- related financial crimes and updated regulation will likely also require greater cooperation and information sharing between participants in the art markets to combat potential money laundering and financing for illicit purposes. International AML regulations and sanctions are likely to get stricter, so it would be judicious for art market participants to adopt strong AML programs now.

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The European Union’s Fifth Anti Money Laundering Directive (5AMLD) came into force across all member states on 10 January 2020. The directive set out a range of requirements and amendments to EU AML legislation, including the introduction of a legal definition of cryptocurrency and reporting thresholds for prepaid credit cards. 

One of 5AMLD’s key new requirements was the extension of the scope of AML/CFT compliance regulations to art dealers (persons trading or acting as intermediaries in the trade of works of art, including auction houses and galleries). The extension was motivated by insights from previous money laundering directives that indicated criminals were increasingly using the art trade to launder money, exploiting opportunities to conduct high value trades with an almost guaranteed level of anonymity.

New AML Responsibilities

Under the new rules, art dealers must implement the same AML/CFT measures that apply to banks, real estate agents, notaries, and other financial institutions, where the value of a transaction amounts to €10,000 or more. In practice, this means that art dealers must:

• Implement a risk-based AML/CFT program
• Conduct customer due diligence (CDD) checks
• Monitor customer transactions for suspicious activity
• Screen customers against sanctions lists
• Monitor for politically exposed person (PEP) status 
• Monitor for adverse media involving customers
• Submit suspicious activity reports (SAR) to the authorities

Money Laundering Methodologies

The art market represents such an attractive target for money launderers because of the status that works of art have within certain communities and the potential to use those works as vehicles to insert illegal funds into the legitimate financial system. The art trade is specifically useful to money laundering methodologies in the following ways:

• Art can be stored in free ports (such as Geneva, Singapore, Monaco, and Delaware) that offer tax advantages, high levels of anonymity, and secrecy. 
• Works of art may be sold to offshore countries in locations all over the world. 
• Works of art may be purchased with cash. 
• Once purchased, works of art do not need to be moved from the ports in which they are stored. 
• Art purchases often do not require the disclosure of the ultimate beneficial ownership (UBO) of companies involved.
• The value of artwork can be subjective and works of art can easily be over and undervalued. 

Case Study: The Nahmad Family

In 2016, the leaked Panama Papers brought a range of international money laundering activities to light, including numerous crimes involving the art trade. 

While it did not involve money laundering, a particular case from the leaked documents illustrated how the anonymity of the art trade helps criminals disguise their identities. The case in question involved well-known art dealers the Nahmad family who had formed a company in Panama called the International Art Centre (IAC) with the assistance of Panamanian law firm Mossack Fonseca. In 1996, the IAC bought the painting “Seated Man with a Cane” by Amadeo Modigliani for $3.2 million in an auction organized by Christie’s of London. In 2011, the painting was subject to a claim in a Nazi-related restitution case however the Nahmad family was able to deny owning the artwork and conceal its beneficial ownership of the IAC. The Panama Papers leak revealed the Nahmad family’s 20 year ownership of the painting along with their ownership of the IAC. 

Ongoing AML Compliance

The Nahmad family case illustrates the need to accurately establish and verify customer identities and the beneficial ownership of firms involved in art transactions. Accordingly, 5AMLD regulations ensure that firms involved in the art trade develop and implement effective know your customer (KYC) systems in order to obtain the relevant information from their clients and customers and assist in any subsequent criminal investigations. 

Beyond the identification and verification of customers, art dealers have a responsibility to conduct ongoing AML checks and monitoring. Over the course of a business relationship, customers may be added to sanctions lists, become politically exposed persons (PEP), or be the subject of adverse media stories: each eventuality represents a change to the customer’s risk profiles and, by extension, the necessary AML response from the firms dealing with them. 

Given the amount of data required by the modern AML process, art traders should carefully consider how to meet their compliance responsibilities and take into account the potential benefits of smart technology tools such artificial intelligence and machine learning models. Smart technology brings automated speed and efficiency to the AML data collection and analysis process:  in addition to helping firms detect and address money laundering incidents in a timely manner, smart technology allows firms to implement versatile compliance programs that can deal with emerging criminal behaviors and adapt to new legislation such as the EU’s upcoming 6AMLD.

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