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More ‘ugly’ compliance needed to fight criminal abuse of global art market

For criminals, what’s not to love about the art and antiquities market? There’s widespread secrecy surrounding beneficial owners and transactions, values that are subjective and wide-ranging, and an easily accessible and active marketplace. On top of that, there’s low-priority regulatory attention that’s often weak and inconsistent.

The Financial Action Task Force (FATF) — the global money laundering and terrorist-financing watchdog — highlighted these risk factors in a report published in late February.

The FATF report shies away from making a recommendation to include art market participants under the supervision of designated non-financial businesses and professions. Leaving the supervision of this sector as a regulatory add-on at the discretion of each jurisdiction is a missed opportunity which leaves the market largely exposed to abuse.

The majority of cases submitted for the FATF report highlight the wide use of corporate structures — a common money laundering typology — for disguising ownership and concealing funds laundered in the art market. Other reports also cast doubt over how art is dealt with internationally. For instance, an investigation by the International Consortium of Investigative Journalists in early 2022 revealed art market connections with oligarchs and criminals, often in tax haven jurisdictions.

(To be sure, there are occasional enforcement efforts that generate headlines. Although the U.S. art market — the largest in the world — is still largely unregulated, prosecutors in New York this year demanded that auction houses provide sales information in order to track potentially illicit transactions by sanctioned Russian collectors as part of a crackdown on sanction evasion networks. In October last year, U.S. authorities indicted a UK businessman for conspiring to violate and evade U.S. sanctions by allegedly attempting to move artwork owned by a Russian oligarch out of the country.)

Even when the art market falls within the scope of regulations, issues abound. For example, in the UK, AML regulations were extended in 2020 to anyone trading or acting as an intermediary in works of art for €10,000 or more in a single or series of linked transactions. Art market participants were given new obligations, including registering with HM Revenue and Customs designated AML supervisors, conducting due diligence on buyers and sellers to verify their identity, and assessing the risks to which they were exposed based on the nature of their business.

But my conversations with UK experts over past year reveal the lack of clarity surrounding the scope of the regulations and how to implement them. The problems flagged by those UK experts often apply to the global art market as a whole.

First, there are definitional issues. With so many intermediaries in the chain of art transactions, understanding who an art market participant is becomes a complicated task. For instance, the current threshold creates confusion among smaller galleries — less fluent in AML language — who query the need for HM Revenue and Customs registration for one-time over-threshold sales.

Likewise, the definition of “work of art” is pivotal for appropriate supervision. Should antiques, designer, or luxury items be included alongside Picasso’s works and Da Vinci paintings? What about new trends, such as non-fungible tokens (NFTs)?

(The FATF report finally settles on the term “cultural object” to collectively refer to art, antiquities, and other cultural objects, including digital art and NFTs. However, when it comes to recommending supervision, the FAFT report only covers dealers in precious metals and stones.)

Second, experts report that there are differences in perceptions about art market risks. The UK National Crime Agency assessed it in June 2021 as “high risk.” And yet, sector representative groups neither perceive its severity nor understand where they sit in the wider financial crime puzzle.

Third, some businesses worry that uneven compliance with AML requirements may hinder them and encourage commercial migration to less-regulated jurisdictions. Many in the British art market feel that AML, due diligence, and risk-assessment obligations are unwarranted, overly stringent, and too costly, thereby putting them at a disadvantage to their European and U.S. competitors.

What’s the way forward?

At the international level, FATF should push for the extension of designated non-financial businesses and professions supervision to high-value goods dealers, thus including art dealers under money laundering supervision.

At the domestic level, following FATF guidance, regulation of the art market should become a standard and be accompanied by clarity in definitions, awareness of new technologies and the risks (and opportunities) that these may bring, and appropriate enforcement of sanctioning powers.

Another vital step is to close the gap between the risk narratives of art market participants, law enforcement, and regulators. That will help build a common “culture of compliance” similar to what has developed among financial institutions. The financial sector changed mainly because of targeted outreach, as well as regulatory fines and interventions.

As my research has shown, new regulations in the art world need to be thoroughly understood. This can be achieved through guidance that “speaks the same language” as art market participants and is tailored to accommodate the peculiarities of the market. Meanwhile, outreach should be balanced with robust enforcement where egregious wrongdoing occurs.

The art market is a world of beautiful things. But it’s in serious danger of reputational harm and economic damage from criminal infiltration and abuse.

In a world of beautiful things, compliance can seem an intrusive and ugly process. Yet, there is no other way.

A version of this post first appeared on RUSI

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