The global art market is an ever-growing and dynamic industry. However, as the market expands and evolves, it becomes increasingly susceptible to criminal activity. In particular, the market’s unregulated nature and lack of transparency in the ownership and transfer of pieces renders it highly attractive to money launderers. As such white collar crimes proliferate, governments worldwide have begun to crack down on art transactions to prevent instances of fraud and deceit. In this article, Artsper explores the threat of money laundering, how it is carried out and how you can avoid the serious consequences which could arise if you become unknowingly implicated in a money laundering scheme.
Money Laundering: A background
Money Bag sculpture Blue by Sanuj Birla © Artsper
Although the existence of money laundering is common knowledge, few understand exactly what the practice involves. At a glance, it’s the process by which illegally obtained money is provided with a "legitimate" source, but how does it work in the art market? Violette Taquet, the founder of Eunomart and a specialist on the subject, explained the practice to us.
Terrorist or criminal organizations are financed in part by money laundered on the art market, as some galleries or auction houses still accept cash or foreign payments without asking whether the money is clean or whether it has been used to buy weapons. They can also be financed by the looting of artifacts in war-torn countries and reintroduced thanks to certain other dealers who are not careful about the provenance of the works.
Works can also be purchased through shell companies and resold at inflated prices, allowing illegal funds to be laundered as profit. The multiple avenues through which money laundering schemes occur render it a bigger problem in the art market than professionals might initially anticipate.
According to UNESCO, the art market is the third largest source of financing for terrorism after arms and drugs.
A global crackdown
Around the world, governmental and regulatory agencies have introduced new legislation to curtail illegal activities, like money laundering, in the art market. One such example is the The Financial Action Task Force (FAFT). FAFT is a formidable global financial crimes task force, headquartered in Paris, comprising representatives from 37 countries and 2 regional bodies which recently expanded its scope to include the art market.
The opacity of the art market has benefited criminal organizations for too long, which is why the FATF has decided to subject all sectors of collectibles and luxury goods to the fight against money laundering (This regulation was initially dedicated to banks and financial institutions).
Similarly, in the US, the proposed Enablers Act would require art market professionals to report suspicious transactions to the US Treasury, in accordance with their own due diligence guidelines. As global art markets continue to develop, it will not be surprising to witness the adoption of similar legislation worldwide.
View from the Capitol by Philippe Pradalié © Artsper
Moves such as these are a major step in the fight against money laundering and other financial crimes in the art world. However, the clampdown on money laundering has various negative implications for you, as a gallery or an artist, especially when selling artworks of high value. In the UK, HMRC, the British tax agency, has started fining art market participants who have not registered themselves as such. Individual fines can reach up to £5,000 for each quarter the participant is not registered. And for professionals in France?
The consequences for galleries that have not implemented these obligations are heavy. The penalties are up to 5 million euros in fines, a ban on practicing, and a penalty of reputation in the media.
When money is laundered through art market transactions, everyone involved (even unwittingly) becomes implicated. This means the consequences for you as professionals can be more complicated than if you had unknowingly purchased a forgery or were the victim of a theft.
How can I recognize fraudulent transactions?
Anti-Money Launering (AML) legislation is becoming more stringent worldwide © Unsplash
The only way for artists and galleries to prevent a fraudulent transaction is to adopt robust anti-money laundering policies and procedures and anticipate risk. The policies should include conducting due diligence on prospective clients, verifying the source of funds, and monitoring transactions for suspicious activity. To ensure professionals are adhering to its appropriate standards, the French Monetary and Financial Code included guidelines.
The Monetary and Financial Code defines each question to ask, and when to ask them, to determine a level of risk.
There are countries at risk, professional activities at risk, and behaviors at risk. The key is to understand the level of vigilance to be put in place and to identify the risk points in order to adapt your analysis and fulfill your obligations.
What does this mean in practice?
For example, if your client is a politically exposed person, additional vigilance measures will have to be put in place and further information regarding this client will be required. If, after this analysis (which is a legal requirement), the professional identifies a risk of money laundering, they are obligated to report it to Tracfin (a financial intelligence unit) via a suspicious transaction report.
The fight against money laundering requires art professionals (galleries, auction houses, antique dealers, etc.) to do research on the origin of the work, but also to analyze the client who buys the work.
What if I need some help?
A discussion at l'École du Louvre on money laundering in the art market © Eunomart
Between 2019 and 2020, Tracfin, the French governmental agency responsible for combating financial crimes, saw a 120% increase in suspicious transaction reports concerning those dealing in precious goods and fine arts goods. Whilst this statistic suggests that the guidelines are sufficient in identifying questionable transactions, if the rules and regulations seem overwhelming to you, Eunomart is a business that exists to ensure ease and peace of mind.
Eunomart is the first software that automates and centralizes all these mandatory processes. You create your online account and let us guide you through the process. A new client to investigate? We ask the right questions, collect information for you and deliver our risk diagnosis to you (in keeping with the guidelines imposed by the monetary and financial code).
The advantage is that professionals do not need to be concerned by customs controls as all files are centralized in one platform which conforms to the legal standards required.
With stringent guidelines and severe consequences in place for galleries and professionals who fail to comply, Eunomart can be a key resource. Other resources for you include anti-money laundering training videos put together by three key associations in the UK. The British Antique Dealers’ Association, the Society of London Art Dealers and the Association of Art and Antiques Dealers, together representing approximately 700 dealers, have recruited an art compliance specialist to create videos aiding those who participate in art market transactions.
A shared responsibility
Whether through the employment of a third-party or through individual due-diligence, it is crucial that you remain vigilant in your handling of art transactions. Incorporating legal obligations into art market practices will help complicate the work of criminal organizations, combat fraudulent activity and protect you as an artist or a gallery. In the fight to create a more transparent and trustworthy art market, collective action is the only way forward.