Tuesday, 22 October 2024
By Sophie Maillard, Deputy CEO of BRP Bizzozero & Partners SA and Achille Deodato, CEO of Indigita SA
Money laundering, a global issue long associated with organized crime, has increasingly found an avenue through the art market. Traditionally, money laundering refers to the process of making illicitly obtained "dirty" money appear legitimate or "clean" through a series of financial maneuvers. The art market, with its high-value transactions and relative opacity, has become a target for criminals looking to launder funds discreetly.
Money laundering generally follows three stages: placement, layering, and integration. First, illicit funds are placed into the financial system. This is followed by layering, where a network of transactions across international banks and companies obscures the money’s origins. Finally, integration occurs when the laundered money is reintroduced into legitimate markets, such as through the purchase of art, luxury goods, or antiquities.
While money laundering was, in the past often linked with crimes like drug trafficking and arms dealing, it tends to be now connected more to white-collar crimes such as fraud, embezzlement, bribery and tax evasion. In the art market, white-collar criminals can remain prominent figures in the market until their activities are exposed, often through high-profile investigations or legal actions.
One unique challenge in addressing money laundering in the art market is its structure. Unlike heavily regulated financial markets, the art world lacks a clear, universally accepted definition of its core assets. The term "art market" encompasses many distinct submarkets, from fine art and antiquities to digital art and luxury items like watches and jewelry. This fragmentation complicates efforts to regulate the sector uniformly and creates vulnerabilities for exploitation.
Freeports, secure storage facilities where high-value items like art can be held tax-free, further complicate regulatory oversight, even though, for instance in Switzerland, warehouse operators are required to report all ‘sensitive goods’ stored, including cultural property and other works of art, to the customs authorities, allowing for their control.. These facilities, which may still offer a certain degree of anonymity and protection from certain tax obligations, can make it easier for criminals to move assets across borders undetected.
The global response to money laundering in the art market has taken shape over the last few years. The Fifth EU Money Laundering Directive (5MLD), implemented in 2020, brought the art market under AML regulations for the first time. Any transaction involving artworks valued at €10,000 or more must now undergo enhanced due diligence, particularly when intermediaries or freeports are involved. This applies across the EU and in the UK, which has extended the directive despite leaving the European Union. Switzerland has adopted a similar approach, setting however the threshold at which transactions must be subject to enhanced due diligence at CHF 100,000.
In the UK, additional regulations under the Money Laundering Regulations 2017 require art market participants to register with HM Revenue & Customs (HMRC) and implement strict identity verification and record-keeping processes. The United States has followed suit with the Anti-Money Laundering Act of 2020, expanding the definition of “financial institution” to include those trading in antiquities, though broader regulations for the art market are still under development.
For clients interacting with financial institutions, particularly in relation to high-value art transactions, caution and transparency are key. Banks are increasingly vigilant when it comes to suspicious activity, and clients must be prepared to provide clear documentation regarding the source of funds and the provenance of artworks being traded. Vague or incomplete information about ownership or the origins of funds can raise red flags and may lead to investigations or even the freezing of assets.
Clients should ensure they understand the regulations governing their transactions, particularly in high-risk markets like freeports or when dealing with intermediaries. A transparent approach, with full disclosure of the ultimate beneficial ownership of assets and clarity on the source of funds, can help avoid complications and build trust with financial institutions.
In light of recent geopolitical developments, including sanctions imposed following the Russian invasion of Ukraine, art market participants must also be aware of restrictions on doing business with certain individuals or entities. The UK, for example, has imposed bans on selling luxury goods, including art, to clients based in Russia or connected to sanctioned individuals.
Navigating the complexities of the art market and the evolving regulatory landscape requires a proactive approach. Clients engaging in high-value art transactions should maintain meticulous records and work closely with their banks to ensure compliance with AML regulations. With growing scrutiny from governments and financial institutions, transparency is more important than ever in maintaining the integrity of transactions in the art world.
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