The industry of art and other cultural objects is a billion-dollar industry, where there is a culture of privacy, discretion and anonymity; due to this the market is prime for criminals, organised crime groups and terrorists who seek to launder proceeds of crime and fund their activities, as illustrated in the FATF’s Report on Money Laundering and Terrorist Financing in the Art and Antiquities Market. Though it is notoriously difficult to estimate, the United Nations Office on Drugs and Crime (UNODC) estimated in 2011 that as much as $6.3 billion USD could have been laundered through or associated with trade in cultural objects.
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Art or cultural objects can be sold at significantly high prices in cash and retain their value, subsequently discreetly transferred between people and businesses before being sold for ‘clean money’. There have been instances where transnational crime organisations have cooperated with terrorist groups to acquire such items and smuggle them out of conflict areas, using shell companies and cash transactions to conceal the origin of the item, thus cultural objects originating from areas where terrorist groups are active, or bordering jurisdictions, are particularly vulnerable to financing terrorism.
Framework to Combat Money Laundering (ML) / Terrorist Financing (TC) Linked to Cultural Objects
Global Instruments and Standards such as the 1954 Hague Convention, acts as a comprehensive multilateral treaty dedicated to the protection of cultural heritage, the UNESCO 1970 Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Cultural Property, urges their members to take measures to prevent and combat the illicit trafficking of cultural objects. Additionally, the FATF Recommendations include requirements on the regulation and supervision of financial institutions, designated non-financial businesses and professions, such as lawyers, accountants and real estate agents; accordingly these entities must conduct customer due diligence, keep records of transactions, and file reports on suspicious activities, these requirements also apply to virtual assets and virtual asset service providers (VASPS) (this sector may be relevant for instance where the transactions are made in virtual assets or where the cultural object itself is a virtual asset such as certain NFTs).
National and Supra-National Actions
Though there are no explicit requirements in the FATF Recommendations for professionals involved in the markets for cultural objects, certain jurisdictions apply enhanced regulation to mitigate ML / TF risks; for instance, the European Union, anti-money laundering (AML) and combating terrorist financing (CFT) obligations have recently extended to cover operators trading or acting as intermediaries in the trade of works of art, where the transaction or series of transactions amount to EUR 10,000 or more.
Multiple jurisdictions have assessed the ML/ TF risks associated with the sector and have reached varied conclusions ranging from “no concluded risk rating” to “significant / very significant” level of money laundering or terrorist financing risks. The variance in conclusions could be due to the correct identification or calculation of risks in individual national markets, or a reflection of the varied understanding and awareness among jurisdictions about the ML/ TF risks.
Vulnerabilities Linked to the Market
In the primary market, cultural objects are usually sold by creators or their representatives, this reduces the risk of ML/TF, as the artists or their representative may try to protect the artist’s reputation by avoiding transactions which may result in a negative perception of the work, the primary market is also less vulnerable to crimes such as forgery. On the other hand, the secondary art market may be more vulnerable to such crimes as the seller may lack incentive to scrutinize the buyer’s intentions for the work, their identity and source of funds.
Another vulnerability of the market to note is that some sectors are accustomed to dealing with high-net-worth clients where privacy and discretion are valued, resulting in market participants not conducting detailed due diligence on buyers and sellers, this is considered a significant challenge in the effective detection of money laundering and terrorist financing.
Furthermore, some cultural objects are small in size thus making them susceptible to smuggling for instance through established drug trafficking networks. The high value of certain items in this sector may present opportunities for money laundering. Criminals who have accumulated significant wealth may be more likely to seek out high value goods for consumption or as a status symbol; purchasing high value items may also mean that it is easier for criminals to hide large amounts of illicit proceeds in a small number of transactions. Case studies involving terrorist financing associated with antiquities revealed that criminals who are likely linked to the smuggling of illegally excavated or looted items often use false documentation or false invoices to disguise or mislead their provenance.
Cases demonstrate that dealers of cultural objects including in galleries and antiquity stores both large and small have been involved in money laundering and terrorist financing, as well as predicate crimes such as forgery, fraud and theft. Comparably with other professions involved in financial transactions, there are dealers who are complicit, those who are wilfully blind and those who are unwittingly involved in facilitating the criminal activity.
Similarly, Auction Houses make a profit by taking commission on each sale and are thus financially incentivised to sell objects at a higher price, this may reduce the amount of due diligence conducted on transaction counterparts, though often the risk of negative publicity is a strong deterrent to being involved in money laundering or other criminality. Certain case studies indicated that auction house experts may act as accomplices in order to hide the identity of the customer or to manipulate price estimations or the description and origin of the objects.
The sale of digital art work, particularly those associated with NFTs, has been identified by the FATF as having numerous market vulnerabilities pertaining to money laundering, this is an area that the FATF have stated they will continue to monitor. Vulnerabilities include the ease of transferability of ownership, the lack of a need to physically transfer the art, the possibility of exploiting the flaws in smart contracts used by a NFT platform, not to mention the lack of monitoring of NFT wallets and concealability of transactions, lack of transparency, subjective pricing and high value transactions.
Use of Cash in Transactions
Case studies illustrate that the use of cash in purchasing cultural objects is a favoured money laundering technique, in order to conceal the source of funds providing anonymity to cultural object transactions and making it more difficult to identify the buyer and seller. Purchasing art and other cultural objects may be a way to legitimise illicit cash and convert it into an asset which will retain value and be sold at a later stage. It was revealed that criminals received illicit funds via cash or bank transfer, through shell companies or through nominees such as their close associates or family members and then laundered the aforementioned funds by purchasing high-value art or by falsifying art sales. The misuse of corporate structures may be a common technique in order to disguise ownership of items and conceal funds laundered in the cultural objects market.
In addition to traditional venues, there are cases where social media has been used to connect, advertise and sell stolen art. Algorithms are used to connect members, drive content choice, and also help facilitate connections between thieves, facilitators, buyers and sellers.
Conclusion
Market participants who are subject to AML / CFT obligations, including certain financial intermediaries, report a generally low number of suspicious transactions taking into account the risks involved. The FATF believe this is due to the fact that actively monitoring suspicious financial activity is relatively new for the market and many are still in the process of establishing and implementing adequate AML/ CFT procedures. Additionally, financial institutions were found to rarely employ experts from the cultural object market resulting in a lack of expertise in the area. The varied risks associated with jurisdictions can make it very challenging for some market participants to effectively build their own risk understanding and detect suspicious activity.
For more information you may access the FATF's full report here.
By Andie Henderson, Legal & Compliance Associate, The Legal Opinions
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