Learn how money is laundered through NFTs and the art market, how marketplaces can protect themselves, and the best ways to stay away from fraudsters and regulatory fines.
In December 2019, the US Treasury Department sanctioned Nazem Said Ahmad, a prominent gallerist from Beirut. The investigation revealed that Mr. Ahmad used his gallery and impressive personal collection, which included Warhol and Picasso, as a front to sponsor the terrorist group Hezbollah.
The art industry has long been a watering hole for criminals. According to Deloitte, 4-6 billion dollars in art is stolen and most likely laundered every year. Artworks are faked, sold on the black market, while terrorist organizations like ISIS trade in cultural artifacts to finance their activities.
However, the art trade is changing, with new regulations now coming into play in the EU, UK and US. With traditional art marketplaces under greater scrutiny, some money launderers have decided to move to NFT marketplaces. As of 2023, the NFT industry is unregulated in most countries, but this might change in the near future. This is why, now more than ever, NFT businesses need to develop a solid AML program.
In this article weâll observe how money is laundered through art and NFT marketplaces, the regulations that are already in place, and go through a checklist on how to prevent money laundering in both industries.
With global art sales reaching $65.1 billion in 2021, the art sector is a huge source of illegal wealth. The main reasons for this include:
Letâs look at a typical case: a wealthy family has financial trouble and decides to sell its art collection, but they donât want people to find out about their misfortune. So, the art dealer conceals their identities. Now, this is a seemingly innocent example. However, criminals can use this same anonymity factor to conceal their criminal background, while moving millions in illicit funds through the art trade.
Even if there can be some objective value, the price of contemporary artwork is often driven by incidental factors. One of Gerhard Richterâs paintings was originally bought for $260,000, and just 30 years later, when the painter was better known, it sold for $33 million. This very subjectiveness allows criminals to manipulate prices: you can buy a painting for $100 today, and sell it for $1 million tomorrow.
Artworks are easy to move. They can be sent to another country, for instance, on a private plane, and no one would even notice. Letâs take a look at a real-world example of this.
In 2016, the US returned several paintings that a banker smuggled from Brazil. One of the paintings was worth $8m, but when it entered the US, the shipment invoice stated that the piece was only worth a meager $100. So, the customs officer let the shipment through, the work reached the secure warehouse, and could not be re-allocated for almost a decade.
In many countries, art dealers neither have to report transactions nor verify their clients. Even reputable jurisdictions like the US and Australia do not add art dealers to their lists of reporting entities. Today, only antiquities businesses are regulated in the US.In July 2020, a US-led investigation discovered that two Russian billionaires, sanctioned in 2014, had exploited regulatory loopholes in the US art market to launder $18.4m. Although the 2014 sanctions forbade the two from any financial operations in the US, in reality, the billionaires were still able to trade on the art market. This happened because AML regulations remain absent from the US art sector, so auction houses, where the billionaires purchased the artworks, had no responsibility to check the buyersâ identities.
Money laundering schemes can be quite straightforward.
Imagine: A corrupt politician decides to âcleanâ their money. They anonymously buy a Van Gogh painting for cash at an auction and transport the piece via a private plane to a secure warehouse. The politician can then sell the painting through a legitimate art dealer and obtain âcleanâ money, completing the money laundering cycle.
Suggested read: Money Laundering and Its Impact on Business
If authorities can prove that youâre involved in money laundering, there will be a penalty. This can be in the form of a fine, business license revocation or even imprisonment. Also, since many countries now require reporting large transactions within the art sector, criminals now lean towards money laundering through inexpensive art to avoid verification procedures.
In the UK, the following works are defined as art:
Meanwhile, âantiquesâ shall mean:
Art and antiquities dealers are regulated in different ways, depending on the jurisdiction.
In 2020, the EU and the UK adopted the 5th European AML Directive and became the first jurisdictions in the world to regulate the art trade.
Art and antique traders (both individuals and businesses) as well as intermediaries (galleries, freeports, auction houses, etc.) that trade or store artworks worth over âŹ10,000 must comply with the new directive.
Art traders are now perceived as financial institutions and must follow the AML requirements outlined in the 5th AML Directive, including due diligence checks. Art dealers must also report both wire and cash transactions above âŹ10,000.
In 2020, the Anti-Money Laundering Act (AMLA 2020) extended the same AML regulatory framework to antiquities dealers under the AML Act Section 6110. Previously AMLA 2020 only applied to US financial institutions, like banks, under the Bank Secrecy Act (BSA). Now the definition of âfinancial institutionâ includes âa 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.â Therefore, under the AMLA 2020 antiquities dealers are also required:
At the same time, the activities of art dealers generally remain unregulated in the US.
Itâs hard to change longstanding practices overnight. To support you, weâve gathered a list of AML requirements that are outlined by the 5th AML Directive. This compliance checklist is relevant not just for European art businesses, but also for all art traders that want to protect themselves from money laundering sanctions.
Suggested read: 6 Key Steps to a Successful Anti-Money Laundering (AML) Program in 2023
In the art industry, you have to conduct due diligence checks not only on clients, but also on the art itself. This is commonly known as provenance. We want to share the industryâs best practices for checking the authenticity of artwork.
Apart from examining the work itself, art dealers should obtain all documented information about the piece (invoices, photographs, exhibition catalogs, etc.). It is also recommended to run the piece against stolen art databases, such as Interpolâs the Stolen Works of Art database, the Art Loss Register, and the ICOMâs Red Lists.
Moreover, art dealers should check that the piece in question agrees with the sellerâs profile. For instance, it might be suspicious if a politician with no previous connection to art suddenly tries to sell a Victorian antique vase.
The Responsible Art Market (RAM) has also compiled a guide which includes the following recommendations for art dealers:
The AML guide compiled by the Basel Art Trade may also be useful.
Since the traditional art sector has recently become subject to AML legislation in many parts of the world, criminals have moved into NFTs.
The biggest vulnerability of NFT marketplaces is that user identities are not verified. Criminals can create an NFT, register two separate accounts (one for selling and one for buying), and purchase the NFT from themselves. This is a classic money laundering method now used in the world of NFTs.
Moreover, NFT prices are highly volatile and speculative, which also makes this market attractive for launderers. Indeed, an NFT that was bought for $1 can be sold for thousands or even millions the next day, allowing criminals to launder money through legitimate transactions.
Therefore, according to FinCEN, the âemerging digital art marketâ presents a threat for potential money laundering and financial crime.
To prevent money laundering and various kinds of fraud, NFT marketplaces should implement KYC procedures and build a strong AML-compliance program. Check out the following guide to learn how.
Suggested read: Building AML Compliance for NFT Marketplaces
Criminals use artworks to hide the source of illegally-obtained funds. They buy and sell artworks, hiding its true ownership, and inflate their prices.
Criminals can create an NFT, register two separate accounts (one for selling and one for buying), and purchase the NFT from themselves. This is a classic money laundering method now used in the world of NFTs.
