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Best practices for KYC/AML

6 min read

Money Laundering Within the Art Trade and What Art Dealers Can Do About It (With the Checklist)

In December 2019, the US Treasury Department sanctioned Nazem Said Ahmad, a prominent gallerist from Beirut. The investigation has proven that Mr. Ahmad used his gallery and his impressive personal collection, which included works of 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, and terrorist organizations like ISIS trade in cultural artifacts to finance their activities. However, the art world is changing, and, as of 2020, art traders in all European countries and the UK became regulated.

The highlights

  1. Why the art sector is so attractive to money launderers
  2. How criminals launder money through art and why this is everyone’s problem
  3. What has changed since 2020
  4. The standard compliance checklist for art dealers
  5. Specific recommendations for the verification of art dealers
  6. Where to find out more

Why the art sector is so attractive to money launderers

With global sales reaching $64.1 billion in 2019, the art sector is a huge source of illegal wealth. The main reason for this is that the industry is mostly unregulated and the artwork prices are easily manipulated. Below, you will find the principal factors that allow criminals to generate illicit funds through the art trade.

  • Protection of private life

Let’s examine a usual case: a wealthy family enters financial trouble and decides to sell its collection, but they do not want people to find out about their misfortune, so an art dealer conceals their identities.

Because individuals’ privacy is so respected within the art industry, it is often difficult to trace the path of the artwork. This allows criminals to deal in art absolutely anonymously.

  • Subjective pricing

Even if there are some objective factors, the prices of contemporary artworks are often driven by incidental factors—they can depend on the number of Instagram followers on the artist’s page, on a dealer’s reputation or on current trends.

For instance, one of Gerhard Richter’s paintings was originally bought for $260,000, and just 30 years later, when the painter became better known, it was sold for $33 million. This very subjectiveness allows criminals to manipulate prices: you can buy a painting for $100 today, sell it for $1 million tomorrow, and you have not only laundered money but earned more.

  • Ease of transportation and concealment

Artworks are so easy to move: One can send a piece to another country with a fake invoice or just transport it on a private plane, and no one would notice. Let’s take a look at a real-world example of this.

In 2016, the US returned to Brazil several paintings that a Brazilian banker smuggled into the States. One of the paintings was worth $8m, but when it came into 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.

  • Lack of regulation

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 on the list of reporting entities.

In July 2020, the 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 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 buyers’ identities.

How criminals launder money through art and why this is everyone’s problem

Money laundering schemes can be quite straightforward.

Imagine: A corrupt politician decides to turn their illegal profit into ‘clean’ money. They anonymously buy Van Gogh’s painting at an auction and transport the piece via a private plane to a secure warehouse. The politician then legitimately sells the painting, without even taking it from the warehouse, and obtains the ‘clean’ money, completing the money laundering cycle.

Whether you are an art dealer, a buyer or a seller, if the authorities prove you to be involved in money-laundering activities, there will be a penalty. This penalty can be in the form of a fine, the revokement of a business license or even imprisonment. For instance, under the UK’s Proceeds of Crime Act, if a person knows the location of laundered property but does not disclose it, they can be put in prison for up to five years.

Also, since many countries now require one to report large transactions within the art sector, criminals lean towards money laundering through inexpensive art to avoid verification procedures. So, even an individual who buys a painting for $1000 can involuntarily become a part of a money-laundering scheme and face imprisonment.

Talk to one of our experts to learn how a reliable KYC solution can help you to avoid regulatory sanctions.

What has changed since 2020

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.

Who is affected: Art and antique traders (both individuals and businesses) as well as intermediaries (galleries, freeports, auction houses, etc.) that trade or store artworks worth over €10,000.

What has changed: 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 €10,000.

However, the global art industry is not so eager to adopt such AML requirements. For instance, the proposed amendments to the Bank Secrecy Act in the US, which aimed to include art dealers on the list of reporting institutions, have faced many objections from art traders. Dealers have argued that the regulation would bring too much bureaucracy and eliminate the culture of privacy.

The standard compliance checklist for art dealers

It is hard to change established practices overnight, so to support you, we’ve gathered a list of AML requirements that are outlined by the 5th AML Directive. This compliance checklist is relevant not only for European art businesses but for all art traders who want to protect themselves from money laundering sanctions.

  • Risk-based approach: An art dealer must evaluate the money laundering risks that their business is exposed to.
  • AML compliance program: This is a document that describes the company’s policies and safeguards meant to reduce the money laundering risks.
  • Know Your Customer (KYC) procedures: Verification checks must be applied for customers and their transactions.
  • AML compliance officer: Businesses operating within the art industry must appoint an AML compliance officer who will be responsible for a company’s overall compliance and reporting. A sole art dealer becomes, by default, the compliance officer of their business.
  • Reporting: Reporting obligations include reporting clients’ suspicious activity and financial reporting.
  • Recording of data: Art dealers are to record the results of customer verification checks and information on transactions.
  • Employee AML training: All individuals working within the realm of the art industry must be acquainted with the money laundering schemes and know how to deal with them.

We’ve talked about the standard AML requirements for businesses, so let’s move on to the specific guidance available for art dealers.

Specific recommendations for the verification of art dealers

Within 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 industry’s best practises for checking the artwork’s authenticity.

Apart from examining the work itself, art dealers should obtain all of the documented information about the piece (invoices, photographs, exhibition catalogs, etc.). It is also recommended to run the piece against ‘stolen art’ databases, such as Interpol’s the Stolen Works of Art database, the Art Loss Register, and the ICOM’s Red Lists.

Moreover, art dealers should check that the piece in question agrees with the seller’s profile. For instance, it might be suspicious if a politician that previously had no connection to art suddenly tries to sell a Victorian antique vase.

Where to find out more

With the 5th AML Directive on its way, many art dealers, that have never carried out AML compliance, feel lost. Here, you’ll find a number of links that can be useful for getting to grips with the latest AML requirements.

  1. Art Trade AML Principles
  2. The RAM’s list of red flags and what to do when you spot them
  3. Due diligence checklist for art traders
  4. The RAM’s guidelines on ML/TF

We know that AML compliance can be costly and burdensome, especially when maintained manually. To reduce the amount of work, you should think about automating your KYC procedures or reaching out to a reliable KYC & AML service provider. If you are totally new to the world of AML, you can hire a legal expert who can help you to evaluate the risks that you may encounter and create an AML compliance program.

Feeling lost with all the new AML requirements for art dealers? Check Sumsub’s wholesome solution.

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