Other discussions at the plenary centered around:

• Changes to the grey list
• The suspension of Russia’s FATF membership 
• Enhancing beneficial ownership transparency 
• Identifying and disrupting the financial flows from ransomware
• The FATF Vice Presidency (2023-2025)

Digital Art and NFTs

The FATF’s report features a section on digital art and non-fungible tokens (NFTs). While 2021 saw a sharp increase in digital art sales associated with NFTs – the sector’s potential market value reached $44.2 billion compared with $106 million in 2020 – blockchain analysis firm Elliptic found that over $100 million worth of NFTs were publicly reported as stolen through scams between July 2021 and July 2022. 

While the regulation and supervision of NFTs remains incipient or nonexistent in many jurisdictions, the FATF has identified market vulnerabilities of NFTs related to money laundering. These include:

• The ease of transferability of ownership
• The lack of transparency
• Subjective pricing
• The absence of a need to physically transfer the art
• The possibility of exploiting the flaws in smart contracts used by an NFT platform in thefts or other illicit activities
• High-value transactions
• The lack of monitoring of NFT wallets and the concealability of underlying VA transactions
• The inherent exposure to online theft
• Wash-trading
• The range of market participants that facilitate their exchange

However, the FATF also noted that some of these vulnerabilities may be mitigated if policies and operational techniques were developed to improve the ability of law enforcement to track the transfer of NFTs between parties. 

Money Laundering Risk Indicators for the Wider Art Market

The guidance also includes a non-exhaustive list of risk indicators relating to money laundering and terrorist financing in both the public and private sectors of the art and antiquities market. These include:

• The use of shell companies, trusts, or third-party intermediaries, including art dealers, brokers, advisers, or interior designers, to purchase, hold, or sell cultural objects
• Cash transactions, in particular using large amounts of cash
• The use of large-denomination banknotes
• Sales or purchases of art involving purchasers who do not appear to be concerned with paying a substantially higher price than the notional value of the work
• Sales or purchases of art where a client is not interested in the provenance, history, style, genre, or artist of an object
• The unwillingness of a customer to provide identification information to receive an art-collateralized loan, or early repayment or use of cash to pay such a loan
• Transactions involving art market participants (AMPs) without expertise in concluding high-value purchases or sales 
• Transactions involving politically exposed persons (PEPs) or their family members or close associates

The FATF reminds compliance staff that while a risk indicator may demonstrate or suggest the likelihood of suspicious activity, a single indicator concerning a customer or transaction may not alone warrant suspicion. Rather, firms should use the risk indicators to prompt further monitoring and examination, where appropriate. 

AML Requirements for UK Art Market Participants 

In February 2023, the British Art Market Federation also issued updated guidance on AML requirements for UK AMPs and how they can be implemented. This guidance builds on the initial guidelines that were published in August 2022. Approved by HM Treasury, the advice aims to provide a detailed explanation of the new requirements outlined in the European Union’s Fifth Anti-Money Laundering Directive (5AMLD), which came into force across all member states on January 10, 2020. 

The main amendments to the guidance center around legislative updates and a clarification on the obligations of AMPs to report inconsistencies in company information that come to their attention. Specifically, the updated guidance reflects the following:

• Artists selling their own work are no longer subject to AML requirements, but artists selling works on behalf of other artists must register as an AMP and follow appropriate customer due diligence (CDD) procedures
• In addition to assessing the risk of money laundering and terrorist financing, AMPs must now also assess the risk of proliferation financing when analyzing the risk profile of their business and customers
• From April 1, an AMP must obtain full details of beneficial owners when the customer is an unlisted company, registered trust, or limited liability partnership
• AMPs must report to HM Revenue and Customs (for registered trusts) and Companies House (for companies) any discrepancies in the information they have received regarding beneficial owners of customers, such as:
  • Different names
  • Incorrect date of birth
  • Inconsistent nationality
  • Different correspondent address

For further guidance on obtaining beneficial ownership information, compliance staff should look out for upcoming guidance from the FATF due to be published in March 2023. 

To learn more about the key takeaways from February’s plenary session, read our coverage here.

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While the guidance offered by the British Art Market Federation is not mandatory for AMPs to implement, departures from the guidelines must be documented along with the rationale for doing so. According to the document, “AMPs may have to stand prepared to justify departures to HMRC and the courts.” 

5AMLD and the art trade

5AMLD introduced changes that brought AMPs into the scope of the Money Laundering, Terrorist Financing and Transfer of Funds Regulations 2017 (MLRs). Under the rules, AMPs must implement the same anti-money laundering and combatting the financing of terrorism (AML/CFT) measures that apply to banks, real estate agents, notaries, and other financial institutions. 

In addition to providing added clarity on specific terminology, the guidance confirms that under 5AMLD, AMPs must do the following:

• Register with HMRC – applicable to AMPs that facilitate sales where the value of a transaction, or a series of linked transactions, amounts to €10,000 (£8,600) or more
• Carry out a written AML risk assessment
• Maintain a written prescribed range of policies, controls, and procedures  
• Carry out customer due diligence (CDD) measures before a transaction is concluded 
• Appoint a nominated officer  
• Train staff appropriately  
• Submit suspicious activity reports (SAR) to the authorities  
• Keep appropriate records of CDD and transactions

Intermediaries 

The Money Laundering Regulations 2017 apply to and define AMPs as traders or “intermediaries” in the sale or purchase of works of art valued at €10,000 (£8,600) or more. In the updated guidelines, the previously undefined term “intermediary” is clarified as  “someone who, by way of business, actively transacts in the sale or purchase of works of art on behalf of a seller or buyer under whose authority they act.” Through this definition, the guidelines confirm that an intermediary can refer to art dealers, agents, auction houses, art galleries, and online sales platforms that conduct relevant activity by selling to UK customers.

The guidance also confirms that any person who does not actively participate in purchasing or selling a work of art, such as framers and shippers, is not an intermediary.

AMP risk assessment guidance

Two days before the British Art Market Federation issued this guidance, HMRC released guidance on understanding money laundering risks in the art sector and how AMPs should take action against these risks following a money-laundering risk assessment. 

Some of the critical risks identified that all AMPs should be aware of include:

• Anonymity: Anonymous trades are advantageous to those seeking to launder money as they can hide their involvement and their source of funds 

• Remote sales: Transactions made online, over the phone, or via an intermediary decreases effective identification and increases vulnerability to money laundering and terrorist financing 

• • Unusual sales or purchase activity: Anything that is not consistent with the standard practice for the type of business concerned is a key risk indicator

• High-risk jurisdictions: The purpose and nature of any transaction with businesses from high-risk jurisdictions should be carefully considered

Key takeaways

Compliance staff should ensure they read HMRC’s risk assessment guidance in conjunction with the AMP guidance and other relevant documents, such as the National Risk Assessment 2020 and guidance produced by the Financial Action Task Force (FATF).

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With anti-money laundering (AML) regulations continuously being updated and tightened, some of the more “traditional” money laundering vehicles, such as real estate, may become less attractive to criminals. Art money laundering, however, continues to be an attractive avenue as the industry’s price fluidity and traditional use of free ports can be exploited by criminals to anonymously abuse the system. 

What is art money laundering? 

Art money laundering involves the buying and selling of art and antiquities – often at inflated prices – to disguise the origins of illegally-obtained funds and reintroduce them into the legitimate economy. In addition to “works of art” and “antiquities”, the FATF also includes “cultural objects” in its sector-specific guidance due to the prevalence of forgeries and illegal trafficking being used to launder funds and finance terrorist groups or activities. 

The FATF’s report highlighted 40 examples of money laundering in the art market, over half of which involved fine art. The report also shows examples of money laundering that implicated non-fungible tokens (NFTs), which are susceptible to misuse due to numerous vulnerabilities, including the ease of transferable ownership and subjective pricing.  

How does art money laundering work?

Criminals exploit many unique factors related to the art market to launder illicit funds. Common techniques and tactics include:

• Price inflation: Since the artwork valuation process is not regulated, criminals and their co-conspirators will often use this as an opportunity to purposely drive up the price at auction, allowing them to launder large amounts of money in one sale. 
• Anonymity: Regulations in many jurisdictions enable criminals to maintain anonymity at auctions through agents, brokers, advisors, and other intermediaries hired to represent them. This can make it difficult for art market participants (AMPs) to fully understand who they are doing business with.
• Ultra-secure freeport warehouses: These are commonly used to store purchased artwork. In these locations, merchandise is classed as “in transit” and is exempt from customs duty, making it a tax haven for legitimate buyers as well as oligarchs and drug kingpins with money laundering intentions. 
• Changing ownership: Artwork stored in freeports can also technically change ownership multiple times through selling and reselling, putting further distance between the latest transaction and the origin of the illicit funds.
• False shipping invoices: Sometimes, fraudsters fill out false documentation or shipping invoices to smuggle stolen artwork and forgeries into countries where they go on to be sold. According to the FATF, multiple case studies showed this to be a common method of terrorist financing, particularly with physically small antiquities or cultural objects that attract less attention.
• Misuse of corporate structures: Criminals often use intermediaries such as shell companies or non-profit organizations (NPOs) to obscure the transfer of high-value art, hide the source of funds, and conceal the identities of sellers and buyers.
• Bribery: The FATF highlights multiple case studies in its 2023 report that showed corrupt officials receiving high-value art as a bribe or kickback rather than receiving payment directly through the financial system. This method allows the involved parties to avoid moving funds between bank accounts, complicating attempts to trace the funds.

Regulators are aware that these types of activities are ongoing and are working to create new art and antiquities AML regulations, to curtail the illegal use of these markets. 

Example of art money laundering

A prominent example of art money laundering hit the headlines in 2015 when local Philadelphian art dealer, Nathan “Nicky” Isen, was charged with money laundering and fined $15,000 for advising an undercover cop on how to launder her “drug money”. 

Isen had been introduced to the police by Ronald Belciano, a convicted drug dealer and previous customer of Isen’s who had been caught buying artwork to launder his illicit funds. When Belciano’s house was raided in 2011, vast amounts of high-value artwork were found alongside $2.5 million that was hidden in a secret compartment under a fish tank.

While Isen denied knowing about Belciano’s money laundering scheme and was not convicted, he was charged four years later on account of his conversations with a wired undercover agent.

AML regulations in the art and antiquities market

Regulators across the globe are aware that art money laundering activities are ongoing and are working to set forth new regulations to curtail illegal activities within the art and antiquities market. 

Art AML regulations in the US

The Anti-Money Laundering Act of 2020 (AMLA 2020) brought antiquities dealers under the same AML regulatory framework that previously applied to US financial institutions via the Bank Secrecy Act (BSA). Becoming law in January 2021, AMLA 2020 requires antiquities businesses to identify beneficial owners; train staff on appropriate record keeping; keep provenance and transaction records; adopt appropriate compliance policies; report obligations, and audit their recordkeeping and compliance measures.

The US Treasury published a report in February 2022 on the facilitation of money laundering and the financing of terrorism through trading high-value artwork. The study found that while the art market is vulnerable to money laundering, further regulations are not required until “we’ve tackled more systemic issues, like creating a beneficial ownership registry to crack down on shell companies”, says Scott Rembrandt, Deputy Assistant Secretary for Strategic Policy in the Office of Terrorist Financing and Financial Crimes.

Art AML regulations in Canada

The FATF’s 2016 Mutual Evaluation Report of Canada identified the luxury goods sector as an area with increased money laundering and/or terrorist financing risks, including luxury automobiles, art, and antiques. A subsequent report issued by the Standing Committee on Finance of Canada’s House of Commons in 2018 reiterated this. It recommended that “the Government of Canada require companies selling luxury items to be subject to reporting requirements under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) and report large cash transactions to the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) if those transactions are not already reported through other means.”

In June 2019, an amendment to the Criminal Code of Canada came into effect, which broadened the possibility of financial intermediaries being prosecuted for money laundering offenses if they are “reckless as to the source of those funds”. If the recommendations in the FATF and finance committee reports are implemented, each high-value sector dealer will need to implement a rigorous risk-based AML program to avoid such prosecution. This includes conducting due diligence for clients, conducting enhanced due diligence (EDD) for clients in high-risk jurisdictions, and monitoring and reporting suspicious activity.

Art AML regulations in the EU

The European Union’s Fifth Anti-Money Laundering Directive (5AMLD) came into effect on January 10th, 2020. Expanding the scope of previous legislation, 5AMLD requires art businesses within EU member states – including agents, dealers, galleries, auction houses, warehouses, and any other individual or firm involved in the buying, selling, or storing of art – to implement risk-based AML/CFT programs. 

The Sixth Anti-Money Laundering Directive (6AMLD) followed a year later and is regarded as the EU’s toughest set of measures to deter money laundering to date. 6AMLD essentially made Anti-Money Laundering (AML) screening and customer due diligence (CDD) compulsory for all participants in the art market and provided harsher penalties for any violations moving forward.

Art AML regulations in the UK

When it left the EU in 2020, the UK adopted the EU’s AML Directives and amended its Money Laundering, Terrorist Financing and Transfer of Funds Regulations Act (MLR) 2017, to include provisions applicable to the art market. 

In 2020, the Treasury issued guidance to art market participants for money laundering supervision. The guidance states, “Art market participants who deal in sales, purchases and/or storage of works of art… with a value, for a single transaction or a series of linked transactions, of 10,000 euros or more, will be subject to further anti-money laundering obligations, under the Money Laundering Regulations 2017.” 

These obligations include the requirement for obliged entities to register with HMRC, establish and maintain AML procedures, nominate a person responsible for AML compliance, conduct training for the entity’s staff, report suspicions, and keep applicable records.

Following this, in June 2022, the British Art Market Federation issued updated guidance on AML requirements for UK AMPs and how they can be implemented. While the guidance offered by the Federation is not mandatory for AMPs to implement, departures from the guidelines must be documented alongside the rationale for doing so.

What are the challenges in combating art money laundering?

Despite these regulations, various risk factors associated with the art market can make it challenging for AMPs to distinguish legitimate sales from money laundering activities. Some of these challenges include:

• Navigating insufficient or inconsistent regulations: In its commentary on the FATF’s 2023 art market guidance, UK think-tank RUSI noted that while art dealers are subject to reporting requirements in some countries as high-value goods dealers (HVGDs), there is no common or consistent regulatory approach. Currently treated as a “regulatory add-on at the discretion of each jurisdiction,” RUSI said this leaves the art market “highly exposed to abuse”.  
• Subjective pricing: While art dealers, curators, and gallery owners usually play a role in gauging the value of a piece of art, the process is ultimately subjective as prospective buyers can radically raise the price while at auction. This can create a challenge for compliance staff as they seek to determine whether the price is legitimate or whether it was deliberately inflated to allow the buyer to launder a higher amount of illicit funds. 
• Identifying forgeries and fakes: According to the FATF, forgeries of art and cultural objects are more likely to occur in the secondary art market, where the artists and/or their representatives are absent during the sale. In addition to generating illicit sales, forgeries present a significant threat to the financial system as they can be used as collateral for loans. This is when criminals insure forged art or cultural objects at the price of the real ones and fraudulently present them to financial institutions as collateral for borrowing large sums of money.
• Handling buyer anonymity: While anonymity has historically been favored in the art market to prevent bias in the bidding process, the practice can make it difficult for law enforcement to effectively trace the movement of dirty money and track the ownership of particular assets.

How to mitigate art money laundering risks

1. Ensure familiarity with red flag indicators

In a March 2023 interview, Rena Neville, Lead AML Consultant at FCS Compliance and ex-Global Compliance Director at Sotheby’s, reminded art market professionals it is “not sufficient” to know “your client personally and have a good feeling about them.” Rather, firms must ensure their staff are “truly familiar” with red flag indicators of corrupt finance and criminal clients. 

The FATF provides a non-exhaustive list of red flags relating to money laundering and terrorist financing in the art and antiquities market, including:

• Cash transactions, in particular using large amounts of cash
• The use of large-denomination banknotes
• Sales or purchases of art involving purchasers who do not appear to be concerned with paying a substantially higher price than the notional value of the work
• Sales or purchases of art where a client is not interested in the provenance, history, style, genre, or artist of an object
• The unwillingness of a customer to provide identification information
• Transactions involving AMPs without expertise in concluding high-value purchases or sales 
• Transactions involving politically exposed persons (PEPs) or their family members or close associates

Additionally, HM Revenue & Customs in the UK published guidance on understanding money laundering risks and taking action for AMPs in June 2021. The guidance highlighted five cross-sector risks for all art market participants: off-record sales, anonymity, face-to-face sales, unusual purchasing activity, and high-risk jurisdictions. 

2. Harness the power of AI-driven AML solutions

Neville also highlights the importance of “tech tools” to carry out comprehensive screens of global databases. Firms working in or with a nexus to the art and antiquities market should implement robust AML solutions to mitigate the risk of art money laundering. Some solutions to incorporate into an AML program include: 

• Customer screening: Whether screening customers at the onboarding stage or on an ongoing basis, firms should consider partnering with a vendor with a real-time AML risk database and the ability to refresh entity profiles within minutes of a change. Not only will this enable AMPs to exceed regulatory screening and CDD requirements, but it also helps firms effectively establish who they’re doing business with and whether or not they want to continue the relationship if a customer’s risk profile was to change. 
• Transaction monitoring: AMPs should prioritize implementing a transaction monitoring tool where custom rule sets can be built to mitigate the threat of emerging art money laundering typologies. Considering the high-value nature of the arts and antiquities market, AMPs should also ensure their solution has easily adjustable thresholds. 
• KYB: For corporate clients, firms should utilize a robust know-your-business (KYB) screening solution that facilitates the mapping out of company ownership and control through a single combined search. Since corporate structures are often misused in art money laundering, a good KYB solution can help firms mitigate that risk. 
• PEP screening: As identified by the FATF, high-profile officials and politically exposed persons (PEPs) can sometimes present a higher risk of money laundering, particularly if they have received valuable works of art and antiquities as a bribe or kickback. AMPs should ensure they have a robust PEP screening tool in place to mitigate this risk, adjusting their ongoing due diligence measures accordingly. 

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One of 5AMLD’s key new requirements was the extension of the scope of AML/CFT compliance regulations to art dealers (persons trading or acting as intermediaries in the trade of works of art, including auction houses and galleries). The extension was motivated by insights from previous money laundering directives that indicated criminals were increasingly using the art trade to launder money, exploiting opportunities to conduct high value trades with an almost guaranteed level of anonymity.

New AML Responsibilities

Under the new rules, art dealers must implement the same AML/CFT measures that apply to banks, real estate agents, notaries, and other financial institutions, where the value of a transaction amounts to €10,000 or more. In practice, this means that art dealers must:

• Implement a risk-based AML/CFT program
• Conduct customer due diligence (CDD) checks
• Monitor customer transactions for suspicious activity
• Screen customers against sanctions lists
• Monitor for politically exposed person (PEP) status 
• Monitor for adverse media involving customers
• Submit suspicious activity reports (SAR) to the authorities

Money Laundering Methodologies

The art market represents such an attractive target for money launderers because of the status that works of art have within certain communities and the potential to use those works as vehicles to insert illegal funds into the legitimate financial system. The art trade is specifically useful to money laundering methodologies in the following ways:

• Art can be stored in free ports (such as Geneva, Singapore, Monaco, and Delaware) that offer tax advantages, high levels of anonymity, and secrecy. 
• Works of art may be sold to offshore countries in locations all over the world. 
• Works of art may be purchased with cash. 
• Once purchased, works of art do not need to be moved from the ports in which they are stored. 
• Art purchases often do not require the disclosure of the ultimate beneficial ownership (UBO) of companies involved.
• The value of artwork can be subjective and works of art can easily be over and undervalued. 

Case Study: The Nahmad Family

In 2016, the leaked Panama Papers brought a range of international money laundering activities to light, including numerous crimes involving the art trade. 

While it did not involve money laundering, a particular case from the leaked documents illustrated how the anonymity of the art trade helps criminals disguise their identities. The case in question involved well-known art dealers the Nahmad family who had formed a company in Panama called the International Art Centre (IAC) with the assistance of Panamanian law firm Mossack Fonseca. In 1996, the IAC bought the painting “Seated Man with a Cane” by Amadeo Modigliani for $3.2 million in an auction organized by Christie’s of London. In 2011, the painting was subject to a claim in a Nazi-related restitution case however the Nahmad family was able to deny owning the artwork and conceal its beneficial ownership of the IAC. The Panama Papers leak revealed the Nahmad family’s 20 year ownership of the painting along with their ownership of the IAC. 

Ongoing AML Compliance

The Nahmad family case illustrates the need to accurately establish and verify customer identities and the beneficial ownership of firms involved in art transactions. Accordingly, 5AMLD regulations ensure that firms involved in the art trade develop and implement effective know your customer (KYC) systems in order to obtain the relevant information from their clients and customers and assist in any subsequent criminal investigations. 

Beyond the identification and verification of customers, art dealers have a responsibility to conduct ongoing AML checks and monitoring. Over the course of a business relationship, customers may be added to sanctions lists, become politically exposed persons (PEP), or be the subject of adverse media stories: each eventuality represents a change to the customer’s risk profiles and, by extension, the necessary AML response from the firms dealing with them. 

Given the amount of data required by the modern AML process, art traders should carefully consider how to meet their compliance responsibilities and take into account the potential benefits of smart technology tools such artificial intelligence and machine learning models. Smart technology brings automated speed and efficiency to the AML data collection and analysis process:  in addition to helping firms detect and address money laundering incidents in a timely manner, smart technology allows firms to implement versatile compliance programs that can deal with emerging criminal behaviors and adapt to new legislation such as the EU’s upcoming 6AMLD.

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