When will the U.S. art market be regulated for AML? The U.S. Treasury findings released: Study of the Facilitation of Money Laundering and Terror Finance Through the Trades in Works of Art

February 6, 2022
by ArtAML™ Team

At last, the findings from the 2021 U.S. study on the potential application of anti-money laundering in the art sector have been published.

This article accordingly highlights top-level insights from the U.S. Treasury’s 40-page ‘Study of the Facilitation of Money Laundering and Terror Finance Through the Trades in Works of Art’ (“Study”). Our aim in writing this piece is to help art market participants and service providers to the industry understand the direction that the U.S. appears to be taking for bringing the industry into scope.

Money laundering versus terrorist financing targeted at the art market? One of the first points made by the Study parallels a finding in the UK’s National Risk Assessment 2020. The Study found (p.1):

“…some evidence of ML [money laundering] risk in the institutional high-value art market but found little evidence of TF [terrorist financing] risk
.” This indicates a future focus on money laundering risks, with reduced emphasis on terrorist financing.

What are the identified risks? The Study highlights the following factors (p.1):

“…the high-dollar values of single transactions, the ease of transportability of works of art, the long-standing culture of privacy in the market (including private sales and transactions), and the increasing use of art as an investment or financial asset.”

Considerations with the modern art market in mind? Also noted early in the Study is the vulnerability inherent in online market activities, with an explicit mention of NFTs (p.1):

“…the emerging online art market may present new risks, depending on the structure and incentives of certain activity in this sector of the market (i.e., the purchase of non-fungible tokens [NFTs], digital units on an underlying blockchain that can represent ownership of a digital work of art).

The timing of the Study – amidst the pandemic and explosion of NFTs, has therefore resulted in a modernised view of risks that will feed into future mitigations presented by the U.S. Treasury.

As for overall risks? In a broader consideration of financial crimes, the Study outlines the following qualities for vulnerabilities when transacting in high-value artworks (p.9):

  • The relatively high value of art compared to other retail goods and commodities;
  • The historically opaque nature of the high-value art market;
  • Subjective valuations and the lack of stable and predictable pricing;
  • The transportability of certain types of artworks, including across international borders;
  • The difficulty faced by law enforcement to monitor such movements and assess the value of artwork, including across borders; and
  • The accepted use of third-party intermediaries to purchase, sell, and hold artwork while their clients remain anonymous (i.e., art dealers, advisors, interior designers, shell companies, trusts).

There are parallels of the above to HMRC’s Risk Guidance (UK), published in June 2021. Fascinatingly, both the Study and the Risk Guidance specifically name interior designers as potential intermediaries, although they were not initially listed when the UK introduced the Money Laundering Regulations in 2020.

What about the sector’s willingness – or lack thereof, to provide due diligence when required? The Study presents an insight that indicates a cultural shift taking place (p. 32):

“Outreach to industry over the course of the Study identified that historic resistance by art market participants to provide due diligence information to compliance teams at larger art market institutions, such as auction houses, has already begun to fade…

Additionally, the following line stands out, as it speaks to a common concern amongst UK-based art market participants with whom we speak (p. 33):

“Previous concerns regarding client stealing have become less prevalent…”

Continuing in this vein, the Study addresses the divide between compliance team members and sales team members, with the latter (in businesses with teams) potentially being tempted to use client information for business and client development. While the Study suggests there is delineation in the roles and suggests that compliance team members are the only ones with access to information collected for due diligence, the reality is that unless you’re using a system such as ArtAML™ that masks such information, art businesses are at risk of collected information being misused.

Will the U.S. implement the equivalent to Regulation 41 of the Money Laundering Regulations (UK), making it illegal to use information collected for any purpose but compliance adherence? Only time will tell.

What about value threshold and international harmonisation (p. 33)?

The Study states that as the largest art market in the world (42% according to the Art Basel / UBS Global Art Market Report 2020), standards set by other countries are not relevant. According to taking a risk-based approach, it is presented that the U.S. might present a two-tiered system:

  • Individual transactions of $50,000; and
  • Cumulative transactions by one customer in a year of $200,000

Bear in mind that in other jurisdictions, the value includes tax and directly associated costs on the invoice, as the point is about the value of money being moved.

When is the U.S. likely to implement? The Study’s conclusion indicates that there could be some time yet before the U.S. implements anti-money laundering for the art market?

“…it is recommended that Treasury complete its ongoing work to close outstanding gaps in the U.S. AML/CFT regime related to beneficial ownership, real estate, and potentially investment advisers and nonfinancial gatekeepers before potentially turning its attention to the high-value art market.”

Our reading of the situation:

Providing the U.S. Treasury takes the final recommendation on board, it will be several years before the U.S. sector is regulated for AML in a way that is parallel to its counterparts in the UK and around Europe. While that might be welcome by many, this presents challenges for cross-border transactions, and moreover, does not alleviate existing burdens, for example, to not transact with individuals or companies that have been sanctioned by the U.S. In our experience, many art businesses will not be aware of existing regulations and could be unwittingly breaking the law. Lack of awareness does not alleviate legal responsibility.

Read the full report:
​​Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art

Further reading:

> See our article on HMRC’s Risk Guidance that provides excellent insights based on their real-life, on-the-ground findings as sector regulator (pub. June 2021):
> See our overview of HMRC’s Risk Guidance (2021): https://artaml.com/hmrcs-risk-guidance-for-the-art-market-a-must-read/
> Access the UBS / Art Basel Global Art Market Reports: https://artbasel.com/about/initiatives/the-art-market

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