Treasury Releases Study on Money Laundering and Terror Financing Through Art Trade

The passage of the Anti-Money Laundering Act (AMLA) of 2020 demonstrated that the US government is looking at more effective ways to combat financial crime and money laundering (ML). As part of that law, Congress mandated that the Department of the Treasury undertake an investigation of the risks of ML and the potential for terrorist financing (TF) in the art world. In early February 2022, the Treasury published the aptly named, “Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art.” Overall, “the study found some evidence of ML risk in the institutional high value art market but found little evidence of terror financing risk.”

 

Purpose of the Art Study

The Treasury study both explores the magnitude of ML and TF risk posed to the US financial system by the art trade and identifies the types of market actors, geographic regions, and criminal mechanisms most closely associated with these risks. Additionally, it aims to assess the level of need for regulations on these actors, asks if there should be any thresholds or exemptions based on the scope of a market participant’s engagement, and seeks to answer “whether information on certain transactions in the trade in works of art has a high degree of usefulness in criminal, tax, or regulatory matters.”

With global art sales estimated at over $50 billion annually, there is immense potential for ML in the sale and trade in high value works of art. This is commonly attributed to the high dollar value of single transactions, the easy transportability of artwork, a tradition valuing the privacy of buyers and sellers, and the increasing use of art as a store of value. The study paid special attention to “non-fungible tokens” or NFTs, digital art that is created on a blockchain. While total sales at traditional art markets declined over the past year, pandemic-induced growth in online sales of traditional art and digital art has presented new challenges for market actors and unique opportunities for those seeking to profit from illegal activity alike.

What Does this Mean for Financial Institutions?

The report poses four recommendations to combat ML risks in the high value art market. These include: 

  1. Creating and strengthening private sector information-sharing programs to encourage transparency among art market actors.
  2. Updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies. 
  3. Using Financial Crimes Enforcement Network (FinCEN) recordkeeping authorities to support information collection and enhanced due diligence.
  4. Bringing certain art market participants under the AML/Combating the Financing of Terrorism (CFT) legal framework and obligating them to create and maintain AML/CFT programs.

The first recommendation suggests the creation of a customer due diligence database and codified data collection controls on art market participants. This type of tool has potential for use by financial institutions (to assess credit risk for lending), by law enforcement (to aid investigations), and by art market participants (to vet prospective buyers and sellers based on their market participation history). 

The third and fourth recommendations are regulatory in nature and consequently face an uncertain chance of introduction or subsequent passage by the Legislative and Executive branches of the government. Should FinCEN enact reporting requirements targeted to high risk market types (e.g., NFT marketplaces) or geographic regions, art market participants would face new challenges in purchaser and intermediary identification. More specifically, these recommendations are targeted to art finance companies that offer collateral-based loans or facilitate lending through banks, without being subject to AML/CFT requirements themselves. Where banks and other FIs are obligated to use fraud controls and know-your-customer tactics for their dealings with these art financiers, the legislative products of these Treasury recommendations would now require the art finance companies themselves to design and implement their own AML programs.

How can Guidehouse Help?

Guidehouse is uniquely positioned to help both financial institutions and a variety of art market participants, including NFT platforms, to mitigate their financial crime risk now, and to comply with new AML requirements in the future.

The study noted that many interviewees highlighted there is no standard means of providing information on art transactions and the relevant parties to law enforcement. This is particularly perilous for players in the emerging world of decentralized finance, where the purchase of digital art and NFTs is rapidly gaining market share, compared to traditional art markets. Guidehouse offers market-tested expertise in the development of AML and anti-fraud compliance programs for clients ranging from retail and commercial banks to cryptocurrency exchanges.

Guidehouse also offers comprehensive and continuous compliance reviews to ensure clients are not only meeting Treasury and FinCEN guidelines, but proactively anticipating developments like those proposed in this latest Treasury study. This includes prioritizing controls to protect clients from dealing with sanctioned parties, ensuring end-to-end knowledge of market actor profiles and behaviors, and an industry-leading commitment to best practices. 

 
Special thanks to Michael Freed for contributing to this article

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