EU, US and UK tackle the problem
Authorities in the leading art markets, recognising the scale of the challenge, have recently tightened anti-money laundering regulations, placing greater responsibility on market participants and increasing the financial penalties that can be imposed on those who do not conform. These regulations include measures focused on establishing the ultimate beneficial ownership of pieces, understanding the source of wealth of buyers, and encouraging wider awareness throughout the market. The most important recent initiatives are:
The US Anti-Money Laundering Act of 2020 which requires art businesses to identify the ultimate beneficial owners, keep provenance and transaction records, and adopt and audit appropriate compliance policies.
The Sixth EU Anti-Money Laundering Directive (implemented in June 2021) which made anti-money laundering screening and customer due diligence compulsory for all art market participants and introduced sanctions for violators in the EU.
The UK Money Laundering and Terrorist Financing Regulations 2019 which outline similar measures to the EU legislation and require art market participants handling transactions worth £10,000 or more to register or face fines of up to £100,000.
The Financial Action Task Force (FATF) issued a report in February 2023 highlighting the risks in the art market. The report similarly pushed for market participants to implement anti-money laundering programmes and undertake customer due diligence on suspicious operations.
Non-compliance now comes with the risk of substantial fines, with the penalties for money laundering including jail sentences. The risk of reputational damage has also increased, which overlooked could lead to the disruption of business relationships for many years.
The risk of involvement in illicit activities is well illustrated by the case of Jean-Luc Martinez, former president and director of the Louvre in Paris. A French appeals court recently upheld fraud charges against him in an indictment for money laundering and complicity in the smuggling of artefacts for the Louvre Abu Dhabi: the artefacts had allegedly been looted and had fraudulent certificates of provenance as well as fake export licences.
The Martinez case demonstrates the need for art market participants to understand as much as possible about the origin of the assets being sold, as well as the identities and sources of wealth of those funding the purchase. And these checks must be undertaken proactively: once a sale has been completed, it may be too late to check where the funds for the purchase came from. Art market participants must therefore prioritise effective customer due diligence, including know your customer (KYC) checks.
Nevertheless, identifying the ultimate beneficial owner of funds is rarely straightforward. In the art market in particular ownership often passes through complex corporate structures in multiple jurisdictions that are designed to hide the true identity of those behind the transaction.
Tracing the links in the chain may require substantial work and specialist knowledge. Tasks include identifying the various corporate entities in the chain, which may be registered in offshore locations; mapping the links between them; ascertaining who is behind them; and ultimately establishing if there are any questions over the sources of their wealth (including pending investigations).
A daunting task
The extent of the work involved in such KYC checks and the specialist knowledge required may be daunting for in-house teams, particularly in organisations with limited resources and when time is short ahead of a planned sale or auction.
Art market participants should therefore consider working closely with due-diligence specialists who have experience in anti-money laundering investigations and are better equipped to identify potential risks. Engaging in such work early will help ensure that potential issues are identified in good time and appropriate action can be taken, so as to avoid unwanted penalties. And when things do go wrong, art market participants and their legal counsel can still call upon the assistance of such specialists in dealing with potential violations of the newly introduced legislation, or disputes centred around the art itself.
The Risk Advisory Group has experience conducting complex investigations in the art industry across the globe. We have undertaken multiple investigations into the asset profiles and sources of wealth of individuals with whom our clients are transacting, as well as into counterparties to legal action. Below we highlight two recent investigations that dealt with the complexities presented by the art industry.
Author: David Martin Santidrian, Senior Associate, Business Intelligence – Europe