The plan was simple: a wealthy client wishing to launder the proceeds of a stock manipulation scheme could do so through a Picasso painting. His accomplice would be Matthew Green, the owner of a prominent London art gallery and son of one of London’s most powerful art dealers. The client would purchase the painting using the illegal proceeds, own the painting for some time to avoid suspicion, and then sell the painting back to Green, who would transfer the original payment back to the client through a US bank—to “clean the money.” It was completely foolproof, except that the client turned out to be an undercover FBI agent.
Why a painting to launder the money? Because the art business is impenetrable by outsiders: it’s a world limited to highbrow art connoisseurs, dealers, and wealthy collectors, where the prices are whatever they want them to be. Here, $9.2 million, although the painting failed to sell at a much lower price estimate years before. And as the defendants in the Green case explained to their client, the art business is “the only market that is unregulated” by the government. It seems that the players in the art world make up their own rules, unchecked by any authority, making this elusive quality of the business the perfect “hotbed” for corrupt activity.
In May 2018—possibly in response to the February 2018 indictment in this case—legislation was introduced in US Congress to tackle the money-laundering problem in the art business (previously described on this blog). The Illicit Art and Antiquities Trafficking Prevention Act (Act) would cover art and antiquities dealers under the Bank Secrecy Act (BSA), which requires financial institutions and other regulated businesses to establish anti-money laundering programs, keep records of cash purchases, and report suspicious activity and transactions exceeding $10,000 to government regulators. This legislation has, perhaps unsurprisingly, been vigorously opposed by the art industry. But the objections to the proposal do not withstand scrutiny:
- First, critics argue that the Act would impose “burdensome regulations” for little purpose, since verifiable cases of money laundering in the art industry are rare. However, an absence of money laundering prosecutions does not mean that money laundering crimes do not occur. In fact, reporting requirements may highlight a problem that so far has flown under the radar. The BSA already applies to small businesses in other industries with high money laundering risk—currency exchanges, issuers of money orders, travel agencies, and dealers of precious metals and jewels—without crippling those industries. And unlike commodities with a set price, such as precious metals and jewels, the subjective dollar value of artwork makes it an industry even more suited to money laundering. The Act would impose much needed transparency on an industry that is otherwise hard to audit. The Picasso painting that Green offered to sell to the undercover FBI agent, much like many pieces of art, has a secretive history—it was previously part of a number of “private” collections and belonged to an “unknown” buyer. It was even unclear whether Green was the actual owner of the painting or selling on behalf of someone else. And art dealers like Green often fudge their own commissions to make the sales seem legitimate—to prevent auditors from accusing them of being “in the money laundering business”—leaving little information to help detect whether money laundering is behind any given art sale.
- Second, though critics object that the Act would be particularly burdensome for small art and antiquities dealerships, this concern is overblown. Indeed, to protect small businesses in those industries where the BSA already applies, there are certain financial thresholds that businesses must surpass before reporting requirements kick in. In the precious metals industry, for example, reporting requirements apply only to businesses with cumulative annual sales of at least $50,000. Similar thresholds for the art business could protect small dealers, where the money laundering risk is lower, from burdensome regulations, while at the same time ensuring adequate transparency for the larger—and riskier—players.
- Third, though the art industry likes to say that it can police itself, this claim is refuted by the fact that even well-resourced auction houses like Christie’s and Sotheby’s—both of which boast their commitment to fighting money laundering (see here and here)—do not currently have adequate safeguards. Consider, for example, the 1MDB scandal, in which a Malaysian billionaire bought and sold famous masterpieces with money stolen from a government investment fund. The purchases included a $49 million Basquiat painting from a Christie’s auction, which the Malaysian billionaire then used, along with other pieces, as collateral to secure a $107 million financing loan from Sotheby’s to acquire more artwork. Including the art industry under the BSA would ensure that the most respected and resourced auction houses—which circulate enormous sums of money through buying, selling, and lending—are held accountable to government regulators.
- Fourth, while there are some legitimate reasons to preserve the anonymity of art collectors to the public at large, such as to avoid potential threats and burglaries, there is no good reason to keep information on ownership of, and transactions in, valuable artwork secret from government regulators, especially given that this opacity makes the art business extremely difficult to monitor. Imposing disclosure requirements, not to the public but to a regulatory body, would help guard buyer and seller anonymity while protecting the integrity of art sales and ensuring that dirty transactions (such as Green’s “I sell you to you and then you sell back to me”) are uncovered.
Given that billions of dollars circulate through the art and antiques market every year, regulatory restrictions on this profitable yet opaque industry are much needed. Including art and antiquities dealers under BSA regulation seems like a no-brainer.
Issues like this led to the Basel Institute developing the Art Trade Anti-Money Laundering Principles – hopefully relevant to those interested in AML in the art trade: https://www.baselgovernance.org/sites/collective.localhost/files/publications/aml_principles_art_trade_2018_1.pdf
Thank you for this interesting piece. The opposition to the legislation is based on nonsensical and self-serving arguments much like those presented by the ABA in its opposition to the TITLE Act.
Vicky, thanks, this is great. I agree the art world is badly in need of some transparency. I do wonder though if you have thoughts on whether the U.S. (or any other country) can effectively target money laundering and other crimes in the art world unilaterally. Since there is such a history of private sales and anonymous buyers (and forgery) the world over, will a U.S.-based dealer or auction house (like Sotheby’s or Christie’s) that is subject to the BSA really be able to adequately detect and report suspicious transactions, even with a robust compliance program? I agree that this legislation is a step forward, but I’m left wondering how much will really be accomplished if it’s still possible to engage in (or concoct) completely private transactions in other jurisdictions.
Adding to Jason’s comment, how would the BSA’s application to art dealers and auction houses differ from its application to financial institutions? While I’m sure some BSA provisions are general enough to be transferrable, I imagine there would have to be some tailoring to the particulars of the art market. The bill you linked to seems to contemplate that any such tailoring would be handled by Treasury Department rulemaking.
These are all the arguments the accountants, attorneys, real estate agents use to explain why they cannot possibly comply with AML regulations as well. However, the current framework of AML (dictated by FATF guidelines, hence pretty much global) makes it impossible for AML to function unless these a actors are on board. I am honestly sick and tired of hearing these arguments and then reading how surprised everyone is when one more money laundering scandal hits. Thanks for such a clear post!!!
Very interesting post, thanks. Is there any idea of how much money laundering actually occurs in the art business? Though, as you describe, it does seem like the perfect place to launder money, I’d be interested in knowing if there are any estimates, based on the frequency of things like this happening, or if this is an isolated case.
Really great insight into an opaque and niche world, thanks Victoriya! Reminded me of an old Economist article that touches on the lack of regulation in the art world. What is interesting is that governments appear to be somewhat complicit in finding places to hide away art- https://www.economist.com/briefing/2013/11/23/uber-warehouses-for-the-ultra-rich