The Art World is Rife with Corruption, But Suspicious Activity Reporting Requirements Aren’t the Answer

Customs officials at JFK airport didn’t have a reason to be suspicious. After all, the package wasn’t anything special—just a regular shipping carton with an unnamed $100 painting inside. Only later did it emerge that the $100 unnamed painting was, in fact, Hannibal, a 1981 painting by Jean-Michel Basquiat valued at $8 million. Authorities across three different continents had spent years trying to track down Hannibal, along with other famous works by Roy Lichtenstein and Serge Poliakoff, that Brazilian banker Edemar Cid Ferreira had used to launder millions of funds he illegally obtained from a Brazilian bank. It wasn’t until 2015, nearly ten years after Edemar’s conviction for money laundering, that US authorities managed to return Hannibal to its rightful owner, the Brazilian government. Meanwhile, thousands of other paintings move across borders with few questions asked about who owns them, who’s buying them, and for what end.

The art world is readymade for corruption. Paintings—unlike real estate—are readily portable. Their true value, as Hannibal illustrates, is readily disguisable. And the law does not require disclosure of the buyer or seller’s true identity. Unlike real estate, where ownership can be traced to a deed, the only available chain of title for most artwork is its “provenance”—which is commonly vague, falsified, or not readily verified. Recognizing that money laundering in the art world is a big (and growing) problem, there’s been a flurry of recent proposals to address that problem. In the United States, Congressman Luke Messer proposed a new law called the Illicit Art and Antiquities Act, which, if enacted, would amend the Bank Secrecy Act (BSA) to require art and antiquities dealers to develop an internal compliance system, report cash payments of more than $10,000, and file the same sorts of “suspicious activity reports” (SARs) with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) that the BSA currently requires of financial institutions and money service businesses. And in Europe, the EU’s Fifth Anti-Money Laundering (AML) Directive dramatically expanded suspicious transaction reporting requirements for art dealers.

These developments show that legislators on both sides of the Atlantic are taking the challenge of art corruption seriously, which is an encouraging development. Unfortunately, expanding SAR requirements, while appropriate in other contexts, is misguided when it comes to the art world, for two reasons:

  • First, the basic triggering requirement for filing a SAR in the financial institution context—whether the institution “suspects or has reason to suspect” that a transaction involves criminal behavior or is otherwise unusual—is significantly harder for art dealers to apply. The traditional motives for buying art are inherently more complex, individualized, and subjective than motives for financial transactions. For example, while it seems objectively suspicious that a small company in Wisconsin would transfer millions of dollars to a drug company in Russia, it’s much harder to say whether it’s inherently suspicious that a 40-year old British man suddenly wants to buy a sculpture by Degas. After all, art catalogues are rife with romantic stories of people spending extravagant sums on art with which they feel a personal connection. Furthermore, because it’s common for art sellers not to know where a painting comes from, it’s less obvious what the SAR benchmarks of “suspicion” should be. (This problem is compounded by lack of a public beneficial ownership registry in the U.S., because art galleries dealing with an anonymous company cannot readily ascertain the real identity of the sellers or buyers with whom they’re dealing.) Given the steep penalties associated with failing to report suspicious activity, it’s likely that if art dealers were subject to SAR requirements, the dealers—confused about what standard to apply—would report every private art sale regardless of whether there’s strong evidence of criminal activity. Such overreporting is not harmless: Not only will it raise compliance costs for galleries, but it will also make it harder for the regulatory authorities (FinCEN and DOJ in the U.S. case) to isolate individual transactions deserving closer investigation, thus reducing the effectiveness of the SAR reporting system overall.
  • Second, SAR requirements will hurt small galleries, with no obvious reduction in art corruption. Under current BSA regulations, financial institutions (broadly defined) must file a suspicious activity report for transactions over $5,000(or $2,000 in the case of money services business). Because many small galleries sell paintings that expensive, they would likely be subject to the same reporting requirements as the mega-auction houses like Christies and Sotheby. Because most reported stories of art corruption typically involve the sale and transfer of million-dollar paintings, it’s not clear what benefit accrues from extending SAR requirements to these smaller galleries. If anything, imposing SAR requirements on all art transactions over $5,000 will likely just concentrate the art market in the hands of fewer players, exacerbating a contraction of small galleries already underway. While it could make sense to simply raise the monetary threshold for SAR reporting as an interim measure, this would make it easier for money launderers to buy larger quantities of artwork falling just below the monetary threshold. Given the limited means available to small galleries to determine who their customers are and the inherent challenges of determining whether a one-off art sale is suspicious, the benefits from imposing SAR requirements on galleries would likely not exceed the costs—at least for now.

Rather than imposing SAR requirements directly on art dealers, legislators might require art purchases over a certain monetary threshold be made through a financial institution, rather than in cash. This would ensure a paper trail for major art purchases and would transfer the regulatory burden onto larger financial institutions that have already developed sophisticated systems to analyze suspicious behavior. To illustrate, imagine the FBI suspects a foreign kleptocrat is buying Degas paintings to hide his wealth. If those Degas painting were purchased through a financial institution, the financial institution would be better placed to first determine the real identity of the customer seeking to purchase the painting. After all, banks have had to comply with robust know-your-customer laws (KYC) for decades, banks—unlike galleries—are permitted to share confidential customer data with third parties to verify aspects of a customer’s application. Also, financial institutions would be better placed to analyze whether a given sale or purchase appeared abnormal for a known customer, especially when considered in conjunction with other transactions. For example, a bank would be able to determine whether an account has been set up with the sole purpose of buying a large painting—an activity that’s inherently more suspicious than buying the painting itself. Because galleries cannot (yet) verity the real identities of the buyers or sellers of art, or to evaluate art purchases against a larger context of criminal behavior, they have less context from which to infer whether something is suspicious, making the SAR report more of a guessing game than a useful regulatory tool.

1 thought on “The Art World is Rife with Corruption, But Suspicious Activity Reporting Requirements Aren’t the Answer

  1. Hi Hilary. Thank you for this interesting post. In countries where corruption is pervasive, the imposition of suspicious activity reporting requirements to art activities is essential. In Brazil, since 2016, especially due to money laundering through negotiation of arts and antiquities that was detected in “Car Wash Operation”, this kind of activity is submitted to strict registration and reporting obligations: http://fazenda.gov.br/noticias/2016/setembro/governo-fortalece-mecanismos-de-controle-sobre-mercado-de-arte (In Portuguese).

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