Tag Archives: art

AML for NFTs: How Digital Artwork Is Used to Clean Dirty Money, and How to Stop It

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The art world has gone digital, thanks in large part to the advent of so-called non-fungible tokens (NFTs). NFTs, like cryptocurrencies, use blockchain technology (a disaggregated database made up of immutable blocks of data), which makes it possible to attach a unique authenticating token—sort of like a digital signature—to a digital item, most commonly a piece of digital artwork. The primary difference between an NFT and a unit of cryptocurrency is that one NFT cannot be exchanged for another—they are, as the name implies, non-fungible. That non-fungibility enables creators of digital art to sell NFTs of their work for profit. That’s important, because unlike traditional artwork, it’s extremely easy to create perfect copies of digital artwork. But one cannot simply copy an NFT. Of course, one can copy the image itself, but the copy, though identical to the naked eye, will lack the authenticating token. Why, you might reasonably ask, would anyone pay for an NFT when they can get the original image for free? Critics have raised these and other questions, but it seems that a sufficient number of people derive pleasure from collecting the original artwork, or from supporting the artists, or from the belief that the price of NFTs will continue to rise, that trade in NFTs has become big business. An artist known as Beeple sold one NFT for $69 million. Platforms from cryptocurrency exchanges to the hundreds-years-old art auction house Sotheby’s (and potentially the movie theater chain AMC) have entered into the growing NFT market; in the third quarter of 2021, the trading volume of NFTs exceeded $10 billion.

As in other emerging high-value markets, however, NFTs present a money laundering risk. Indeed, NFTs sit at the intersection of two sectors that are already characterized by high money laundering risk: fine art and cryptocurrencies. Because of the uniquely-high money laundering risk posed by these digital assets, FinCEN should issue NFT-specific anti-money laundering (AML) compliance guidance, and Congress should extend the Bank Secrecy Act (BSA) to apply to NFT marketplaces.

Before proceeding to regulatory solutions, it’s worth elaborating on why NFTs pose a significant money laundering risk. As just noted, NFTs are particularly high risk because they combine two sectors that are already characterized by high money laundering risk, albeit for different reasons:

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It’s Not Just the Corporate Transparency Act: Other Reasons To Welcome the Passage of the U.S. NDAA

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Last week I posted about the Corporate Transparency Act (CTA), the new law requiring companies to provide the government with information about their ultimate beneficial owners. The CTA, which was passed (over President Trump’s veto) as part of the National Defense Authorization Act (NDAA), has been getting a lot of attention in the anticorruption and anti-money laundering (AML) community, and rightly so. The product of decades of tireless and shrewd advocacy, the CTA—despite its limitations and imperfections—will make it substantially harder for kleptocrats, terrorists, organized crime groups, and others to abuse corporate structures to facilitate their crimes and hide their loot. But the CTA is not the only part of the NDAA that may have a substantial positive impact on the fight against corruption and money laundering. And while it’s entirely understandable that most of the attention (and celebration) in the anticorruption community has focused on the CTA, I wanted to use today’s post to highlight several other provisions in the NDAA that may also prove important in combating corruption and money laundering. Continue reading →

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

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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:

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Proposed US Legislation Can Solve the Art World’s Money Laundering Problem

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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:

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“We Have to Reclaim Our City”: Lessons From the “Eye People”

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Last year, a 22-year-old Afghan woman went to a local government office to get documentation to travel abroad. She was promptly turned away because she was not accompanied by her father or husband, and because she refused to pay the official a small bribe to overlook this detail. As recently as a few years ago, she may have paid the bribe. But things had changed. Defiantly, she confronted the official and proclaimed: “I will go to the eye people.”

The “eye people” she invoked are three activists—Lima Ahmad, Kabir Mokamel, and Omaid Sharifi—who in 2014 founded a grass-roots anticorruption movement in Afghanistan called ArtLords. ArtLords (whose name is a deliberate play on the “warlords” and “drug lords” that too often define Afghanistan’s image) seeks to raise awareness about corruption and other social issues (including women’s rights and domestic terrorism) by empowering youth to “have a say in how we run the government” and giving them the courage and a forum to speak out on these issues. ArtLords’ founders began their work by organizing small group discussions to better understand young people’s concerns. Unsurprisingly, corruption was the most frequently mentioned. The founders sought a way to publicize these concerns and provide an outlet for discussions to shape the national dialogue. To do this, ArtLords creates public art projects, in which artists trace beautiful, powerful designs on blast walls (concrete barriers constructed to protect buildings and people from terrorist-related explosions) across Afghanistan. To date ArtLords has painted more than 400 murals in almost half of Afghanistan’s 34 provinces; the most famous is a piercing set of feminine, hazel eyes glaring onto the front entrance of the National Directorate of Security in Kabul (which is why the group is known to some as “the eye people”).

Through these projects, the group has inspired a generation of younger Afghans. As Faisal Imran, a student in Afghanistan, noted as he painted a mural on a blast-wall, “this art has a message of hope.” It is this message that has driven young girls to draw murals with the words “I can’t go to school because of your corruption. I can see you.” Moreover, beyond providing an outlet and educational opportunity for the youth of Afghanistan, ArtLords has achieved concrete success by both naming and shaming corrupt officials and naming and family good civil servants, working with the national government to drive change, and inspiring grass-roots social movements, including a recent campaign to challenge warlords and corrupt government officials who drive around Afghanistan with black tinted windows and no license plates. Additionally, one of the founders of ArtLords, Lima Ahmad, was invited to serve as the Director of Monitoring and Evaluations in the Office of the President of Afghanistan, a position from which she advocated for anticorruption and other social reform. In fact, over the past year, the group and its founders have been invited by government officials to speak at conferences and engage in substantive policy decisions.

I recently had the opportunity to interview Ms. Ahmad about her experience, and about what lessons that experience might hold for other civil society groups focused on combating corruption. Our conversation highlighted several important messages for other civil society groups seeking to use similar artistic tools—whether art, music, dance, or others—to combat corruption and promote broader social reform.

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Telling Corruption’s Story, or Why is Corruption So Boring? (Part 2)

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In my last post, I identified challenges inherent in creating campaigns that move laypeople to action against corruption, and I proposed solutions to these challenges. In this follow-up post, I will assess how two very different campaigns score on the factors previously proposed.

I’ll start with a less successful campaign: Transparency International’s call to “Unmask the Corrupt.” In late 2015, TI announced its Unmask the Corrupt campaign, which aimed, among other things, to “highlight the most symbolic cases of grand corruption.” The first phase of the campaign encouraged individuals to submit cases of grand corruption, from which TI would select semi-finalists to be voted on in the second phase. In the third phase TI would “look at the cases that have received the most votes and . . . openly discuss with all how the corrupt should be punished.” From 383 submissions, TI selected 15 semi-finalists, which included the “Myanmar jade trade,” “Lebanon’s political system,” and the “U.S. State of Delaware.”

In early 2016, TI announced that it had imposed “social sanctions” on the finalists (including Lebanon’s political system and Delaware). The toothiest of these sanctions were TI press releases which led to some negative coverage of the finalists in important media outlets. TI also launched #StopKadyrov, an Instagram-centered campaign against Chechen leader Akhmad Kadyrov, who had received all of 194 votes in the second phase of Unmask the Corrupt. An Instagram search for #StopKadyrov reveals that the hashtag has been used in a total of fifteen posts. When assessed against the factors I sketched in my previous post regarding the criteria for effective narratives—in particular, the importance of placing the audience in the role of potential heroes of the narrative, depicting a compelling (and repellant) antagonist against whom to struggle—these mediocre results are not surprising.

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Telling Corruption’s Story, or Why Is Corruption So Boring? (Part 1)

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In 2010, a group of talented young musicians from across the globe gathered in Nairobi, with the financial support of Transparency International and Jeunesses Musicales International. Their mission: to write and record a viral hit that would not only communicate the gravity of corruption to young people (a crucial demographic for anticorruption activists), but would also make them want to share the tune with their friends. The diverse band of artists left the studio with “Against Corruption,” a reggae jam complete with Lebanese Arabic hip-hop verses and flamenco-tinged guitar riffs. You can watch the music video here, or listen to the audio here.

Despite its all-star cast and catchy hook, however, the big budget music video has been viewed just over 600 times. This kind of failure to turn big anticorruption dollars into effective campaigns that generate excitement, activism, and action on the ground isn’t unique. The anticorruption community’s proposed revolution may well be broadcast, but its soundtrack will be probably be, dare I say, boring. And as a result, few will tune in.

Why is that? What makes it so much easier to capture an audience’s imagination when speaking about issues like the refugee crisis or modern-day slavery than to tell the story of corruption, whose effects are similarly destructive?

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Artful Transactions: Corruption in the Market for Fine Arts and Antiques

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The fascination surrounding art theft and forgery has long been the subject of much exploration. Only more recently, however, has the art market come under increased scrutiny regarding its connection to money laundering and corruption. It’s not just that stolen artworks often end up in the hands of criminals: even the market for non-stolen art is especially vulnerable to money laundering and corruption. With more banks cracking down on illicit activities, art has become an “efficient instrument for hiding cash.” As an article in the New York Times observed, no business seems “more custom-made for money laundering, with million-dollar sales conducted in secrecy and with virtually no oversight.”

Considering the attention paid by anticorruption and anti-money laundering activists to the role of the real estate market and the market for other luxury goods to facilitate money laundering and bribery, it is perhaps a bit surprising that there hasn’t been more attention to the art market—which is perhaps even more deserving of scrutiny. Continue reading →

Culture Matters: How Indonesia Should Account Culture to Eradicate Corruption

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Corruption in Indonesia is endemic, permeating all levels of society. As I argued in my last post, Indonesia’s culture of corruption is a result of the corruption of culture: Far too many people see corruption as unsolvable and even “normal,” even though they clearly realize its wrongfulness.

To date, Indonesia’s independent anticorruption agency, the KPK, has pursued a main strategy of prosecuting the “big fish”—the high-ranking officials (including numerous parliament members and powerful politicians) whose corrupt behavior has caused massive damage to the country. Laudable though the KPK’s bold enforcement efforts have been, eradicating corruption requires more than prosecutions. Rather, the KPK needs to complement its aggressive law enforcement with preventive measures designed to change Indonesia’s “culture of corruption” to a “culture of anticorruption.” There are several strategies the KPK could pursue to foster such cultural change:

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Fighting Corruption With Art: Successfully Raising Public Awareness

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Art is “one of the best societal mediators of difficult messages — it has always created a bridge between the comprehension and the expression of critical problems in society.” So declares the 10th International Anti-Corruption Conference’s website, which organized an art program against corruption. In keeping with that sentiment, last September the Anti-Corruption Organization of Thailand (ACT) organized a “museum of corruption,” a temporary exhibition at the Bangkok Art and Culture Centre intended to raise public awareness about the extent and costs of corruption. Thailand is not the first country to undertake such an initiative. Museums of corruption (actual museums, not just temporary exhibitions) already exist in Paraguay, Ukraine and the United States, and many other enterprises that use art as a tool for anticorruption education and action are flourishing worldwide. For instance, the Open Society Initiative for West Africa has recently launched a hip hop video against corruption in Liberia, while the Inter-American Development Bank organized a cartoon contest to promote awareness and understanding of the corruption phenomenon and its harm to development. More recently, Pakistani President Mamnoon Hussain called upon poets and intellectuals to write against corruption. Other major players in the anticorruption field that have organized artistic projects include Transparency International (see here and here) and the United Nations Development Program (UNDP). In additions to these institutionalized artistic anti-corruption projects, several countries have witnessed spontaneous public art displays – in the physical public domain, usually outside and accessible to all – to promote awareness and solidarity in fighting corruption (see for example in Afghanistan and South Africa).

Understandably, some are skeptical of these initiatives, arguing that museums and temporary exhibitions are not the right forum to communicate on corruption (this was one of the criticisms of the Thai museum of corruption). One might worry that expressing anticorruption messages through cartoons and popular music won’t lead people to take the message seriously enough. (This would also be true when the artistic initiative takes a more humorous approach, as is the case for many of the anticorruption cartoons, as well as New York’s corruption museum.) And of course, nobody thinks that art initiatives on their own are enough. Yet while artistic initiatives will not by themselves solve the issue of corruption, these initiatives are not just a fad or a gimmick or a distraction. Indeed, there’s quite a bit of research indicating that these programs can be quite effective in raising public awareness on corruption. Continue reading →