Fellow appraiser Maureen Heenan, ISA AM sent me an interesting opinion piece from the Wall Street Journal. The post discusses money laundering and encourages regulators to promote reporting of suspicious activity in the fine art financing, similar to the Bank Secrecy Act of 1970 and to promote transparency. Art market insiders say money laundering is infrequent.
The Wall Street Journal reports
Source: The Wall Street JournalIn April 2014, a subsidiary of the Sotheby’s auction house lent more than $105 million to Jho Low, a business associate of the Malaysian prime minister’s stepson. As collateral, Mr. Low offered Sotheby’s 17 paintings, including a van Gogh and two Monets. The art, worth twice as much as the loan, had been purchased by Mr. Low and an accomplice using a web of offshore bank accounts. Sotheby’s had unknowingly assisted in laundering proceeds of an alleged multibillion-dollar fraud that ultimately ensnared Swiss and American banks, a Saudi oil company and Malaysian and Emirati sovereign-wealth funds.
Sotheby’s is hardly alone. With $64 billion in annual sales, the often opaque art business is an attractive arena for money launderers. Subjective pricing creates an ideal environment for criminals to legitimize illegal funds or get money across well-protected borders. It is long past time for the U.S. to treat art and antiquities like any other major market and require participants to report suspicious activity and keep thorough records on clients and transactions.
Art sales and auctions are famous for secrecy. It isn’t uncommon for a party to a multimillion-dollar art transaction to be anonymous, sometimes because of legitimate concerns about financial privacy and suppression of political art. Galleries and auction houses collect basic information on their buyers and sellers, but the vetting is usually far less intense than for similar-size bank transactions. For criminals, the art world’s comfort with secrecy provides a layer of protection against investigation into their finances.
The variability of art pricing is another lure. The price of a work of art is determined by individual taste and hard-to-quantify trends. In a rudimentary example of money laundering, a person transfers money by overpaying someone else for goods. Customs officials and law enforcement are constantly analyzing pricing data to spot this type of behavior, and it is relatively easy when the costs of goods are easy to compare. Art transactions are harder to investigate because hardly any two prices, or pieces, are alike.
Even in the world of luxury goods, art and antiquities sales are curiously opaque. Dealers in precious metals, jewelry, high-end cars and private planes are all regulated by the Treasury using the same standards used to regulate banks, casinos and securities brokers.
Real-estate developer Aristos Aristodemouhas described the sale of artwork as “the only market that is unregulated.” At least that’s what he allegedly told a crooked stock trader in December 2017 as he explained how to purchase art and resell it, obscuring the origin of illicit funds so that it could be moved to the U.S. Working with British art dealer Matthew Green, Mr. Aristodemou, his nephew Panayiotis Kyriacou and the trader concocted a scheme to do just that using a Picasso painting valued at $9 million. One problem: The crooked stock trader was an undercover Federal Bureau of Investigation special agent. The Justice Department indicted Messrs. Aristodemou and Kyriacou and four associates in March on charges of money laundering and securities fraud.
Art-industry insiders insist that money laundering through art is rare. And stand-alone prosecutions for money laundering that involve art are rare, because prosecutors generally address the activity in the context of crimes that are easier to prove, such as tax evasion or fraud. But even if money laundering through art weren’t occurring—which it is—the art market’s vulnerability to such crimes is obvious enough that something must be done to address it.
The first step is to apply the Bank Secrecy Act of 1970 to dealers of art and antiquities. The BSA establishes standards for anti-money-laundering controls, record-keeping and reporting of suspicious activity to the government. Rep. Luke Messer (R., Ind.) introduced a bill in May that would extend the BSA to art dealers but it remains stuck with House Financial Services Committee and is unlikely to become law. Even without legislation, the Treasury secretary has authority under the USA Patriot Act to introduce similar requirements by regulation.
Officials at the Treasury Department’s Financial Crimes Enforcement Network should be specially trained to supervise implementation of the BSA on art-related businesses. Art-industry associations should do their part by investing in secure technology to record transactions worth more than $10,000. This would reduce the cost of compliance with any eventual regulations and improve “provenance research”—verifying ownership of a work of art.
Critics of art regulation have argued that increased reporting requirements and controls could be used by the government to suppress politically motivated art. But the overwhelming majority of records would remain in the hands of private individuals and companies. Increased record-keeping and reporting comes with a cost, but auction houses and dealers already have much of the information they need to satisfy banks, insurers and the Internal Revenue Service. Compliance software used by banks could easily be adapted for use in the art business.
By embracing the BSA and a new generation of reporting technology, the American art market has the potential to become more transparent, secure and efficient. Many American businesses will soon need to comply with European Union regulations that are stricter than the BSA, making this a good time to evolve.
Criminals will always look for places to launder money. The art industry should do everything it can to convince them to look elsewhere.
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