The Art Industry and U.S. Policies that Undermine Sanctions/Section 2B

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​B. The Art Market

This section describes the global and U.S. art industry; the U.S. art industry's current exemption from legal safeguards aimed at stopping money laundering and corruption; and the role of shell companies in purchasing high-value art.

The modern global art market—and its U.S. component—has been enjoying a boom. However, critics assert the secrecy found in the art market attracts illicit activity and suspect funds.[1] In 2019, global art sales reached $64.1 billion.[2] In addition, the art market has become a source of reliable return on investment.[3] One report found that since 2000, art has delivered average annual returns of 8.9 percent.[4] In 2019, 86 percent of surveyed wealth managers asserted that "they thought there was a convincing argument for including art in their wealth management service offering."[5] Investors also purchase art to diversify portfolios, and some view individual pieces as financial instruments to be traded like stock.[6] Over the last several years, growth was most pronounced at the top end of the market, with works priced above $10 million outperforming other parts of the market.[7]

The art market is also now more accessible due to globalization and the internet.[8] These two factors have transformed the art market into an international industry with a customer base located around the world.[9] The ​United States continued to lead the market in 2019 with 44 percent of all sales by value, with the United Kingdom in second place with 20 percent.[10] International art fairs gather dealers, artists, and collectors to display art from different regions around the world.[11] For those unable to travel, the internet enables collectors from Europe, the Middle East, and Asia to easily bid on the same pieces of art.[12]

The art market has attracted criticism because of its lack of transparency. Current rules allow sellers to remain anonymous, and purchasers can use offshore shell companies to conceal ownership and sources of funds.[13] Sellers of artwork at auction are often not required to disclose their identity to the buyer; in some cases, the auction house does not know the name of the original owner or buyer.[14] Anonymity in the market can make it difficult to track sales transactions, art ownership, and determinations regarding authenticity.[15] Concealment of buyer and seller identity also makes art "an attractive instrument to hide illicit assets . . . because the transactions are often private, prices are speculative and an item can easily be smuggled to evade authorities."[16]

Deloitte and ArTactic's Art & Finance Report 2019 found that 77 percent of wealth managers and 75 percent of collectors cite the art market's lack of transparency as one of the industry's key challenges.[17] Moreover, 75 percent of art professionals identified the market's lack of transparency as a major concern, marking a six percent increase from 2016.[18]

​1. Money Laundering in the Art Market

A large part of the art market operates in secrecy, allowing participants to conduct transactions anonymously.[19] According to an article quoting Thomas Christ, a board member of the Basel Institute of Governance, "[t]he art market is an ideal playing ground for money laundering."[20] Michael Martin, head of the forensic and anti-money laundering services at Deloitte Luxembourg acknowledged this, saying, "art is one of the asset classes that obviously lends itself to money laundering."[21] Smugglers, drug traffickers, arms dealers, and others have turned to the art market as a means to obscure profits and transfer assets outside the reach of financial regulators.[22]

In recent years, critics note that "[p]art of the reason art has become an attractive vehicle for money laundering is that other channels have been narrowed by tighter regulation," particularly in the financial sector.[23] For example, mortgage brokers, stockbrokers, casinos, banks, and Western Union are subject to federal money laundering statutes requiring them to report suspicious financial activity and perform due diligence to deter money laundering activities and "combat the financing of terrorism."[24] The same requirements do not apply to buyers and sellers of art.[25]

To provide greater transparency and prevent money laundering activities, the European Union adopted its fifth Anti-Money Laundering directive on April 19, ​2018.[26] This directive compels businesses selling art to verify the identity of customers before completing transactions of €10,000 or more.[27] Under the directive, European Union member states were required to implement this new requirement by January 10, 2020.[28] The United Kingdom adopted similar rules in the weeks before its exit from the European Union on January 31, 2020.[29] The United States has yet to follow suit.[30]

2. The Art Industry is the Largest Legal, Unregulated Market in the United States

Today, the art industry is considered the largest legal, unregulated industry in the United States, permitting purchasers to buy pieces without any record of the transactions, even when large amounts of cash are involved.[31] In effect, buyers and sellers can remain anonymous raising the concern that corporate veils are being used "to manipulate markets, evade taxes, [and] launder money."[32] Illegal activity, including money laundering, in the art market is made possible, in part, because the art market is generally not subject to the transparency requirements of the Bank Secrecy Act ("BSA").[33] The BSA was enacted by Congress in the 1970s to protect the United States from money laundering and corruption by imposing transparency requirements on many types of cash transactions.[34] It includes "requirements for reporting, customer identification and due diligence, recordkeeping, and the establishment and maintenance of BSA/AML compliance programs."[35] The BSA's reporting requirements mandate, for example, that financial institutions file suspicious ​activity reports ("SARS") regarding "any suspicious transaction relevant to a possible violation of law or regulation."[36] In addition to SARS, Currency Transaction Reports ("CTRs") must be submitted for "individuals transporting large amounts of cash internationally, persons with large foreign financial interests, and nonfinancial entities conducting large cash transactions."[37]

The art industry in the United States is not required to comply with the requirements of the BSA.[38] Art dealers in the United States continue to operate without any regulated or structured mechanisms for transparently buying or selling art, including mandatory systems for the declaration or transfer of ownership.[39] Moreover, insider-trading rules applicable to the commodities market do not apply to art, allowing collectors to buy works of art based on privileged information.[40] In addition, "there is currently no regulation that specifically targets money laundering in the art market, nor does the art market itself subject professional art intermediaries to any standards of professionalism that directly address money laundering."[41] The lack of regulatory requirements or voluntary industry-wide standards in the United States means "art dealers have little incentive other than good faith to flag possible money laundering schemes involving artwork for law enforcement."[42]

Despite the weaknesses in U.S. AML safeguards for the art market, participants in the art industry may be subject to other restrictions including: import and export regulations; cultural property regulations; data protection and privacy laws; state anti-money laundering laws; tax regulations; and local auction regulations.[43] If they buy or sell art outside of the United States, they may also be subject to non-U.S. anti-money laundering controls.[44]

​

While members of Congress have introduced legislation to add art and antiquities to the list of industries that must comply with the BSA,[45] Congress has not required comprehensive transparency in the art market.[46]

3. The Applicability of the Berman Amendment to High-value Art

Questions have arisen about whether U.S. sanctions policy could help address at least some aspects of the art industry’s problems by requiring artists and dealers to ensure they are not engaging in transactions with sanctioned individuals or entities.[47] To gauge the feasibility of that approach, the Subcommittee inquired whether the U.S. sanctions regime applies to high-value art.

As described above, IEEPA allows the President to issue sanctions against specific categories of individuals and entities during a national emergency.[48] IEEPA authority does not, however, allow the President "to regulate or prohibit, directly or indirectly" "the importation from any country, or the exportation to any country . . . of any information or informational materials, including but not limited to, publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds."[49]

The Subcommittee asked the Treasury Department how high-value art is treated under IEEPA, including whether it is exempt from IEEPA controls under the informational materials exception in the Berman Amendment. In response, on October 3, 2019, the Treasury Department stated:

Earlier [in 2019], Treasury undertook a review of the issues related to your inquiry. That review is ongoing and may result in the issuance of new or further pertinent guidance. Accordingly, it would be premature to provide the Subcommittee a formal position on how the Berman Amendment to the International Emergency Economic Powers Act may apply in the context of the matters you raise, particularly since any ​new or further guidance could have broader implications. Nevertheless, we are taking the concerns you have expressed seriously in the context of that review. We will update you as soon as we are in a position to do so.[50]

On July 22, 2020, the Treasury Department provided the update and stated:

Our review confirmed that Treasury does not believe the Berman Amendment is a categorical bar to the application of IEEPA-based sanctions to transactions involving artwork. Evaluation of a specific license application relating to designated persons-including one that implicates Berman Amendment materials—must depend on the particular facts and circumstances presented. OFAC intends to issue additional public guidance on this issue in the near term.[51]

The Subcommittee has continued to examine money laundering vulnerabilities in the U.S. art market in order to gauge the extent of the problem, how sanctioned individuals may be exploiting the market's vulnerabilities to launder suspect funds, and what action should be taken to detect, stop, and prevent ongoing misuse of the U.S. art market.

4. Shell Companies

Shell companies play a significant role in contributing to anti-money laundering vulnerabilities in the U.S. art industry. Treasury's Financial Crimes Enforcement Network ("FinCEN") defines shell companies as "typically non-publicly traded corporations or limited liability companies ("LLCS") that have no physical presence beyond a mailing address and generate little-to-no independent economic value."[52]

Shell companies are generally straightforward and inexpensive to create in all 50 states and offshore jurisdictions.[53] This process involves completing online forms and making an online payment, functions that can be executed by ​individuals, lawyers, or third parties.[54] Despite a shell company's lack of employees and office space, "formation agents" or "company service providers" can provide packages and operational services including mail forwarding, business licenses, local street addresses, telephone listings, and assistance with opening local and foreign bank accounts.[55]

Individuals and companies can use shell companies for legitimate purposes, such as holding assets, making pooled investments, executing reverse mergers or facilitating transfers.[56] They can also be misused to hide the identities of criminals, move illicit proceeds of crime, and commit a wide range of misconduct, including money laundering, human or drug trafficking, fraud, tax evasion, and corruption.[57]

In the art world, shell companies are frequently used when buying or selling valuable pieces of art.[58] For example, shell companies can serve as an intermediary allowing buyers and sellers to shift funds from one jurisdiction to another.[59] But shell companies can also be used to conceal the identity of the buyers and sellers, the source and control of assets, and move suspect funds. In this way, shell companies can be used as financial conduits for the transfer of funds and assets, at times without alerting financial institutions or law enforcement to the parties behind the transactions.[60]

Shell companies can provide this anonymity because there is no requirement that beneficial owners be identified during the entity's formation, opening of financial accounts, or transfer of funds.[61] Tom Cardamone, managing director of the nonprofit research group Global Financial Integrity, illustrated the efforts some parties make to conceal the individuals behind a shell company stating, "you can ​create an anonymous shell in one jurisdiction that controls an anonymous trust in a completely different country that also controls a bank account in a third country."[62]

  1. ↑ Samuel Rubenfeld, Art World's Response to Money-Laundering Concerns Draws Critics, Wall St. J. (Feb. 27, 2017), https://blogs.wsj.com/risk andcompliance/2017/02/27/art-worlds-response-to-money-laundering-concerns-draws-critics/.
  2. ↑ Art Basel & UBS, The Art Market 2020 17 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf; See also Daniel Grant, As Art Collections Grow, So Do the Places That Stash Them, N.Y. Times (Nov. 13, 2018), https://www.nytimes.com/2018/11/13/business/art-storage.html.
  3. ↑ Frederik Balfour, Billionaire's Secrets on How to Make a Bundle in Art, Bloomberg (May 7, 2018), https://www.bloomberg.com/news/features/2018-05-07/top-collectors-reveal-the-secrets-of-how-to-invest-in-art.
  4. ↑ Id.
  5. ↑ Deloitte, Art and Finance Report 84 (6th ED. 2019), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/lu-art-and-finance-report-2019.pdf.
  6. ↑ Cynthia O'Murchu, Art: A market laid bare, Fin. Times (Apr. 7, 2015), https://www.ft.com/content/a91a1608-d887-11e4-8a23-00144feab7de#axzz3WpTPQ6X2; Michel Martin, New Documentary Paints a Picture of the Contemporary Art Market Run Amok, NPR (Nov. 4, 2018), https://www.npr.org/2018/11/04/658920684/new-documentary-paints-a-picture-of-the-contemporary-art-market-run-amok.
  7. ↑ Jeni Fulton, Economist Dr. Clare McAndrew explains why the art market is rebounding, Art Basel, https://www.artbasel.com/news/economist-dr-clare-mcandrew-explains-why-the-art-market-is-rebounding.
  8. ↑ Art Basel & UBS, The Art Market 2020 48 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf.
  9. ↑ Id. at 262.
  10. ↑ Id. at 37.
  11. ↑ Y-Jean Mun-Delsalle, The Art Fair Boom Is Forever Changing the Way the Art Market Does Business, Forbes (Apr. 7, 2016), https://www.forbes.com/sites/yjeanmundelsalle/2016/04/07/the-art-fair-boom-is-forever-changing-the-way-the-art-market-does-business/#52d8f7af6c64.
  12. ↑ Frederik Balfour, Billionaire's Secrets on How to Make a Bundle in Art, Bloomberg (May 7, 2018), https://www.bloomberg.com/news/features/2018-05-07/top-collectors-reveal-the-secrets-of-how-to-invest-in-art.
  13. ↑ Graham Bowley & William Rashbaum, Has the Art Market Become an Unwitting Partner in Crime, N.Y. Times (Feb. 19, 2017), https://www.nytimes.com/2017/02/19/arts/design/has-the-art-market-become-an-unwitting-partner-in-crime.html.
  14. ↑ Id.
  15. ↑ Id.
  16. ↑ Samuel Rubenfeld, Art World's Response to Money-Laundering Concerns Draws Critics, Wall St. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-money-laundering-concerns-draws-critics/.
  17. ↑ Deloitte, Art and Finance Report 16, 171 (6th ED. 2019), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/lu-art-and-finance-report-2019.pdf.
  18. ↑ Id. at 207.
  19. ↑ Graham Bowley & William Rashbaum, Has the Art Market Become an Unwitting Partner in Crime, N.Y. Times (Feb. 19, 2017), https://www.nytimes.com/2017/02/19/arts/design/has-the-art-market-become-an-unwitting-partner-in-crime.html.
  20. ↑ Id.
  21. ↑ Eric Reguly, The link between art and money laundering, Globe and Mail (May 15, 2018), https://www.theglobeandmail.com/report-on-business/international-business/european-business/economists-urge-tighter-regulations-to-curb-money-laundering-in-art-market/article26217852/.
  22. ↑ Patricia Cohen, Valuable as Art, but Priceless as a Tool to Launder Money, N.Y. Times (May 12, 2013), https://www.nytimes.com/2013/05/13/arts/design/art-proves-attractive-refuge-for-money-launderers.html.
  23. ↑ Samuel Rubenfeld, Art World's Response to Money-Laundering Concerns Draws Critics, Wall St. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-money-laundering-concerns-draws-critics/.
  24. ↑ Patricia Cohen, Valuable as Art, but Priceless as a Tool to Launder Money, N.Y. Times (May 12, 2013), https://www.nytimes.com/2013/05/13/arts/design/art-proves-attractive-refuge-for-money-launderers.html; Rena S. Miller & Liana W. Rosen, Cong. Research Serv., R44776, Anti-Money Laundering: An Overview for Congress, Summary (2017), https://www.crs.gov/reports/pdf/R44776.
  25. ↑ Kris Hollington, After Drugs and Guns, Art Theft Is The Biggest Criminal Enterprise in the World, Newsweek (Jul. 22, 2014), https://www.newsweek.com/2014/07/18/after-drugs-and-guns-art-theft-biggest-criminal-enterprise-world-260386.html.
  26. ↑ Anna Brady, European Union tightens anti-money-laundering rules in the art market, Art Newspaper (Apr. 30, 2018), https://www.theartnewspaper.com/news/eu-extends-anti-money-laundering-rules.
  27. ↑ Id.
  28. ↑ Vera Jourova, Strengthened EU rules to prevent money laundering and terrorism financing, European Commission (2018), http://ec.europa.eu/newsroom/just/document.cfm?action=display&doc_id=48935.
  29. ↑ Scott Reyburn, Britain Moves to Regulate Its Art Trade. Bring Your ID., N.Y. Times (Jan. 10, 2020), https://www.nytimes.com/2020/01/10/arts/design/uk-art-money-laundering.html.
  30. ↑ Lawrence Kaye & Howard Spiegler, The Art Market: Would More Regulation Spoil All the Fun, Art & Advocacy, (Vol. 23 2016), http://www.herrick.com/publications/the-art-market-would-more-regulation-spoil-all-the-fun/.
  31. ↑ Kris Hollington, After Drugs and Guns, Art Theft Is The Biggest Criminal Enterprise in the World, Newsweek (Jul. 22, 2014), https://www.newsweek.com/2014/07/18/after-drugs-and-guns-art-theft-biggest-criminal-enterprise-world-260386.html.
  32. ↑ Scott Reyburn, What the Panama Papers Reveal About the Art Market, N.Y. Times (Apr. 11, 2016), https://www.nytimes.com/2016/04/12/arts/design/what-the-panama-papers-reveal-about-the-art-market.html.
  33. ↑ Bank Secrecy Act of 1982, Pub. L. No. 97-258, codified at 31 U.S.C. § 5304.
  34. ↑ Id.
  35. ↑ Rena S. Miller & Liana W. Rosen, Cong. Research Serv., R44776, Anti-Money Laundering: An Overview for Congress, Summary (2017), https://www.crs.gov/reports/pdf/R44776.
  36. ↑ Id. at 6.
  37. ↑ Id.
  38. ↑ Lawrence Kaye & Howard Spiegler, The Art Market: Would More Regulation Spoil All the Fun, Art & Advocacy, (Vol. 23 2016), http://www.herrick.com/publications/the-art-market-would-more-regulation-spoil-all-the-fun/.
  39. ↑ Deloitte, Art and Finance Report 170 (5th ED. 2017), https://www2.deloitte.com/content/dam/Deloitte/at/Documents/finance/art-and-finance-report-2017.pdf.
  40. ↑ Marc Speigler, Time To Reform the Art Market?, Forbes (May 30, 2005), https://www.forbes.com/2005/05/30/cx_0530conn_ls.html#69dcd7715f0a.
  41. ↑ Alessandra Dagirmanjian, Laundering the Art Market: A Proposal for Regulating Money Laundering Through Art in the United States, 29 Fordham Intell. Prop. Media & Ent. L.J. 687, 695 (2019).
  42. ↑ Id. at 696.
  43. ↑ Sotheby's, 2019 Annual Report 56 (2019), https://www.sothebys.com/content/dam/sothebys/PDFs/Sothebys-Annual-Report-12.31.2019.pdf?locale=en.
  44. ↑ Vera Jourova, Strengthened EU rules to prevent money laundering and terrorism financing, European Commission (2018), http://ec.europa.eu/newsroom/just/document.cfm?action=display&doc_id=48935; Scott Reyburn, Britain Moves to Regulate Its Art Trade. Bring Your ID., N.Y. Times (Jan. 10, 2020), https://www.nytimes.com/2020/01/10/arts/design/uk-art-money-laundering.html.
  45. ↑ See, e.g., Coordinating Oversight, Upgrading & Innovating Technology, & Examiner Reform Act, H.R. 2514, 116th Cong. (2019); Wallace Ludel & Margaret Carrigan, US House of Representatives passes an anti-money laundering bill that could affect art and antiquities dealers, The Art Newspaper (Oct. 25, 2019), https://www.theartnewspaper.com/news/us-house-of-representativespasses-an-anti-money-laundering-bill-that-could-affect-art-and-antiquities-dealers.
  46. ↑ Barden Prisant, The FBI Thinks You’re a Money Launderer, And Other Perils of Art Collecting, Forbes (Jan. 10, 2020), https://www.forbes.com/sites/bardenprisant/2020/01/10/the-fbi-thinks-yourea-money-launderer-and-other-perils-of-art-collecting/#589067023957.
  47. ↑ Alice McCool, Could Trump put an end to the Iranian art boom?, CNN (Sept. 25, 2018), https://www.cnn.com/style/article/is-the-iran-art-boom-under-threat/index.html.
  48. ↑ 50 U.S.C. § 1703(b)(2).
  49. ↑ 50 U.S.C. § 1702(b)(3).
  50. ↑ Letter from Brian T. McGuire, U.S. Dep't of Treasury, Assistant Secretary Office of Legislative Affairs to Chairman Rob Portman (Oct. 3, 2019).
  51. ↑ Letter from Frederick W. Vaughan, U.S. Dep't of Treasury, Principal Deputy Assistant Secretary Office of Legislative Affairs to Chairman Rob Portman (Jul. 22, 2020).
  52. ↑ U.S. Dep't of Treasury, Advisory on the Iranian Regime's Illicit and Malign Activities and Attempts to Exploit the Financial System, 5 n.12 (Oct. 11, 2018), https://www.fincen.gov/sites/default/files/advisory/2018-10-11/Iran%20Advisory%20FINAL%20508.pdf.
  53. ↑ Joe Pinsker, Are Shell Companies Useful for the People Who Aren't Ludicrously Rich?, Atlantic, (Apr. 8, 2016), https://www.theatlantic.com/business/archive/2016/04/how-rich-do-you-have-to-be-for-a-shell-company-to-be-useful/477384/.
  54. ↑ Malia Wollan, How to Set Up a Shell Company, N.Y. Times (Nov. 7, 2019), https://www.nytimes.com/2019/11/07/magazine/how-to-set-up-a-shell-company.html.
  55. ↑ U.S. Dep't of Treasury, The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies, 5-6 (Nov. 2006), https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf.
  56. ↑ Drake Forester, The Truth About Shell Companies: The Good. The Bad, and the Ugly, All Business, https://www.allbusiness.com/shell-companies-legitimate-uses-corruption-105041-1.html.
  57. ↑ Combatting Illicit Financing by Anonymous Shell Companies: Hearing Before the S. Comm. on Banking, Housing, & Urban Affairs, 116th. Cong. (2019) (statement of Steven M. D'Antuono, Act. Dep. Assist. Director, Fed. Bureau of Investigation), https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.
  58. ↑ Scott Reyburn, What the Panama Papers Reveal About the Art Market, N.Y. Times, (Apr. 11, 2016), https://www.nytimes.com/2016/04/12/arts/design/what-the-panama-papers-reveal-about-the-art-market.html.
  59. ↑ Casey Michel, The U.S. Is a Good Place for Bad People to Stash Their Money, The Atlantic, (Jul. 13, 2017), https://www.theatlantic.com/business/archive/2017/07/us-anonymous-shell-companies/531996/.
  60. ↑ Staff of S. Permanent Subcomm. on Investigations, 111th Cong., Rep. on Keeping Foreign Corruption out of the United States: Four Case Histories 2, 72 (Comm. Print 2010).
  61. ↑ Id. at 72.
  62. ↑ All Things Considered: Want To Set Up a Shell Corporation To Hide Your Millions? No Problem, NPR (Apr. 13, 2016), https://www.npr.org/2016/04/13/474101127/want-to-set-up-a-shell-corporation-to-hide-your-millions-no-problem.
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