Under the Wave off Kanagawa (Kanagawa oki nami ura), also known as The Great Wave, from the series Thirty-Six Views of Mount Fuji (Fugaku sanjūrokkei) is one of the most recognizable works of Japanese art in the world. This wood block print by the Japanese artist Hokusai, published between 1829 and 1833, embodies the beauty, movement and force of tidal waves on the lakes around Mount Fuji. It seems a fitting illustration of the concepts of movement and change, which we are witnessing in 2017 when it comes to tackling financial crime.
The AML/CTF Regulation Tide
Concerned by the significant and evolving challenges of money laundering and terrorist financing, recent months have witnessed a series of recommendations and measures at international, European and national levels. It seems the tide of regulation is no longer confined to the financial sector with legislators extending their focus to new sectors of financial activity, including the art market.
For example, on June 26, 2017, the European Commission published a supranational risk assessment (SNRA) of money laundering and terrorist financing affecting the internal market.(1) The report identifies dealers in high-value goods and the art market as being sectors at risk due to what the report describes as their “inherent risk exposure and weak level of controls.” It recommends member states extend their lists of obliged entities to include auction houses, art and antiques dealers and specific traders in high-value goods. On the same day, the U.K.’s new anti-money laundering (AML) regulations came into force.2 Art businesses accepting cash payments above 10,000 euros in a single or series of linked operations are regulated as high-value dealers and in a change to the previous legislation are now required to register to carry out their activities.
When it comes to countering terrorism, the G20 published a new action plan on July 7, 2017. Amongst other measures, it calls on heads of state, governments and the private sector to dismantle connections between terrorism and transnational organized crime, including the looting and smuggling of antiquities. Within a week, the European Commission responded by publishing a proposal for a new regulation on the import of cultural goods.3 The proposal is designed to close loopholes and to curb illicit trafficking suspected to be linked to terrorist financing activities.
This article looks at these issues and asks if further regulation is really the answer or if there are alternative and complementary methods of tackling financial crime.
Financial Crime in the Art Market: A reality?
In November 2015, at a conference in Geneva organized by the University of Geneva’s Art-Law Centre and the Geneva-based Art Law Foundation, representatives from the art market, Geneva Freeport, law enforcement and customs, as well as lawyers and academics came together to debate whether financial crime in the art market was a reality.
The absence of any reliable figures makes it practically impossible to gauge the extent to which money laundering may exist in the art market. With that said, the few high profile cases—which have come to light in recent years—demonstrate that the art market, like other financial markets, is at risk of abuse. In the layering stage of money laundering, criminals seek to separate the proceeds of their criminal activity from its illegal origin. Purchasing valuable assets such as artworks, artifacts or antiquities, helps to convert such “dirty” cash or funds into an asset that gains value and can be sold later.
Certain features of the art market (like other luxury goods such as real estate, yachts and cars), make it attractive to criminals seeking to launder the proceeds of crime or to finance illegal activities. These include:
- High-value goods
- International markets and networks
- Common use of intermediaries or proxies for transactions
- Common use of foreign/offshore structures and accounts
- Culture of discretion (the buyer and seller are often unknown to each other)
However, the art market also has features that can serve as a deterrent, including:
- Auction sales are public and highly publicized making them less attractive to criminals seeking to keep a low profile.
- Unlike cash or financial instruments, artworks tend to be unique, making them more easily identifiable and traceable.
- Art values fluctuate and this value volatility can make art less attractive as a means of placement or layering for money launderers.
Challenges Faced by Art Businesses
Globalized and complex, the art market is constantly evolving. Art is increasingly being sold online and collected for investment, as well as for its aesthetic, cultural or historical value.
Online sales and non-face to face transactions, present increased risk and are boosting demand for online identification tools. The advent of modern technology and the ease with which documents can be forged, requires art businesses to be ever more vigilant.
In addition, the legal and regulatory framework within which art businesses are required to operate, is becoming increasingly complex and fragmented.
When it comes to AML and counter-terrorist financing (CTF) measures, certain countries have imposed regulations on art dealers in an effort to continue protecting the market from abuse. However, there is little international harmonization. For example, in France, auction houses and art/antique dealers fall within the regulated sector whilst in the U.K. they only become regulated entities if they accept cash payments at or above 10,000 euros for a single or series of linked transactions. In Switzerland, the cash limit is higher, CHF$100,000 and above.
For art businesses who transact internationally, this patchwork of fragmented legislation presents significant challenges. Art businesses need to understand and comply with AML/CTF laws in a number of jurisdictions (e.g., the situation in the U.K. and France is different to that in Switzerland, the U.S., Asia and so on).
The response of the larger auction houses and industry players has been to invest in dedicated compliance teams to tackle these issues and manage the risk. However, this solution is not available to smaller art businesses, galleries and dealers who lack the financial and human resources to invest in such infrastructure.
Regulation Versus Self-Regulation
The role and place of regulation and self-regulation in the art market has been a topic of hot debate.
The European Commission, in its recent SNRA, advocates extending existing AML regulation to auction houses, art and antiques dealers and specific traders in high-value goods. In addition, it recommends a number of more practical measures including:
- Extending national risk assessments to include cultural artifacts and antiques;
- Carrying out sufficient unannounced spot checks on high-value dealers, especially gold and diamonds, to identify possible loopholes in compliance with customer due diligence requirements; and
- Promoting awareness raising campaigns among art dealers, encouraging them to apply AML/CTF measures.
In the same report, the Commission acknowledges that regulation alone does not necessarily result in better outcomes. For example, when discussing the identification of beneficial ownership information it questions whether the mechanical application of rules by certain obliged entities leads to the identification of the real beneficial owner.
All this begs the question, whether further regulation is really required and whether a better approach would be to complement the existing legal framework with industry driven, self-regulatory codes of conduct. Interestingly, U.S. economist Nouriel Roubini, who at the World Economic Forum warned that art was being used as a form of money laundering, went on to say that regulation was not necessarily the solution. In his words, “Self-regulation probably might be the right way to go for now.”
Can self-regulation in the art market make a difference?
For a market as complex, diverse and constantly evolving as the art market, self-regulatory approaches are widely recognized as having several advantages over state-imposed regulation. These include:
- Flexibility and speed – Industry guidelines can be developed and updated more quickly than state-imposed legislation, which takes time to be approved and adopted. For example, the proposed new EU regulation on the import of cultural goods, if adopted, will take two years to be transposed into national legislation. However, self-regulatory measures can be updated more quickly to respond to evolving threats resulting in greater operating efficiencies for art businesses and in turn minimizing compliance costs.
- Better adapted – Greater technical and industry expertise can be achieved through industry developed guidelines, which strike that critical balance between achieving the desired goal whilst not stifling the market so much that it cannot operate.
- Collaborative – Conflicts of interest are mitigated through the participatory design process.
- Global – Unlike legislation, which is territorial, guidelines and codes of conduct can transcend national boundaries, resulting in a more flexible approach better adapted to serving a global market, such as the art market.
The Responsible Art Market Initiative
To contribute to the discussion on best practices and compliance in the art market, January 2017 saw the launch of the Responsible Art Market Initiative (RAM) together with its online platform.4 This non-profit industry initiative was formed in Geneva in November 20155 under the auspices of the University of Geneva’s Art-Law Centre and the Geneva-based Art Law Foundation and it is the first of its kind. RAM exists to support art market actors providing them with a practical and ethical compass to navigate the increasingly complex and fragmented legal framework within which they are required to operate. It aims to do this by:
- Raising awareness amongst art market actors of risks which they face in conducting business;
- Consolidating and sharing existing industry best practices; and
- Doing so through practical guidelines and tools that can be easily understood and implemented.
Risk-Based AML/CTF Guidelines
RAM’s first set of guidelines tackle the issue of money laundering and terrorist financing threats in the art market. They adopt a risk-based approach and emphasize the importance of art businesses knowing their clients and being alert to red flags. The guidelines are supplemented with a quick reference guide, easy-to-use red flag lists and country guides providing an overview of the AML regimes applying in different jurisdictions.6RAM’s red flag lists are tailored to art transactions and they focus on three areas of inquiry: the client, the artwork and the transaction itself.
Client red flags include:
- Agents acting for undisclosed buyers or sellers
- Offshore companies, trusts and foundations
Artwork red flags include:
- An artwork presented with limited or no documentation or provenance
- Sellers who refuse or are reluctant to provide written evidence of provenance
- An artwork, which is an antiquity or whose source country is or has been in recent conflict
Transaction red flags include:
- Clients who knowingly wish to sell at an artificially low or inflated price
- Sellers who are unwilling or unable to provide adequate proof of ownership for items they wish to consign for sale
- Buyers who insist on making multiple low-value cash payments for a single or series of connected transactions
RAM sees its practical, self-regulatory approach as complementing existing state-imposed regulation. Its guidelines are designed to be accessible to the entire market, including small art businesses and individual dealers and collectors who do not have the financial resources to spend on large compliance departments or expensive lawyers.
A Different Approach
What makes RAM unique is its collaborative, interdisciplinary approach. RAM’s founding members span the entire spectrum of the art market, from international auction houses (Christie’s) and individual dealers (Seydoux & Associés) to services providers (the Geneva Freeport and SGS art services), specialist art lawyers and academics from the University of Geneva’s Art-Law Centre and Geneva-based Art Law Foundation, as well as law enforcement.
This cross-industry participation ensures issues are addressed holistically from various perspectives. By cooperating to share and internalize existing best practices throughout the industry, RAM aims to have a greater impact when it comes to reducing risks for art businesses and collectors alike, thereby increasing public trust and confidence in the market.
Since launching, RAM has generated a positive response and global interest. It intends to build upon this, expanding its platform to address topics of specific concern to the art market with the constant goal of identifying and sharing responsible practices in the art market.
As the tide of regulation turns toward the art market, with the birth of initiatives such as RAM, perhaps it is time to transition to more collaborative and complementary methods of tackling financial crime. For more information, visit http://www.responsibleartmarket.org. RAM will be holding its next annual conference in February 2018 in Geneva, Switzerland.
Mathilde Heaton, lawyer and art law consultant, Art Law Advisory, coordinator of the Responsible Art Market Initiative and researcher at the Art-Law Centre, University of Geneva, Geneva, Switzerland, firstname.lastname@example.org
This article was first published in the ACAMS Today magazine*, September – November 2017 (Vol 16 No. 4, page 24). * A publication of the Association of Certified Anti-Money Laundering Specialists (ACAMS)
 “Report from the Commission to the European Parliament and the Council on the Assessment of Risks of Money Laundering and Terrorist Financing Affecting the Internal Market and Relating to Cross-Border Activities,” European Commission, http://ec.europa.eu/newsroom/document.cfm?doc_id=45319