Art World Good Vehicle for Money Laundering?

Treasury says probably not, but NFTs are a whole new vulnerability

The Treasury Department’s study of money laundering facilitation in the art world appears to be first and foremost a box-checking exercise mandated by the Anti-Money Laundering Act of 2020. This does not mean, however, that Treasury slacked in its assessments. Although most entities involved in art and antiquities—including some that provide financial services within the high-value art market—are not subject to AML/CFT obligations and requirements, the Department assesses that the infrequent use of cash in the high-value art market, coupled with requirements for financial institutions and commercial businesses to report high-value cash transactions, may make the art market a less attractive vehicle for laundering illicit proceeds.

Treasury found that the art market currently presents a small terrorism financing risk, although I can see how groups like Hizballah, that have access to large amounts of cash, control smuggling routes in high-risk jurisdictions, and can move funds by smuggling antiquities, can represent a terrorism financing risk. The Department, however, is aware of emerging technologies and novel threats.

Furthermore, the emerging online art market may present new risks, depending on the structure and incentives of certain activity in this sector of the market (i.e., the purchase of non-fungible tokens [NFTs], digital units on an underlying blockchain that can represent ownership of a digital work of art).

Although art market participants do have incentives to perform due diligence, find out the ultimate beneficial owners of sellers and buyers, and other risk-reduction strategies, collecting information about those moving works of art through the market is voluntary. Institutions in the art world can disregard these good practices that protect their reputations and finances at will without fear of regulatory or financial consequences from the US government.

And that’s where the risk comes in. Corrupt oligarchs and kleptocrats can launder large amounts of misappropriated or otherwise illegally obtained assets through the high-value art market. But Treasury says, the volumes moved through that portion of the art market is relatively limited.

The high-value art market is the portion of the art sector that is of greatest money-laundering concern but represents a limited segment of the broader art market. Less than 20 percent of works sold internationally by art dealers in 2020 were valued at more than $50,000, according to Swiss financial institution, UBS, and a prominent art fair organizer, Art Basel. In addition, participants in the US art market do have certain reporting requirements, such as the obligation to report cash payments of more than $10,000.

It doesn’t sound like Treasury is particularly concerned that the art market is being flooded with illicit cash. Deputy Assistant Secretary for Strategic Policy at Treasury’s Office of Terrorist Financing and Financial Crimes, Scott Rembrandt, remarked that the study revealed the abuse in the art market, much like in a lot of other sectors, is facilitated by issues such as the abuse of shell companies and the facilitation of financial movements by complicit professionals.

Does this mean that there are no issues with money laundering in the art world? Not even close. It just seems that the problems are connected to deeper issues, including lack of transparency and use of anonymous shell companies. As an example, Putin pals, the Rotenbergs reportedly used shell companies to purchase high-end art works. Moscow-based art dealer Gregory Baltser facilitated the brothers’ participation in the US art market, along wit the use of Highland Business Group Limited, Highland Ventures Group Limited, and Advantage Alliance—three shell companies that helped conceal the Rotenbergs’ identities and providing a perfect example of Rembrandt’s assessment.

Treasury does, however, flag new technologies in the art world as a potential risk. Nonfungible tokens—or NFTs— enjoy a section all of their own in the study, highlighting them as “bearer instruments that codify the ownership of a unique digital asset, such as a piece of high-value digital art and are managed via smart contracts and digital wallets.” NFTs are blockchain-based, and therefore verifiable and trackable.

NFT platforms such as Dapper Labs, SuperRare, and OpenSea already allow owners of digital art to sell the assets on virtual exchanges. Depending on the nature and characteristics of the NFTs offered, these platforms may be considered virtual asset service providers (VASP) by FATF and may come under FinCEN’s regulations.

Treasury sees scenarios in which illicit actors could sell NFTs to themselves by creating a record of sales on the blockchain or to unwitting buyers, who would buy the NFT with clean funds, unknowingly facilitating the cleaning of dirty money. In addition, NFT transactions can be conducted peer-to-peer, without the involvement of an intermediary, which would not involve the use of a public ledger, making them a money-laundering risk. Digital art does not need to be moved, locked in a vault, or otherwise manhandled. They can just be transferred via the Internet, and the distance from buyer to seller would not matter.

For me, the bottom line is that the art world is being abused, although not at a rate that should be worrisome—at least not right now. That said… things change quickly in the illicit finance world, and new technologies may facilitate those changes, making the art world more attractive to malign actors in the future.