In recent years, law enforcement agencies around the world have increasingly focused their attention on the use of high-value art and antiquities sales in schemes to evade sanctions, launder money, and even finance terrorism. And last summer, a bipartisan report by a U.S. Senate Subcommittee documented the circumvention of anti-money laundering measures and sanctions in the art market.
Prompted (at least partly) by that report, the U.S. government recently enacted new laws and published regulatory guidelines that will have major implications for art dealers, collectors, and anyone engaging in the art trade. The new laws, which are similar to measures already in place in Europe, apply existing anti-money laundering and sanctions regulations to some art-market participants. The government will begin implementing these laws by December 2021. But how will these developments impact the art market?
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The Problem
In its July 2020 report, The Art Industry and U.S. Policies that Undermine Sanctions, the U.S. Senate’s Permanent Subcommittee on Investigations observed that “[t]he art industry is considered the largest, legal unregulated industry in the United States.” In 2019, the U.S. was the world’s largest art market, representing about $28.3 billion, or about 44 percent of global art sales.
The report documented the case of two Russian oligarchs Arkady and Boris Rotenberg. According to the report, the Rotenbergs used transactions of high-value art to evade sanctions that the U.S. imposed on them in 2014 in response to Russia’s invasion of Ukraine and annexation of Crimea. The Senate Subcommittee found that in the months following the imposed sanctions, the brothers had purchased over $18 million in art using a complex network of shell companies, lawyers, art advisors, auction houses, and intermediaries in the U.S. and abroad. The art purchased during this period included works by seminal artists such as Georges Braque, René Magritte, and Marc Chagall.
The subcommittee found that shortcomings in U.S. laws and in policies and practices of auction houses and private art dealers made the Rotenbergs’ transactions possible. The report highlighted that the culture of the art market favors secrecy. Questioning the identity of buyers or the source of funds in an art transaction is not the norm, and parties are often reluctant to provide such information. Following the publication of the report, the U.S. government issued regulatory guidance on sanctions risks arising from dealings in high-value artwork, and amended existing anti-money laundering laws to apply to dealers in antiquities. These important developments may impose new compliance obligations on art galleries, museums, private art collectors, auction companies, agents, brokers, and other art-market participants.
OFAC Guidance
On October 30, 2020, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) issued an advisory on the sanctions risks from high-value artwork dealings. The Department did not define the term “high-value artwork” in the advisory, but urged “particular caution when dealing with artwork with an estimated market value of more than $100,000.” The Department underscored that the use of shell companies and intermediaries to purchase, hold, and sell artworks, and to remit and receive payments, “allow blocked persons and other illicit actors to obscure their true identities from other market participants and help to hide prohibited conduct from law enforcement and regulators.” Additionally, the advisory observed that the “mobility, concealability, and subjective value of artwork” further assist sanctioned persons and criminals in accessing U.S. markets and financial systems.
The Department reiterated that all U.S. individuals and companies generally are prohibited from engaging in transactions with entities on OFAC’s List of Specially Designated Nationals and Blocked Persons (SDN List), and an individual or company may be subject to civil penalties even without knowledge of the violation. Importantly, the Department encouraged art galleries, museums, private collectors, auction companies, agents, brokers, and other art-market participants to implement a risk-based compliance program, including due-diligence processes, to reduce exposure to sanctions-related violations.
The Anti-Money Laundering Act of 2020
On January 1, 2021, Congress—over President Trump’s veto—enacted the Anti-Money Laundering Act of 2020 as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), representing a major development in the U.S. anti-money laundering legal regime. The NDAA expanded the definition of “financial institution” in the Bank Secrecy Act—the law governing how companies prevent money laundering—to include “a person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities.” In drafting the law, Congress did not define the term “persons engaged in the trade of antiquities.” Instead, the question of exactly which art-market participants will be subject to this law will be hashed out by the Department of Treasury, which has until December 27, 2021 to propose regulations providing those specifics. Those who are eventually covered by the final regulations will be subject to new compliance obligations such as developing, implementing, and maintaining an effective anti-money laundering program and a monitoring system to identify transactions that may indicate criminal activity. Businesses that fail to comply with these obligations can be subject to civil or criminal penalties regardless of whether there is any evidence of actual money laundering. Art-market participants will have an opportunity to weigh in on the scope of these regulations informally before they are proposed and formally once the proposed regulations are issued.
Art Market Impact
For art-market participants who will be covered by the new regulations—including certain auction houses, galleries, agents, and collectors—these new developments have significant consequences. But precise predictions are difficult, in part because the government is still deliberating on what these final regulations should look like. Those in the industry may wish to consider participating in the informal and formal rulemaking process by submitting comments to the Department of Treasury through their attorneys or trade associations. This input from industry professionals may go a long way toward ensuring that the rules are appropriately tailored to the risks and realities of the art and antiquities markets.
We do expect that the art market may become, in some ways, more transparent. (Indeed, that is one of the express goals of this increased government oversight.) Since many art-market participants, including galleries and dealers, will need to implement screening processes for sanctions and money-laundering risks, buyers and sellers may no longer be able to completely shield their identities by hiding behind art advisors or other intermediaries. Parties will need to ensure that they know who is on the other side of an art deal—not always a straightforward matter in a market where a work may be owned by one party but consigned to another, or where multiple investors might have a partial stake in a work. At the very least, both sides may need to reveal their identities to each other’s legal advisors, who can confidentially vet the counterparty and conduct sanctions-list screening. Similarly, many dealers, collectors, and other art-market players may use standard or form contracts including confidentiality and non-disclosure provisions, or they may simply observe common practices regarding confidentiality and privacy of parties to an art transaction. These existing contracts and practices may need to be adjusted in light of recent and forthcoming legal developments. Likewise, parties will need to communicate clearly with agents, intermediaries, and counterparties regarding what they can and cannot promise regarding confidentiality.
Anyone participating in the art market will likely see a renewed commitment to thorough due diligence and documentation as a matter of business practice. Many art dealers and collectors have long operated using informal business practices—deals done on a handshake and a one-page bare-bones invoice, or arrangements made verbally through layers of go-betweens. But where the market is likely to see an uptick in law-enforcement actions and investigations, the industry overall likely will need to respond to the enhanced scrutiny with increased professionalism and accountability.
Imagine that tomorrow, a government investigator needs you to produce thorough documentation relating to a specific transaction. Could you and your employees do it quickly and completely? Everyone participating in the art market should consider investing time and effort—with the help of legal and accounting professionals where necessary—to ensure that their business and recordkeeping systems and practices are in order and up-to-date, and that their personnel are trained and ready for this new chapter.
Mr. Grossman and Ms. Lucas are attorneys at Grossman LLP based in New York; Mr. Volkman and Mr. Ruiz are attorneys at Latham & Watkins based in Washington, DC.