It has long been known that the art market can be fertile ground for persons to “launder” or “wash” cash derived from criminal activity. However, recent charges of money laundering brought by authorities in the United States against certain art dealers and collectors have sparked a renewed focus among art market participants on why and how the art world lends itself so readily to such transactions. Some art advisors and collectors seem to turn a blind eye to their possible involvement in illicit activities, but the potential for becoming embroiled in money-laundering prosecutions and investigations, and the reputational and financial costs that might ensue, have finally resulted in many art market participants taking measures to minimize such risks.
Money is “laundered” or “washed” to conceal illegal activities and cash proceeds garnered from them. Once clean, it can be used freely without revealing its criminal source. Illicit activities that lend themselves to money laundering include tax evasion, drug trafficking, arms dealing, smuggling, human trafficking, bribery of foreign officials, fraudulent conveyances to frustrate creditors or government seizures, and the financing of terrorism. Money laundering generally takes the following forms:
• Placement This involves bringing money derived from illegal activities directly into the financial system, for instance through cash deposits at banks.
• Layering This is a common practice among money launderers, and involves layering illegally derived cash proceeds through several financial transactions, complicating attempts to trace the proceeds back to their original source.
• Integration The act of integration involves moving illegal gains into a seemingly legitimate form, for instance through the purchase and sale of works of fine art.
While integration is the primary form of money laundering in the art market, the use of fine art to hide monies derived from criminal activity is often only one step in a long and complex process that may involve one or more of these tactics.
At the core of any successful money-laundering enterprise is secrecy—the lack of a “paper trail” that documents the attributes of, and players involved in, a financial transaction. Thus the secretive nature of the art market provides ideal cover, aided by the fact that many art market players foster, instill and protect a lack of transparency in the market.
This lack of transparency is largely focused on anonymity—namely, anonymity of price and principals. Most auction houses have intensive diligence and compliance programs that should frustrate money-laundering efforts. In the private-sale market, however, buyers and sellers of artworks are kept apart by the art dealers representing them, who sell artworks by obtaining a “net price” for their clients. While the impetus for this “net price” sales formula lies in a desire to prevent the parties to the transaction from knowing how much the dealer is making on a sale, the practice provides fertile ground for money laundering. One only has to look at the common practice of back-to-back invoices being generated by art advisors on a single transaction (issuing one invoice between advisor and seller and another subsequently between advisor and buyer) to understand how the art market lends itself to washing criminal proceeds.
In addition, as an asset, art is a perfect vehicle for the laundering of money. It is portable and can be moved from country to country. Moreover, the determination of the value of an artwork is, by its nature, a subjective undertaking that affords the money launderers the possibility of arbitrarily inflating or decreasing the price as required.
Art advisors and collectors should take measures to protect themselves from getting dragged into a criminal prosecution relating to the purchase or sale of artworks. As well as bearing the costs involved in cooperating with a governmental investigation, buyers who acted in good faith may still see their purchases confiscated, leaving them with unsecured contract claims against art dealers who may have insufficient personal assets to compensate them for the loss. Moreover, collectors and advisors who had reason to suspect that the source of funds used to acquire an artwork came from an illegal activity can find themselves subject to significant jail time and fines depending on applicable law. To avoid such adverse outcomes, the following measures can and should be taken:
• Perform proper due diligence When entering into an art transaction, one must be sure to do one’s homework about the artwork. Gaps in provenance, inadequate documentation and inconsistent information should raise red flags. One should search the database of the Art Loss Register and of other law-enforcement agencies to minimize the risk that the work is stolen or subject to a claim by another party. Also, one should make proper investigations concerning the counterparties to the transaction. Following the practice of “Knowing Your Customer,” which is well established in the financial industries and includes asking for copies of passports, proof of the purchaser’s source of money and other identifying information, provides an important safeguard.
• Avoid disreputable art dealers A simple internet search of an art advisor’s name can often result in important information about lawsuits or arrests relating to fraud or other criminal activities. An art dealer with a history of such involvements should be avoided.
• Don’t bury your head in the sand If there are indications that an art deal could be part of a criminal conspiracy, one must ask the right questions and insist on receiving appropriate answers or walk away from the deal.
• Obtain proper representations Collectors and their advisors should insist on receiving proper representations and warranties from counterparties to an art transaction that the sources of funds involved in acquiring the artwork are not derived from illegal activities, as well as assurances that the counterparties are not on applicable sanction and embargo lists. In the US, this list is the “Specially Designated Nationals List,” published by the Office of Foreign Assets Control.
• Purchasing title insurance Rigorous diligence efforts undertaken by title insurance companies when issuing a policy can go a long way to identifying problematic transactions, including those that involve criminality.
While not foolproof, employing the safeguards listed above should decrease the possibility of taking part in a transaction that involves criminality and, at a minimum, demonstrate to government authorities that you acted in good faith.