by 
Editor’s Note: This article is part of a collaboration between the Harvard Art Law Organization and the Harvard International Law Journal.
*Juan Carlos Portilla
Introduction
The succinct response to the question posed is affirmative. The Financial Action Task Force (“FATF”), the global money laundering and terrorist financing watchdog, has yet to establish international standards that would incorporate the global art market into its designated non-financial businesses and professions (“DNFBPs”) framework.
The financial sector (banking, securities broker-dealers, fintech, and virtual assets) and DNFBPs (casinos, real estate agents, lawyers, notaries, accountants, trust service providers, and dealers in precious metals and stones) are governed by stringent anti-money laundering (“AML”) regulations. Nevertheless, the art market operates under relatively lax anti-financial crime regulations and oversight across various jurisdictions globally. The lack of a clear international framework from FATF has hindered both nations and art market participants from establishing compliance regulations and policies. Specifically, this absence of guidance affects the implementation of “Know Your Customer” protocols—which prohibit financial institutions from opening accounts anonymously or under a false name, due diligence obligations, transparency regarding beneficial ownership of legal entities involved in art transactions, and the reporting of suspicious activities to relevant authorities.
The absence of a comprehensive global regime regulating the art market renders it particularly susceptible to transnational financial crime, including money laundering, terrorist financing, and proliferation financing. Such a regime should not only incorporate know your customer and due diligence obligations, transparency regarding beneficial ownership of legal entities involved in art deals, and the reporting of suspicious activity, but also the prohibition of engaging in business transactions with sanctioned entities.
The European Union’s Fifth Anti-Money Laundering Directive includes anti-money laundering obligations to art brokers, auction houses, and storage providers, particularly for transactions exceeding €10,000. The proposed Illicit Art and Antiquities Prevention Act in the U.S. Congress would also require art and antiquities dealers to implement AML programs. However, there remains an urgent need for FATF to address the deficiencies in international anti-financial crime legislation to prevent art market money laundering. The objective for FATF should be to encourage its member states worldwide to implement AML programs specifically tailored to participants in the art market. In the future, the FATF mutual evaluation process should incorporate an assessment to determine whether member states comply with an FATF global standard aimed at combating transnational financial crime within the global art market.
To advocate for a new FAFT global standard aimed at safeguarding the art market from transnational financial crime, it is crucial to address several key issues: the role of FAFT in combating transnational financial crime; an understanding of transnational financial crime itself; its prevalence within the global art market; the increasing incidence of money laundering operations in the art sector; the implications of anonymity and secrecy in art transactions; and the necessity of establishing a comprehensive data system that can guide international lawmakers in tackling art-related money laundering more effectively. The remainer of this article will delineate these issues.
The Role of FAFT and its Framework in Combating Transnational Financial Crime
FATF is not a treaty-based international organization but rather a task force composed of member states. FAFT was established in 1989 at the initiative of the G7 to formulate policies aimed at combating money laundering. In 2001, its mandate was broadened to include terrorist financing. FATF is hosted by the Organization for Economic Cooperation and Development (“OECD”) in Paris. FAFT issues international standards, also referred to as the FAFT 40 Recommendations, on combating money laundering, the financing of terrorism, and proliferation financing.
FAFT 40 Recommendations are categorized as soft law by scholars. International legislators often adopt the soft law approach, as a design choice. Soft law offers several advantages over treaty law, including greater flexibility for states to cope with complex issues, such as money laundering, and lower negotiation costs. FATF strives to cultivate the political will necessary for enacting national legislative reforms in these critical areas. FATF empowers national authorities to effectively pursue illicit funds associated with drug trafficking, the illegal arms trade, cyber fraud, and other serious offenses. To date, over 200 countries and jurisdictions have committed to implementing the FATF’s standards as part of a coordinated global initiative aimed at preventing transnational financial crime.
Understanding Transnational Financial Crime
Transnational financial crimes include money laundering, terrorist financing, and the financing of proliferation of weapons of mass destruction. Transnational crimes occur across borders and are highly profitable for organized crime. These include art crime, securities fraud, tax evasion, corruption, cybercrime, and illicit cryptocurrency use. Additionally, transnational organized crime is involved in money laundering, terrorist financing, and proliferation financing. The focal point of this conflict lies within the international financial system, as organized crime relies on it to launder the profits from their crimes. The emergence of transnational financial crime is largely due to globalization and deregulation of financial markets, leading to unprecedent cross-border money transactions involving individuals, companies, and financial institutions.
Money laundering is a significant concern for international policymakers. Money laundering is the process by which criminals disguise and legitimize their financial gains from illegal activities, transforming “dirty money” into “clean” funds. Key tactics involve maintaining anonymity and secrecy to avoid scrutiny of the money’s origins. Criminals obscure the source of their profits, alter the form of the money, or move it to tax haven jurisdictions to avoid detection. FATF and the United Nations (“UN”) have implemented global regulations to address the issue of money laundering. Nonetheless, international policymakers like FATF have struggled to combat money laundering in the art market. Interventions are necessary to close regulatory gaps due to several concerns: The increasing money laundering activities among art market participants, anonymity in art transactions, reliance on shell companies, and the urgent need for a comprehensive data system to aid global lawmakers in tackling art-related money laundering effectively.
Art Market Money Laundering
Money launderers found a niche within the art market. Criminal enterprises have realized the potential of the art market as a vehicle for money laundering due to its unique characteristics and vulnerabilities. The Financial Crime Academy indicates that only 25-30% of art transactions occur through banks, highlighting the prevalence of cash transactions and difficulties in tracing funds. A major vulnerability within the art market stems from the high level of anonymity and secrecy that often accompanies art transactions. Common schemes include shell companies that hide true ownership of artworks and facilitate illegal financial activities. The absence of regulation and oversight in the art market exacerbates its susceptibility to various risks, with estimates suggesting that over $3 billion in art market transactions are linked to suspicious activities each year.
Methods for laundering money through art and antiques include the use of artworks as collateral for loans, the role of freeports, and participating in anonymous purchases and resales. White-collar criminals are often driven to engage in anonymous transactions involving the purchase and resale of art as a means of laundering illicit funds. The Beaufort case exemplifies this contemporary and discreet method of money laundering within the art market. In the past, Beaufort Securities, a firm based in Mauritius and accused of fraud, stock manipulation, and money laundering, successfully laundered their illicit gains by depositing money under fake identities in offshore banks and gradually integrating these funds into the global banking system. However, their biggest challenge was disguising these illegal profits as legitimate income. Matthew Green, who grew up in a family devoted to fine arts, with his father owning renowned galleries, became the crucial link that opened the art market for Beaufort Securities to cleanse their tainted money.
At 51, Green was poised to inherit the family business, but in late 2017, he became entangled with Beaufort Securities. He was then approached by the Beaufort conspirators, one of whom was in fact an undercover U.S. federal agent who had infiltrated Beaufort. Green reportedly agreed to receive £6.7 million (around $9 million at that time) derived from securities fraud in return for a 1965 Picasso, titled Personnages. Green would create fraudulent ownership documents indicating that the artwork had been sold, while actually keeping the Picasso securely stored. Later on, he would feign a purchase of the painting back from his co-conspirators at a reduced price, pocketing 5 to 10 percent of the laundered funds for himself.
The methods employed by Green and others involved in the Picasso scheme are still relatively easy to replicate Green exploited a regulatory loophole that legislators in the U.S and Europe are actively working to close. Unlike financial institutions, lawyers, casinos, currency exchange services, and even precious metals dealers, auction houses and art sellers are not required to report large cash transactions to any governing body. Dealers can keep both buyers’ and sellers’ anonymity. Unlike US businesses managing large sums, they are not required to report suspicious money origins to the U.S. Treasury Department.
Data System to Guide International Lawmakers in Addressing Art-Related Money Laundering Effectively
The legitimate global art market was valued at approximately $67.4 billion in 2018, while the underground art market, involving thefts and forgeries, may generate up to $6 billion annually, according to the United Nations Office on Drugs and Crime (“UNODC”). Furthermore, a 2009 UNODC report estimated that global money laundering amounted to 2-5 percent of the world’s GDP, equating to $800 billion – $2 trillion in current U.S. dollars annually. The data referenced above originates from the years 2009 and 2018, respectively. UNODC acknowledged that due to the clandestine nature of money-laundering, it is challenging to estimate the total amount of money that goes through the laundering cycle. Outdated information falls short in equipping policymakers with the necessary insights to issue international regulation against art-related money laundering. Consequently, utilizing data is essential in addressing art-related money laundering. The international community needs universally accepted frameworks that leverage data to assess the effectiveness of efforts against art-related money laundering.
Essential Components of a Global Standard to Combat Transnational Financial Crime in the Art Market
The fundamental elements of an international standard aimed at combating money laundering in the art market should encompass customer due diligence (“CDD”) measures, record-keeping requirements, and the reporting of suspicious activities. Art market participants should apply CDD when forming business relationships, suspecting illicit activities, or questioning prior customer identification information. The necessary CDD measures may include: (a) identifying the customer and confirming their identity through reliable, independent source documents, data, or information; and (b) identifying the beneficial owner and taking reasonable steps to verify their identity. For legal entities and arrangements, this involves art market participants comprehending the client’s ownership and control structure. Moreover, art market participants should maintain detailed records of all transactions, both domestic and international, to respond to authorities’ information requests. These records should allow for the reconstruction of transactions, including currency types and amounts, to aid in prosecuting criminal activities. Finally, if a participant in the art market suspects, or has reasonable grounds to suspect, that funds may be derived from criminal activities or are associated with terrorist financing related to such activities, it should be mandated by law to promptly report these suspicions to the financial intelligence unit in the jurisdiction of their domicile.
Conclusion
To summarize, this article proposes a new FATF global standard to protect the art market from transnational financial crime. While the financial sector and DNFBP face strict AML regulations, the art market lacks strong oversight, making it vulnerable to money laundering. The absence of a clear international framework from FATF hinders compliance in the art market, impacting KYC protocols, due diligence, transparency in ownership, and suspicious activity reporting. In short, FATF needs to integrate the global art market into its framework for DNFBPs.
* Juan Carlos Portilla, International Financial Law Professor, Sabana Law School
