Money Laundering in the Art Trade and NFT Marketplaces (with a Prevention Checklist)

In December 2019, the US Treasury Department sanctioned Nazem Said Ahmad, a prominent gallerist from Beirut. The investigation revealed that Mr. Ahmad used his gallery and impressive personal collection, which included Warhol and Picasso, as a front to sponsor the terrorist group Hezbollah.

The art industry has long been a watering hole for criminals. According to Deloitte, 4-6 billion dollars in art is stolen and most likely laundered every year. Artworks are faked, sold on the black market, while terrorist organizations like ISIS trade in cultural artifacts to finance their activities. 

However, the art trade is changing, with new regulations now coming into play in the EU, UK and US. With traditional art marketplaces under greater scrutiny, some money launderers have decided to move to NFT marketplaces. As of 2023, the NFT industry is unregulated in most countries, but this might change in the near future. This is why, now more than ever, NFT businesses need to develop a solid AML program.

In this article we’ll observe how money is laundered through art and NFT marketplaces, the regulations that are already in place, and go through a checklist on how to prevent money laundering in both industries.

Why the art sector is so attractive to money launderers

With global art sales reaching $65.1 billion in 2021, the art sector is a huge source of illegal wealth. The main reasons for this include: 

• “Privacy”

Let’s look at a typical case: a wealthy family has financial trouble and decides to sell its art collection, but they don’t want people to find out about their misfortune. So, the art dealer conceals their identities. Now, this is a seemingly innocent example. However, criminals can use this same anonymity factor to conceal their criminal background, while moving millions in illicit funds through the art trade. 

• Subjective pricing

Even if there can be some objective value, the price of contemporary artwork is often driven by incidental factors. One of Gerhard Richter’s paintings was originally bought for $260,000, and just 30 years later, when the painter was better known, it sold for $33 million. This very subjectiveness allows criminals to manipulate prices: you can buy a painting for $100 today, and sell it for $1 million tomorrow.

• Ease of transportation and concealment

Artworks are  easy to move. They can be sent to another country, for instance, on a private plane, and no one would even notice. Let’s take a look at a real-world example of this.

In 2016, the US returned several paintings that a banker smuggled from Brazil. One of the paintings was worth $8m, but when it entered the US, the shipment invoice stated that the piece was only worth a meager $100. So, the customs officer let the shipment through, the work reached the secure warehouse, and could not be re-allocated for almost a decade.

• Lack of regulation

In many countries, art dealers neither have to report transactions nor verify their clients. Even reputable jurisdictions like the US and Australia do not add art dealers to their lists of reporting entities. Today, only antiquities businesses are regulated in the US.In July 2020, a US-led investigation discovered that two Russian billionaires, sanctioned in 2014, had exploited regulatory loopholes in the US art market to launder $18.4m. Although the 2014 sanctions forbade the two from any financial operations in the US, in reality, the billionaires were still able to trade on the art market. This happened because AML regulations remain absent from the US art sector, so auction houses, where the billionaires purchased the artworks, had no responsibility to check the buyers’ identities.

How criminals launder money through art and why this is everyone’s problem

Money laundering schemes can be quite straightforward.

Imagine: A corrupt politician decides to ‘clean’ their money. They anonymously buy a Van Gogh painting for cash at an auction and transport the piece via a private plane to a secure warehouse. The politician can then sell the painting through a legitimate art dealer and obtain ‘clean’ money, completing the money laundering cycle.

Suggested read: Money Laundering and Its Impact on Business

If authorities can prove that you’re involved in money laundering, there will be a penalty. This can be in the form of a fine, business license revocation or even imprisonment. Also, since many countries now require reporting large transactions within the art sector, criminals now lean towards money laundering through inexpensive art to avoid verification procedures.

Artworks that can be used for money laundering

In the UK, the following works are defined as art:

• pictures, collages, paintings and drawings, executed by hand by the artist, other than plans and drawings for architectural, engineering, industrial, commercial, topographical or similar purposes
• original engravings, prints and lithographs, being impressions produced in limited numbers
• original sculptures and statuary, in any material, provided that they are executed entirely by the artist; sculpture casts the production of which is limited to eight copies and supervised by the artist 
• tapestries and wall textiles made by hand from original designs provided by artists, provided that there are not more than eight copies of each
• individual pieces of ceramics executed entirely by the artist and signed by him
• hand-made non-precious jewelry in a limited edition
• photographs taken by the artist, printed by them or under their supervision, signed and numbered and limited to 30 copies, all sizes and mounts included;

Meanwhile, “antiques” shall mean: 

• objects other than works of art or collectors’ items which are more than 100 years old.

AML regulations of the art industry

Art and antiquities dealers are regulated in different ways, depending on the jurisdiction. 

The UK and EU

In 2020, the EU and the UK adopted the 5th European AML Directive and became the first jurisdictions in the world to regulate the art trade.

Art and antique traders (both individuals and businesses) as well as intermediaries (galleries, freeports, auction houses, etc.) that trade or store artworks worth over €10,000 must comply with the new directive.

Art traders are now perceived as financial institutions and must follow the AML requirements outlined in the 5th AML Directive, including due diligence checks. Art dealers must also report both wire and cash transactions above €10,000.

The US

In 2020, the Anti-Money Laundering Act (AMLA 2020) extended the same AML regulatory framework to antiquities dealers under the AML Act Section 6110. Previously AMLA 2020 only applied to US financial institutions, like banks, under the Bank Secrecy Act (BSA). Now the definition of “financial institution” includes “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.” Therefore, under the AMLA 2020 antiquities dealers are also required:

• to have an AML/CFT programs in place
• to identify beneficial owners
• to conduct AML employee training
• to keep transaction records
• to report suspicious transactions to the regulator
• to audit their record keeping and compliance measures.

At the same time, the activities of art dealers generally remain unregulated in the US.

The standard compliance checklist for art dealers

It’s hard to change longstanding practices overnight. To support you, we’ve gathered a list of AML requirements that are outlined by the 5th AML Directive. This compliance checklist is relevant not just for European art businesses, but also for all art traders that want to protect themselves from money laundering sanctions.

• Take a risk-based approach: An art dealer must evaluate the money laundering risks that their business is exposed to.
• Establish an AML compliance program: This is a document that describes the company’s policies and safeguards meant to reduce money laundering risks.
• Set up Know Your Customer (KYC) procedures: Verification checks must be applied to customers and their transactions.
• Appoint an AML compliance officer: Businesses operating within the art industry must appoint an AML compliance officer who’s responsible for compliance and reporting. Anart dealer operating sol is, by default, the compliance officer of their business.
• Create Reports: Obligations include reporting suspicious client activity and financial reporting.
• Record of data: Art dealers must record the results of customer verification checks and information on transactions.
• Conduct employee AML training: All individuals working in the art industry must be acquainted with money laundering schemes and know how to deal with them.

Suggested read: 6 Key Steps to a Successful Anti-Money Laundering (AML) Program in 2023

Specific recommendations for verifying artwork

In the art industry, you have to conduct due diligence checks not only on clients, but also on the art itself. This is commonly known as provenance. We want to share the industry’s best practices for checking the authenticity of artwork.

Apart from examining the work itself, art dealers should obtain all documented information about the piece (invoices, photographs, exhibition catalogs, etc.). It is also recommended to run the piece against stolen art databases, such as Interpol’s the Stolen Works of Art database, the Art Loss Register, and the ICOM’s Red Lists.

Moreover, art dealers should check that the piece in question agrees with the seller’s profile. For instance, it might be suspicious if a politician with no previous connection to art suddenly tries to sell a Victorian antique vase.

Responsible Art Market

The Responsible Art Market (RAM) has also compiled a guide which includes the following recommendations for art dealers:

• “Do a risk assessment of your business and apply risk-based measures
• Know and comply with the laws where you are doing business and be alert to red flags
• Know Your Clients (KYC) and establish their risk profiles
• Research the artwork, its ownership and provenance
• Know the background and purpose of transaction
• Keep records
• Train staff and monitor processes and procedures
• If grounded suspicions exist, know how to act”

The AML guide compiled by the Basel Art Trade may also be useful.

Money laundering through NFTs, or digital artworks

Since the traditional art sector has recently become subject to AML legislation in many parts of the world, criminals have moved into NFTs.

The biggest vulnerability of NFT marketplaces is that user identities are not verified. Criminals can create an NFT, register two separate accounts (one for selling and one for buying), and purchase the NFT from themselves. This is a classic money laundering method now used in the world of NFTs.

Moreover, NFT prices are highly volatile and speculative, which also makes this market attractive for launderers. Indeed, an NFT that was bought for $1 can be sold for thousands or even millions the next day, allowing criminals to launder money through legitimate transactions.

Therefore, according to FinCEN, the “emerging digital art market” presents a threat for potential money laundering and financial crime.

To prevent money laundering and various kinds of fraud, NFT marketplaces should implement KYC procedures and build a strong AML-compliance program. Check out the following guide to learn how.

Suggested read: Building AML Compliance for NFT Marketplaces

FAQ

• How is art used for money laundering?

  Criminals use artworks to hide the source of illegally-obtained funds. They buy and sell artworks, hiding its true ownership, and inflate their prices.

• How is the NFT market used for money laundering?

  Criminals can create an NFT, register two separate accounts (one for selling and one for buying), and purchase the NFT from themselves. This is a classic money laundering method now used in the world of NFTs.