TABLE OF CONTENTS I. INTRODUCTION 1062 II. MONEY LAUNDERING IN THE ART MARKET 1065 A. The Problem of Money Laundering 1065 B. International Money Laundering in the Art Market 1068 1. How Art is Used to Launder Money 1069 2. Weaknesses and Susceptibilities in the Art 1070 Market: Pricing, Theft, and Anonymity 3. Scope of the Art Market 1075 C. New EU and Proposed US Laws 1076 III. EVALUATION OF NEW REGULATIONS AND INTERNATIONAL 1079 FINANCIAL REGULATION A. Arguments for and against New EU and US Regulation 1080 1. Shortcomings of Regulatory Requirements 1080 2. Effect on Small and Medium-Size Dealers 1082 3. Benefits of Additional Regulation 1084 B. Structure of Current International "Soft Law" 1085 Regulation of Money Laundering 1. Overview of International "Soft Law" Agreements 1086 2. The Role of the FATF in Anti-Money Laundering 1089 Regulation IV. REFORM TO EFFECTIVELY DETER AND CATCH MONEY 1090 LAUNDERING IN THE ART MARKET V. CONCLUSION 1096 I. INTRODUCTION
Government corruption, shell corporations, "The Wolf of Wall Street," and a Picasso or two--no, not a new Dan Brown novel--but details from the latest case of money laundering involving the art industry. (1) An ongoing international investigation revealed in 2016 that Malaysian government officials and their co-conspirators hid more than $1 billion worth of embezzled funds in the United States in assets such as real estate and artwork. (2)
Throughout history, criminals have sought ways to "clean" illicit money acquired through illegal activities. The process of "cleaning money," commonly referred to as money laundering, is accomplished through a range of techniques that allow criminal proceeds to enter legitimate financial markets. As regulators and law enforcement tighten control over traditional methods used to launder money, art and cultural artifacts are becoming increasingly appealing tools for money laundering. (3)
The art market's tradition of secrecy and discretion relating to purchases and sales presents a challenge to regulators. Terrorist financiers, in addition to money launderers, have also identified the fine art and artifacts markets as potential avenues to fund their activities. (4) The highly publicized illegal sales of cultural artifacts from war-torn parts of the Middle East (5) and the release of the Panama Papers in 2015 (6) highlighted the misuse of the art market for illicit gain and attracted increased scrutiny over financial transactions involving art. (7) Since the art market serves a global clientele, domestic law enforcement is frequently inadequate or limited in its ability to investigate and prosecute these crimes.
International organizations, including the Basel Institute on Governance, have issued new guidelines aimed at making the art industry less susceptible to money laundering. (8) These recommendations include enacting new domestic regulations requiring art dealers, galleries, and auction houses to maintain detailed records about their clientele and requiring the reporting of suspicious financial activity within these institutions. (9) International art market players approached the Basel Institute as early as 2008 to draft rules focusing on self-regulation. (10) However, this approach failed to ease concerns or gain widespread acceptance. (11) The Financial Action Task Force (FATF), the world's leading international anti-money laundering organization, subsequently labeled the art market in some countries as "high-risk" for financial crimes. (12)
In response to these concerns, the European Union passed the Fifth Anti-Money Laundering Directive on April 19, 2018. (13) The directive requires listed entities to conduct customer due diligence searches, commonly referred to as know your customer (KYC) requirements, and to identify and notify the proper authorities of suspicious activity by clients via suspicious activity reports (SAR) or an equivalent process. (14) Prior directives required auditors, tax advisors, real estate brokers, gambling services, and credit and financial institutions to follow the SAR and KYC requirements. (15) The Fifth Anti-Money Laundering Directive adds "persons trading or acting as intermediaries in the trade of works of art, including ... art galleries and auction houses, where the value of the transaction ... amounts to EUR 10,000 or more" to the list. (16) Similarly, on May 18, 2018, Representative Luke Messer introduced H.R. 5886 to the House of Representatives. (17) The bill, titled the "Illicit Art and Antiquities Trafficking Prevention Act," amends the Bank Secrecy Act (BSA) to include dealers in art or antiquities on the list of businesses that are required to follow record keeping guidelines and report possible criminal activity. (18)
Unfortunately, these new laws offer minimal deterrence to potential money launderers and shift the burden of detecting and reporting money laundering from law enforcement to art and antiquities dealers. Further, dealers already face significant responsibilities to ensure the authentication of works and compliance with domestic and international laws regarding art theft, looting and trade in goods from endangered species. (19) Adding to their burden could prove devastatingly expensive and ineffective. However, self-regulation raises additional problems without seeming to impose a significant check. (20)
International money laundering in art and antiquities illustrates both the complex challenges of regulating international finance and the tangible impact that well-intentioned regulation can have on legitimate business dealings. This Note will provide a background of money laundering in the art market, followed by an analysis of the enacted EU and proposed US measures and conclude that a uniform, international strategy is necessary to protect the art market and art businesses from abuse by money launderers.
Part II of this Note presents the history of money laundering through art, and also documents efforts, both domestic and international, to regulate it. Since a large segment of the international art market is located in the United States and the European Union, this Note will focus on those jurisdictions.
Part III will focus on new measures introduced in the United States and enacted in the European Union, and provide an analysis of the intended goals, strengths and the arguments against the measures. This analysis will require an exploration of how international soft law dominates most international financial regulation.
Part IV proposes an alternative strategy for discouraging and preventing money laundering in the art market by focusing on international soft law agreements and uniform FATF guidelines that use a risk-based approach to regulation and encourage greater information sharing.
MONEY LAUNDERING IN THE ART MARKET
The Problem of Money Laundering
Money laundering dates back more than two thousand years to a group of prosperous Chinese merchants who engaged in illegal activities and looked for ways to "cleanse" their profits. (21) The term "money laundering" was coined in the United States during the 1920s and quickly became popularized because of the notorious rise in crime during the Prohibition era. (22)
Money laundering is defined as the "disguising or concealing of the illegal origin(s) of the proceeds of crime." (23) There are three main steps to the process: placement, layering, and integration. (24) The first step is collecting and placing illegal funds in multiple bank accounts or other financial institutions. (25) Next, illegal funds are layered, meaning the funds are transferred from various banks in various locations to conceal when and where the funds enter the financial system and the time and place they will eventually leave. (26) During the final step, integration, illegal funds are mixed into the legitimate economy and markets. (27) These funds now are virtually indistinguishable from their legitimate counterparts and create a significant challenge to any regulator or law enforcement official attempting to "follow the money" and detect or trace the original criminal activity. (28)
The archetypical example follows. Criminal proceeds are collected by a money launderer and placed in bank accounts or used to purchase a series of monetary instruments that are deposited into accounts at another location. (29) The money launderer layers the funds by using a complex chain of domestic and international shell company accounts, utilizing virtual currencies or by using trade-based techniques such as purchasing high-value goods and then shipping and reselling the goods overseas. (30) Finally, the laundered funds are returned to clients for investment or asset acquisition, which could include the purchase of luxury goods. (31)
Financial institutions play a critical role in the money laundering process. (32) Governments responded by imposing record keeping and reporting requirements, such as know your customer (KYC) (33) and suspicious activity reporting (SAR), on a range of financial institutions through measures such as the US Bank Secrecy Act (BSA) in 1970. (34) KYC is an internal record keeping and verification requirement. (35) The exact information an institution is required to collect and the level of verification required varies by industry and the nature of the financial transaction. (36) Generally, KYC programs require "covered financial institutions... to obtain, verify, and record the identities of the beneficial owners." (37) SARs are filed electronically and are available to federal and local law enforcement agencies. (38) Originally designed to prevent domestic money laundering, the BSA has expanded to combat terrorism financing and other financial transaction crimes. (39) Since governments are heavily involved in the regulation of banks and financial institutions, tightening regulations and reporting requirements to combat money laundering in financial markets and institutions is widely accepted and...