Spotting suspicious activity in the arts and antiquities markets

Non-financial investments such as fine art and precious artifacts enable the movement of billions of dollars across international borders every year.

With the value of da Vincis and Picassos constantly soaring it is becoming ever more apparent that transactions involving art and antiquities can be exploited by money launderers and terrorist financiers.

Expensive pieces of art can be ideal vehicles to launder money. Items purchased for cash can be sold in foreign markets with the proceeds booked as legitimate sales. Registration papers for art can easily be forged or mysteriously created, adding validity to the object and bolstering the air of legitimacy necessary for effective money laundering.

In cases of capital flight and restricted currencies, expensive art objects are highly valued by people who want to move funds out of one country and into a safe haven.

Banks with lax defences are more likely to be exploited by criminals that will seek to channel their transactions through the formal financial system.

Private bankers and wealth managers may have specific experience dealing with customers who invest in art and antiquities. In those instances, suspicious indicators might include:

• a customer who previously showed no interest in art but suddenly becomes an art dealer in a jurisdiction with an underdeveloped art market
• customers who make irrational decisions about valuing or insuring their art

Employees at financial institutions do not require a degree in fine art to know that commodities of this nature can be abused by the criminal element.

Their professional instincts about whether or not transactions are suspicious will often serve them much better than their ability to differentiate between a Vermeer and Rembrandt.

When transactions are deemed to be suspicious, bank employees must report their suspicions. This has been a long-standing anti-money laundering (AML) compliance requirement. It is not the responsibility of the bank employee to determine what predicate offence has led to the suspicion of money laundering, only that a transaction, or series of transactions, appears to be suspicious. Bankers who do not report reasonable suspicions about customer activity in order to protect revenue streams or political or economic relationships are said to exert “wilful blindness” and could face fines.

Wilful blindness compromises the very foundation of a compliance regime that requires suspicious transaction reporting from participants. Financial institutions that tolerate wilful blindness can expect a forceful reaction from supervisory agencies, as no national government will ignore the efforts of financial institutions to deceive financial intelligence units (FIUs).

While the onus has primarily been on financial sector employees to conduct customer due diligence (CDD) and report suspicious transactions, regulators are expanding their expectations.

Over the past couple of decades, steps have been taken in the real estate market as well as the precious metals industry to monitor and curtail the use of high-value assets for the purpose of money laundering. In those instances, the responsibility of reporting has been extended to real estate agents and precious metals dealers. Now legislators are starting to mandate reporting by art and antiquities dealers as well.

Under the Fifth Anti-Money Laundering Directive (5AMLD), which came into force on January 10th 2020, art dealers and intermediaries in Europe facilitating transactions over €10,000 must conduct CDD. They must also report any suspicious activity to the appropriate FIU. While these AML practices are not outside the norm for employees of financial institutions, these obligations are new for those in the art world.

In the US, the National Defense Authorization Act (NDAA) for fiscal year 2021 has extended the Bank Secrecy Act (BSA) reporting requirements to include dealers in antiquities, but stops short (for now) of including art dealers:

 Legal experts expect that the new antiquities regulations will be similar to others governing the precious metal and jewelry industries, where certain transactions are flagged to the authorities, who then determine whether they are suspicious. The law also seeks to end the use of shell companies to conceal the identities of buyers and sellers.

In January 2022, the Financial Crimes Enforcement Network (FinCEN) (the US FIU), will define the degree to which the art market should also be subject to these AML regulations.

Going forward, for entities required to report suspicious transactions, whether they are art and antiquities dealers or financial institutions, many of the same red flags will apply, such as:

• transactions that appear to be inconsistent with a customer’s stated circumstances or business activity;
• transactions that do not appear to make economic sense;
• transactions that involve complex and opaque legal entities and arrangements;
• transactions that involve receipt of payments from third-party entities with no apparent affiliation to the seller or the buyer;
• the preference for, or instance of, use of cash in high-value transactions.

When red flags arise in the course of a transaction, or series of transactions, customers should not be confronted. It is a fine line when conducting CDD to not tip off customers if the intent is to follow up on suspicious transaction reporting. Submitting suspicious activity reports to the proper authorities is the appropriate response so that the situation can be further assessed.

With the heightened reporting expected to come from art and antiquities dealers, it will provide financial investigators with clearer insights into how these high-value commodities are used to move and clean the proceeds of crime.

Ultimately, the art and antiquities markets have great potential to be abused by criminals. For detection to be possible, financial intelligence staff must first understand basic components of this crime. When suspicious indicators arise, taking a “follow the money” approach will help staff identify, report and potentially disrupt the broader criminal support networks that move money in this way.

By Paula Krulicki, Senior Production Editor, ManchesterCF

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