As we’ve blogged, high-end artwork can create an ideal vehicle for money laundering. And, as we’ve also blogged, the Permanent Subcommittee on Investigations for the U.S. Senate released in July 2020 a detailed report titled “The Art Industry and U.S. Policies That Undermine Sanctions,” focusing on the nexus between high-end art and U.S. sanctions law violations, potential money laundering schemes and anti-money laundering (“AML”) risks. The Senate report recommends in part that the Bank Secrecy Act (“BSA”) be amended to include art dealers as “financial institutions” subject to AML obligations under the BSA.
Indeed, recent legislation has included a proposal to (i) add to the list of “financial institutions” covered by the BSA “a person trading or acting as an intermediary in the trade of antiquities, including an advisor, consultant or any other person who engages as a business in the solicitation of the sale of antiquities;” and (ii) require a study by the Secretary of the Treasury “on the facilitation of money laundering and terror finance through the trade of works of art or antiquities,” including an evaluation of whether art industry markets should be regulated under the BSA.
This is a “hot” topic. In the latest development in this area, and in what appears to be a response to — or affirmation of – the Senate report, the U.S. Department of the Treasury’s (“Treasury”) Office of Foreign Assets Control (“OFAC”) recently issued a new advisory (the “Advisory”) highlighting the related problem of individuals blocked by OFAC from entering the U.S. financial system trying to evade those restrictions through the commerce of art, and emphasizing sanctions for U.S. persons who engage in prohibited transactions.
As part of its enforcement efforts, OFAC compiles and publishes lists of individuals and companies owned, controlled by, acting for or on behalf of countries subject to sanctions by Treasury. It also identifies individuals, groups, and entities, such as terrorists and narcotics traffickers not tied to specific countries who are similarly excluded from the United States financial system. These individuals and entities are designated Specially Designated Nationals (“SDNs”) and their assets are blocked from the U.S. financial system, so that U.S. individuals and entities are generally precluded from transacting with them. SDNs, however, sometimes do not take “no” for an answer and exploit other avenues for moving illicit funds.
The recent OFAC Advisory describes how the art world can provide just such an avenue. The art world consists of numerous actors, acting in various capacities and for a variety of interests. These actors include art galleries, museums, private collectors, auction companies, agents, brokers and assorted other players. They could be buying, selling, or lending art work, benefiting from or facilitating those transactions. As OFAC explains it, the market for high-end art possesses other unique features making it subject to exploitation by illicit actors. These features “include a lack of transparency and a high degree of anonymity and confidentiality, especially with respect to the sale and purchase of high-value artwork.” That is, individuals will use shell companies to maintain anonymity and buy, sell, or donate works of art and engage in such transactions with a variety other parties. Those transactions are very often cross-border transactions.\
Specifically, OFAC states that “[s]hell companies and intermediaries are . . . frequently used to purchase, hold, or sell such artworks, as well as to remit and receive payments.” Also, and importantly, the value of art is subjective, allowing nearly boundless financial investment in a given piece of art without raising suspicion, unlike other high-end products and expenditures that generally have an ascertainable value. Accordingly, “[t]he mobility, concealability, and subjective value of artwork further exacerbates its vulnerability to sanctions evasion.”
And the art world has been so exploited. OFAC cites the example of Nazem Said Ahmad, a prominent Lebanon-based diamond dealer, art collector and Specially Designated Global Terrorist (“SDGT”) with an alleged history of providing financial support to Hizballah, including laundering substantial amounts of money for Hizballah. While a designated SDGT, Ahmad possessed an art collection valued in the tens of millions of dollars, including works by Pablo Picasso and Andy Warhol. Ahmad set up a private gallery in Beirut, into which he stored substantial amounts of his personal wealth through high-value artwork in an alleged effort to launder funds and avoid U.S. sanctions.
Recognizing the ease with which a Picasso or Warhol could pass hands across borders and throughout the world through concealed or anonymous transactions, OFAC reminds players in the art world that transacting with an individual such as Ahmad not only facilitates his evasion of United States sanctions but creates significant exposure to themselves for two reasons.
First, although the International Emergency Economic Powers Act (“IEEPA”) and the Trading with the Enemy Act (“TWEA”) generally exempt “the importation from any country, or the exportation to any country . . . of any information or informational materials, including but not limited to . . . artworks,” OFAC “does not interpret this exemption to allow blocked persons or their facilitators to evade sanctions by exchanging financial assets such as cash, gold, or cryptocurrency for high-value artwork or vice versa.” Therefore, “OFAC will apply IEEPA- and TWEA-based sanctions to transactions involving artworks in which a blocked person, including a person on the SDN List, has an interest, to the extent the artwork functions primarily as an investment asset or medium of exchange.”
Second, OFAC can impose civil penalties for engaging in such transactions based on strict liability, “meaning that a person may be held civilly liable even if it did not know or have reason to know it was engaging in prohibited conduct.”
So, for example, if a U.S. auction house unknowingly acquires an Ahmad Picasso through a broker on behalf of an otherwise anonymous entity, that auction house could be liable for civil penalties pursuant to OFAC’s Economic Sanctions Enforcement Guidelines even if it had no reason to know the piece is traceable to Ahmad.
Accordingly, OFAC recommends players in the art world – such as art galleries, museums, private collectors, auction companies, agents, and brokers – ensure they are implementing risk-based compliance programs to mitigate their potential participation in such transactions and exposure to such sanctions-related violations. They also should regularly seek guidance or a license from OFAC relating to potential transactions to further mitigate their potential exposure.
In regards to such compliance programs, OFAC posted on its website in 2019 frequently asked questions (FAQs) reminding members of the art community of their sanctions compliance obligations. FAQ 813 states in part:
813. As a member of the art community, what are my compliance obligations with respect to Executive Order 13224, as amended?
U.S. persons (including galleries, museums, private art collectors, auction companies, and others that conduct or facilitate transactions involving artwork) must ensure that they do not engage in transactions with persons listed as . . . [SDGTs] on OFAC’s SDN List or with persons otherwise blocked pursuant to E.O. 13224, unless authorized by OFAC. U.S. persons should develop a tailored, risk-based compliance program, which may include sanctions list screening or other appropriate measures. An adequate compliance solution will depend on a variety of factors, including the type of business involved, and there is no single compliance program or solution suitable for every circumstance. For purposes of these requirements, U.S. persons include all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, and all U.S.-incorporated entities and their foreign branches.