Money Laundering and Terrorist Financing in the Art and Antiquities Market / February 2023

On 27 February 2023, the FATF published its Report "Money Laundering and Terrorist Financing in the Art and Antiquities Market".

Our Compliance Department reviews the key points of the Report, as well as the specific risks and vulnerabilities of the Monegasque art and antiquities market, including auctions, identified in the framework of the National Risk Assessment 2 (ENR2) on money laundering and terrorist financing (2020-21).

FATF Report: key points for professionals in the art and antiquities market, including auctions

The FATF focuses for the first time exclusively on money laundering and terrorist financing (ML/FT) related to art, antiquities and other cultural objects.

It addresses both public and private actors in the art and antiquities market, such as art dealers, art advisors, auction houses, gallery owners, antiquities dealers, storage facilities (free port), art financing service providers, etc.

Contents of the Report

After identifying the vulnerabilities and threats associated with the market and cultural objects, the Report describes the challenges faced by law enforcement agencies in identifying and investigating ML/FT activities related to cultural objects.

The Report highlights the progress that still needs to be made by many jurisdictions in the knowledge and understanding of the risks of ML/FT associated with this market, the lack of investigative resources and expertise, and the difficulties of conducting cross-border investigations. It highlights approaches adopted by some competent authorities to overcome these difficulties.

Finally, the Report provides guidance for public and private actors to mitigate these difficulties, with an annexed list of risk indicators for identifying suspicious activity in the art and antiquities market, as well as 40 additional case studies from the United States, the European Union (Eurojust, Italy, Spain, the Netherlands, Belgium, France, Poland, Finland), Switzerland, India and Brazil.

The characteristics of the art and antiquities market as a source of vulnerabilities in terms of ML/FT risk

The markers of the art and antiquities and other cultural objects market are as follows:

• Culture of confidentiality and discretion (which protects sellers and buyers from theft and other crime, and ensures that wealthy individuals are not charged a higher price if their identity were known to the seller);
• Common use of intermediaries and legal entities in the buying and selling process;
• High speculation with subjective and volatile prices.

These markers are also vulnerabilities in terms of money laundering and terrorist financing risks. In practice :

• Works of art can easily be over- or undervalued;
• Storage in free ports offers tax advantages and high levels of anonymity and confidentiality - Once purchased, works of art do not need to be moved from the ports in which they are stored;
• The use of intermediaries and companies in the buying and selling process, which is relatively common in the market, can mask the identity of the final seller or buyer, the beneficial owner of the companies involved;
• Where cultural objects can be purchased anonymously in cash, this complicates the traceability of transactions.

Due diligence: risk indicators (not exhaustive) to identify suspicious activities in the art and antiquities market (Annex A of the Report):

• Use of shell companies, trusts, or third-party intermediaries, including art dealers, brokers, advisers, or interior designers, to purchase, hold, or sell cultural objects.
• Cash transactions, in particular using large bulks of cash.
• Use of large-denomination banknotes (e.g., the €500 banknote).
• Unusually high profit margins on the sale of an item of art, antiquity or other cultural objects.
• Sales or purchases of items involving sellers who are not concerned with recouping their initial investments.
• Sales or purchases of art vastly or routinely exceeding the expected sales value of the work.
• Sales or purchases of art involving purchasers who do not appear to be concerned with paying a substantially higher price than the notional value of the work.
• Sales or purchases of art where a client is not familiar with, or interested in the provenance, history, style, genre, or artist of an object.
• Unwillingness of a customer to provide identification information to receive an art-collateralized loan, or early repayment or use of cash to pay such a loan.
• Imported or exported items not declared to the relevant customs administration(s).
• Purchase or termination of insurance policies to protect the market value or provide cash payments for the loss, theft, or destruction of privately held or donated high-value art in circumstances where other information has suggested the art has a low value.
• Presence of natural or legal persons known to be involved in, or suspected of, trafficking in cultural objects.
• Use of social media or financial intermediaries to advertise cultural objects that have been looted.
• Unique archaeological pieces allegedly related to existing collections but previously unstudied.
• Newly ‘discovered’ art attributed to a prominent artist.
• Purchases of items by third party intermediaries on behalf of an ultimate seller or purchaser.
• Transactions involving market participants without expertise in concluding high-value purchases or sales.
• Transactions involving politically explosed persons (PEPs) or their family members or close associates.

Monaco: the specific risks and vulnerabilities of the antiques and artworks, auction sector

Monaco has transposed the 5th Directive (EU) 2018/843 on anti-money laundering and terrorist financing (under the Monetary Agreement between the Principality and the European Union of 29 November 2011), which has included new art market professionals.

Focus on professionals of the art and antiquities sector subject to Law No. 1.362:

Are subject to Law No. 1.362 of 3 August 2009 on the fight against money laundering, terrorist financing and corruption, as amended, the following art and antiques market participants (Art. 1):

• 16°) traders and persons who deal or act as intermediaries in the trade of artworks and antiques, including when this is carried out by art galleries and auction houses, when the value of the transaction or a series of related transactions is equal to or greater than €10,000 ;
• 17°) persons who store or negotiate works of art or act as intermediaries in the trade of works of art when this is carried out in free ports, when the value of the transaction or a series of related transactions is equal to or greater than €10,000.

At the end of 2020, Monaco had:

• 41 antique dealers and art dealers: contemporary art galleries, professionals specialising in numismatics, philately, or the purchase and sale of decorative art, jewellery, watches and silverware;
• 26 auction professionals: the majority of establishments act as liaison offices looking for potential buyers or sellers on behalf of their respective groups, with sales then being organised abroad; they also carry out private sales, assistance in putting buyers or sellers in touch with each other or identifying them, and the sale of goods.

Being subject to Law No. 1.362 implies for the professionals concerned:

• The implementation of risk-based procedures to combat ML/FT;
• Carrying out customer due diligence checks;
• Monitoring transactions to detect suspicious activity;
• Screening clients against sanctions lists;
• Checking the status of politically exposed persons (PEPs);
• Monitoring negative media coverage involving clients;
• Where appropriate, reporting of suspicious activity.

Risks and vulnerabilities identified in the National Risk Assessment 2 (ENR 2)

1. Antiques and artworks sector:

The risk of the profession being used in ML/FT strategies is considered significant:

• Indicators of exposure to the threat in Monaco: significant use of cash; recourse to online sales on the increase and representing almost a quarter of sales; highly speculative nature of certain operations; possibility for clients (natural persons and commercial companies) to intervene financially in an anonymous manner;
• Indicators of vulnerabilities: lack of a code of conduct; weak knowledge of AML/CFT by staff and effectiveness of compliance (internal procedures, training, verification and monitoring of transactions, weak audit culture, identification of risk indicators and higher-risk clients).

The sector has a medium-high vulnerability, a medium-high but increasing threat. The final risk level is assessed as medium high in 2020/21.

2. Auction houses sector

The risk of the profession being used in ML/FT strategies is deemed to exist:

• Indicators of exposure to the threat in Monaco: tax evasion; the conditions under which clients enter into a relationship with the institution for online auctions via specialised platforms (30% of auctions) are not always clearly defined; although bank cards and cheques are the preferred means of payment, cash settlements are used by clients; involvement of brokers or traders who make purchases on behalf of third parties, which can complicate the client identification process;
• Indicators of vulnerability: specific training for AML/CFT officers; communication of internal procedures; tools for detecting PEP and higher-risk clients.
  

The sector presents a medium-high vulnerability and a medium but growing threat. The final risk level is assessed as medium in 2020/21.

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New challenges are emerging with the phenomenon of NFTs (non-fungible tokens), which allow the sale of virtual works that benefit from a digital property certificate that authenticates and guarantees the value of the work. Presented as a solution to counterfeiting, it is also conducive to money laundering.

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SOURCES :

FATF (2023), Money Laundering and Terrorist Financing in the Art and Antiquities Market, Paris, France https://www.fatf-gafi.org/publications/methodsandtrends/money-laundering-terrorist-financing-artantiquities-market.html

SICCFIN (2021), Evaluation Nationale des Risques n° 2 (ENR 2) de blanchiment de capitaux et de financement du terrorisme, Monaco https://www.siccfin.mc/Evaluat...

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Our Compliance Department acts both in prevention and in defence.