New Approaches to Combating Money Laundering and Terrorism Financing in the Art World
A few months ago, I wrote an article for Charged Affairs examining how a U.S. Authorization for the Use of Military Force (AUMF) against Islamic State of Iraq and the Levant (ISIL) that incorporates a version of World War II’s “Monuments Men” could be an invaluable instrument in the fight against the widespread pillaging, destruction, and illicit exportation of cultural property from Iraq and Syria. In fact, as recently as November 2016, prosecutors in Geneva seized from its ports cultural relics that had been looted from Syria and other countries in the Middle East that are in turmoil, such as Yemen. The United Nations Educational, Scientific, and Cultural Organization just hosted an international meeting to evaluate the damage in Syria, and there have been multiple reports over the past few years on ISIL’s exorbitant profits gained by trafficking in cultural property. At the moment, it is unclear whether President Trump will pursue passage of an AUMF by the U.S. Congress or whether the Trump administration will back away from the cultural property protection efforts called for by the G7’s Action Plan on Countering Terrorism and Violent Extremism.
Another tool in the fight, long discussed in law enforcement circles as well as by auction houses, art dealers and other key players in the art market, are policies to combat the use of the art market to launder money and finance terrorism. Such policies are often referred to as “anti-money laundering/combating the financing of terrorism” policies, or AML/CFT policies. Unfortunately, the art market can often attract wrongdoers because law enforcement does not always have the resources or training required to accurately identify and value a particular artifact, making it easy to misreport value or country source when importing and/or exporting the artifact. In addition, other venues for money laundering or terrorism financing, such as traditional financial institutions, are now highly regulated by multiple authorities such as the New York Department of Finance, the U.S. Treasury, etc. This article seeks to act as an analytical exercise in order to ultimately suggest a multi-faceted approach to finding a balance between further law enforcement and simultaneous private sector responsibility.
There is a host of important issues and questions associated with AML/CFT policies in the arts industry. For example, as discussed recently in The Wall Street Journal, one question is how effective can these policies actually be (even if they are collective, as opposed to one-off policies drafted by institutions and businesses) if there is no associated enforcement mechanism? Should there be standard requirements for Know-Your-Customer (KYC) policies in the art world, and should those policies differ depending on the role the person plays in the art market (dealer, auction house, museum, etc.)? Should certain businesses or persons in the art industry be required to file Suspicious Activity Reports (SARs), similar to the filing requirement for financial institutions under the Bank Secrecy Act, or would joint private sector coordination between large art markets be more effective? Should businesses in the art market be legally required to identify ultimate beneficial owners (UBOs) of clients, similar to how the U.S. Treasury Department requires title insurance companies to disclose UBOs in certain high-value real estate purchases in specific U.S. markets? Could a further focus on public, global cataloging of cultural property from Iraq and Syria constitute another way to fight money laundering and the financing of terrorism, which might stymie some of the looting taking place in the region by reducing the market for such objects?
The best approach requires multi-faceted investments by both the public and private sector. For example, following the art seizure in Geneva, the Responsible Art Initiative published Guidelines on Combating Money Laundering and Terrorist Financing. These Guidelines represent a collective effort to tackle this issue, rather than an institution-by-institution effort, and highlight factors that are key to combating money laundering and terrorism financing: recognizing client red flags, identifying UBOs (i.e. the actual human(s) who own(s) an entity client), and conducting a risk assessment. Every business or person in the art market may have different risks, depending on their customer countries and business models, and every business needs to understand its own risk appetite. Further, the types of extensive transaction and customer screening performed by large financial institutions may not be feasible for a small art dealer. However, art markets should still follow the lead of Geneva in drafting collective AML/CFT policies—ideally accompanied by AML and CFT training for market participants—and identifying ways to ensure incorporation and use of such policies.
Before creating legal reporting requirements such as SARs—which could be onerous in terms of resources and time, and run the risk of failing to incorporate the unique attributes of the art market—regulators should consider issuing guidance on best practices for AML/CFT compliance programs in order to ensure those programs ultimately kill the demand for cultural property looted from conflict regions like Iraq and Syria. Such guidance could follow the recent “Evaluation of Corporate Compliance Programs” published by the U.S. Department of Justice. One thing is clear: the looting and destruction of cultural property in conflict regions, particularly Iraq and Syria, continues in earnest and can best be tackled on the demand side by thoughtfully-tailored AML/CFT policies, effective compliance programs, and meaningful collaboration between the private sector and the public sector to achieve the appropriate enforcement framework.