Art: In the Frame for Money Laundering
03 Feb 2020

Art has come a long way from the more than 70,000-year-old drawings in the Blombos Cave of South Africa to, in perhaps its most “postmodern” iteration, its appearance in the EU’s 5th Anti-Money Laundering Directive (5AMLD), which was to be implemented earlier this month.  With sales in the global art market in 2018 reaching $67.4billion, according to a 2019 report, art is big business, attracting legal and illegal wealth.

The very nature of art makes it an attractive vehicle for money laundering. For one, the value of any work is fundamentally subjective and therefore easily manipulated. Art can also be smuggled or otherwise transported with ease and related transactions can be conducted privately and anonymously.

They say, “a picture paints a thousand words”. Art, by contrast, can launder millions of dollars.  The use of art in money laundering is not new but it would appear that many may not have got the picture until recent regulations were drawn in Europe.

The Significance of Art

The significance of art touches everything from music to banking dynasties – from musician Terrence Thornton rhyming “The Warhols on my walls paint a war story, Had to find other ways to invest” (a reference to the paintings of Andy Warhol) to Jaime Botin, the uncle of Banco Santander Group Executive Chair (Ana Botin), who was sentenced to 18 months in prison for attempting to smuggle and sell a painting.

Jaime was recently sentenced, fined $58 million and had a Pablo Picasso painting seized.  He was found guilty of trafficking Picasso’s painting titled “Head of a Young Woman”, valued at c$26million.  The painting was seized from Jaime’s yacht after prosecutors suspected he planned to sell it.  He had taken it to Corsica in violation of a court order that it should remain in Spain, given its designated cultural importance to the country.

If anyone wanted an idea of just how much value can be realised from art, they need only look at Leonardo da Vinci’s “Salvator Mundi”. Measuring in at c25 x 18 inches (65.7 x 45.7 cm), it was sold by Christie’s in 2017 for $450,312,500 to the Abu Dhabi Department of Culture and Tourism, and is currently the most expensive painting ever sold at auction.

Regulating Art

Although many compliance professionals in Europe would have had about 1.5 years to consider changes under 5AMLD, the 10th of January 2020 was a day of renewed focus on the directive for many.  This was the date 5AMLD was to be implemented, bringing into scope the art sector—specifically, with the amendment to Article 2 of 4AMLD, by inserting the following points to include those involved in works of art as “obliged entities”:

(i) persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or series of linked transactions amounts to EUR 10,000 or more;

(j) persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the value of the transaction or series linked transactions amounts to EUR 10,000 or more

An initial attempt in the USA to bring the art sector under the scope of anti-money laundering rules, through the Illicit Art and Antiquities Trafficking Prevention Act, has seen no progress since its referral to the House Committee on Financial Services on 18th May 2018.  The bill would have amended the Bank Secrecy Act (BSA) to require art and antiquities dealers to comply with reporting, record-keeping and other BSA requirements.

Other legislative attempts to police the art sector include the USA’s Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform Act, referred to as “COUNTER Act of 2019”, which if passed, could see greater focus on the art sector.  Although Section 211 of the Act is primarily focused on “dealers of antiquities”, it does include cite the need for study on the facilitation of money laundering and terrorist financing through the trade of works of art or antiquities.

Defining Art

Although 5AMLD does not answer the age-old of question of what “Art” is, practitioners in the UK do have some guidance on the topic. The Money Laundering and Terrorist Financing (Amendment) Regulations 2019, which transposes 5AMLD in the UK, points readers to the Value Added Tax Act’s Section 21(6). Here, a “work of art” is defined as:

  • Paintings, drawings, collages, decorative plaques or similar pictures executed by hand
  • Original engravings, lithographs or other prints
  • Sculptures or statues
  • Sculpture casts
  • Tapestries or other hangings
  • Ceramics
  • Enamels on copper
  • Photographes

Whilst the definitions of works of art are specific, there are certain exemptions found in the Value Added Tax Act’s Section 21(6A), and these include:

  • Technical drawings, maps or plans
  • Pictures comprised in a manufactured article that has been hand-decorated
  • Anything in the nature of scenery, including a ‘backcloth’

Interestingly, antiques that are not works of art or certain collectors’ pieces, and which are more than 100 years old, appear to be out of scope of the AML provisions since they are under they are cited under Section 21(b) and (c), which are not referenced in The Money Laundering and Terrorist Financing (Amendment) Regulations.  Similarly, 5AMLD does not mention “antiques” and only introduces the following under Annex III(b)(2)(ii)(f) as a “Product, service, transaction and delivery channel risk” level, covering certain artefacts:

  • “transactions related to… cultural artefacts and other items of archaeological, historical, cultural and religious importance, or rare scientific value”

Drug Cartels

For anyone under the impression that the use of art in money laundering is new, need only look into the activities of the Colombian Cali Cartel in the 1980’s and 1990’s.  Whilst this may not the the first time art was used in money laundering, it does provide a perfect example of its use in criminal activities.

Author Ron Chepesuik details in his book Narcos Inc: The Rise and Fall of the Cali Cartel how, in November 1994, one of the drug cartel’s members told undercover agents he wanted to sell three paintings valued at $9 million and launder the proceeds.  The three paintings were Joshua Reynolds’ “Portrait of a Gentleman”, Peter Paul Ruben’s “‘Saint Paul” and Pablo Picasso’s “Head of a Beggar”.

The paintings came to the DEA’s attention after they had bought a failing bank and renamed it the RHMT Trust Bank for the purpose of luring cartel members to launder money.  The undercover agent the cartel member was speaking to was posing as a banker who could help launder the funds.  When a cartel representative took the three paintings to the United States to sell, she was led to believe she was meeting a banker and an art expert, though they were in fact undercover agents.  Believing she was on her way to meet the buyer of the paintings, the cartel member boarded a jet and was arrested.

This was not the Cali Cartel’s first brush with the refined world of high art.  Reports in the 1990’s also stated that both US and UK authorities were looking into money laundering schemes in which the cartel bought and sold paintings at art galleries in London and New York, a senior US law-enforcement official was quoted as saying.

One of the cartel’s leaders, José Santacruz Londoño (aka ‘Don Chepe’), used the services of interior decorator Alexander Blarek and Frank Pellecchi to furnish his home with expensive art and luxury fittings in order to launder the proceeds of drug trafficking. Blarek and Pellecchi were said to have used their profits to live an extravagant lifestyle themselves, including through the purchase of luxury homes and expensive artwork. Reports also suggest they were no strangers to possessing Picassos as well as paintings by Fernando Botero, a well-known Colombian painter and sculptor.

Even the Cali Cartel’s rival, Pablo Escobar, was said to have had Botero’s paintings in his house, which Botero was dismayed to learn about and is quoted as saying: “I felt repugnance due to the fact Escobar had one of my works”.

Panama Papers Scandal

Whilst many have heard of the Panama Papers scandal, they may not have heard of a forfeiture Bill of Particulars filed in the US District Court of Southern District of New York in December 2019.  In the ongoing Panama Papers-related case involving Richard Gaffey and Harald Joachim Von Der Goltz, property subject to forfeiture included a painting by Raoul Dufy entitled “Régates á Henley”.  The painting and other property is subject to the forfeiture on grounds of money laundering and wire fraud.

1MDB Scandal

The Panama Papers was not the only major scandal where art was involved.  The 1MDB scandal, which involved corruption and the misappropriation of funds that were intended to benefit the Malaysian populace, ensnared everyone from the former Prime Minister of Malaysia to Goldman Sachs, and also saw art included in forfeiture proceedings.

As part of a settlement to recover $700 million in assets from one of the primary suspects in the scandal, Low Taek Jho (better known as “Jho Low”), several works of art were to be forfeited.  These included Vincent Van Gogh’s pen and ink drawing “La Maison de Vincent à Arles” and Claude Monet’s paintings “Saint-Georges Majeur” and “Nymphéas Avec Reflets De Hautes Herbes”. 

Further related forfeitures cited Picasso’s painting “Nature Morte Au Crâne De Taureau”, Jean-Michel Basquiat’s collage “Redman One” and Diane Arbus’s photograph “Boy with the Toy Hand Grenade in Central Park”.  These latter three works were reported to have been handed over to authorities by Hollywood star Leonardo DiCapro in 2017 after Low had gifted them to him in previous years.

Freeports

Many of the paintings acquired by Low had been stored at the Geneva Freeport.  Although originally intended as spaces to store merchandise in transit, ffreeports have become popular for storing various assets including art, antiques, gold, precious stones and even wine collections, often on a permanent basis.  Apart from serving as storage space, they can also afford such benefits as deferral of import duties and indirect taxes like VAT as well as a high degree of secrecy.  Art featured heavily in the October 2018 report by the European Parliamentary Research Service (EPRS) titled “Money Laundering and Tax Evasion Risks in Free Ports”, which further highlighted the risks of financial crimes these arrangements can pose.

The EPRS report highlights lawsuits in the so-called “The Bouvier Affair”.  These legal actions involve Swiss freeport owner, art shipper and dealer Yves Bouvier, who allegedly defrauded his clients by misrepresenting the original cost of art works and consequently overcharging them.  The alleged victims include such High Net Worth Individuals (HNWIs) as Monaco-based Russian oligarch Dmitry Rybolovlev, who legal case highlights the opacity of transactions in the art world.

Although 5AMLD brings into scope freeports and the art sector, its effect on the sectors following transposition remains to be seen.  Some market players in the EU fear that the bloc will lose some attraction as an art market.  Others are sceptical about attempts to make the market more transparent, especially as the EPRS report states, “AML datasets will be segregated, kept by obliged entities, and in order to have access, a motivated request with some sort of prior suspicion needs first be tabled by authorities”.

Theft

Risks involving art stretch beyond opacity in transactions.  Works of art are prone to theft, and two of the most well known thefts include Michelangelo Merisi da Caravaggio’s “Nativity with St.Francis and St. Lawrenece” in 1969 and the theft of 13 works of art stolen from the Isabella Stewart Gardner Museum in 1990.  The “Nativity with St.Francis and St.Lawrenece” is valued at $20 million. Theories on its fate range from sales on the black market to destruction. The theft of works from the Isabella Stewart Gardner Museum included paintings by Rembrandt Harmenszoon van Rijn, Johannes Vermeer, Édouard Manet and Edgar Degas, with the collection said to be worth over $500 million.  The museum is offering a $10 million reward for information leading to recovery of all 13 works stolen, including a separate $100,000 reward for the missing “Napoleonic eagle finial”.

Forgery

Few compliance professionals may have heard of painter John Myatt, but in 1999 he was said to have been involved in the “twentieth-century’s biggest contemporary art fraud” and was labelled a “master forger”.  Working with art dealer John Drewe, the pair sold approximately 200 fraudulent pieces, making millions and fooling even prestigious galleries, collectors and auction houses, such as Christie’s and Sotheby’s, as well as the Tate Gallery in London.

Myatt put in significant effort to produce highly detailed “new” works in the style of artists such as Chagall, Le Corbusier, Giacometti and Matisse.  As well as the forged paintings, documents were also falsified and back stories to the works were fabricated to give them an air of legitimacy.

He has since used his skills for good, going on to appear on such TV shows as “Mastering the Art” and”Brush with Fame”, and believes it is just as easy to carry out art forgery today as it was previously.

I got in touch with Myatt to get his views on the new regulatory efforts aimed at the art market and forgery. 

“It is doubtful that the new regulations will be effective at stopping fakes,” he said. “There are currently Modigliani’s on the market that have all the correct provenance. So, real or fake it will make no difference”.

Interestingly, neither the regulations nor brief guidance currently available from HMRC, the UK’s supervisor for the art market, makes reference to provenance of art.  Even for those checking provenance, risks remain, according to Myatt.

“New fakes would still be accepted as genuine if the forged provenance is excellent and an expert is deceived,” he said.  

Myatt did say that he approves of due diligence on provenance of the seller however, which Sotheby’s is now acting upon.

Sanctions

The transportability, demand and value of art makes it an ideal sanctions evasion tool.  In December 2019, the US Treasury’s Office of Foreign Assets and Control (OFAC) added Nazem Said Ahmad, a Lebanese national, to its SDN list.  He was added to the list because he was using money laundering and tax evasion schemes to help fund Hizballah, as well as financing his own lavish lifestyle.

Ahmad is believed to be one of Hizballah’s top donors. According to OFAC, Hizballah turned to Ahmad and his companies to launder significant amounts of funds destined for the terrorist group.  Ahmad’s vast art collection is believed to be worth millions and includes works by Andy Warhol and Pablo Picasso, some which have been displayed in his gallery and penthouse in Beirut. 

“Art and luxury goods dealers should be on alert to schemes of money launderers who hide personal funds in high-value assets in an attempt to mitigate the effects of U.S. sanctions,” said OFAC Deputy Secretary Justin Muzinich, in a statement referencing Ahmad.

New Era

For both the art market and financial institutions, there is much to think about and act on.  The regulatory demand may be particularly challenging for small to midsize art dealers if the UK example is anything to go by, as HMRC has yet to publish detailed guidance.  If the views of some of the art dealers at this year’s London Art Fair in January are an indication of frustration amongst the art community, there is potential for many falling foul of their new obligations.  One dealer who wished to remain anonymous at the fair is quoted by The Art Newspaper as saying, “We’ve been told to be compliant with regulations that we still don’t have guidelines for.”  The new obligations are less likely to impact the larger dealers, which possibly may be used to obtaining more intrusive information from their clients.

For financial institutions with art market clients, they should be considering things such as how they will assess the risks, how they will assess compliance programmes of their clients and how will they identify and assess potentially suspicious transactions of clients who may be buying or selling art that is not regulated (such as from individuals).

Financial institutions should also be considering how they will manage risks of clients involved in the sale of antiquities that fall outside the scope of the regulations, especially as illicit antiquities have been used heavily by terrorist groups such as ISIS to finance their activity.

As with Sandro Botticelli’s “Birth of Venus“, which depicts the goddess of beauty and love’s arrival to our mundane Earth, what happens next remains a mystery.

Dev Odedra is an independent anti-money laundering and financial crime expert.  He has over a decade of experience in managing financial crime risk in the retail, corporate and investment banking sectors.  His expertise covers investigations, advisory and controls implementation and improvement.

This article is expressing personal opinions and is meant for information purposes only. The article does not intend to replace professional or legal advice. It is recommended that readers seek independent professional or legal advice, or speak to authorised persons/organisations.

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