Anti-Money Laundering Update: FinCEN’s Surprising Conclusion and the Impact of Russian Sanctions on the US Art Market


Susan Mumford and Chris King, co-founders of ArtAML, return to the Podcast and talk with Steve about the recent release by the Financial Crimes Enforcement Network (“FinCEN”) of its “Study of the Facilitation of Money Laundering and the Financing of Terrorism through the Trade in Works of Art.” To the surprise of Steve and his guests, FinCEN concluded that there is limited evidence of money laundering and little risk of terror financing through the sale of high value art. The discussion focuses on the findings of the study, and its implications, particularly when compared with the existing AML regulations covering the art market in the UK and the EU. (Susan and Chris discussed these requirements with Katie and Steve on the November 1, 2021 episode entitled: “How Anti-Money Laundering Regulations are Hitting the Art Market in the United Kingdom and What Participants Can Do to Comply.”)  Recorded just days after Russian troops invaded Ukraine, the conversation turned to the impact that sanctions against Russia and its oligarchs are likely to have on the high-value art market, and what art market participants must do to not run afoul of these sanctions.

Resources:

FinCEN Study of the Facilitation of Money Laundering and the Financing of Terrorism Through the Trade in Works of Art

ArtAML Website


Episode Transcription

Steve Schindler:  Hi, I’m Steve Schindler.

Katie Wilson-Milne:  I’m Katie Wilson-Milne.

Steve Schindler:  Welcome to the Art Law Podcast, a monthly podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne:  The Art Law Podcast is sponsored by the law firm of Schindler Cohen & Hochman LLP, a premier litigation and art law boutique in New York City.

Steve Schindler:  So we’re here again today with Susan Mumford and Chris King, who we had on the podcast last November to talk about developments in anti-money laundering in the UK. And today we’re going to have a talk about a recent publication and study by FinCEN in the United States. But before we get there, we’re recording this on March 3rd, and I think we have to acknowledge what’s going on in Ukraine. Last night, for example, the Russian troops escalated their bombing of various cities in Ukraine, and at this time we know that 660,000 refugees have fled that country. So as we’re recording this, our thoughts are with the people of Ukraine. And as a consequence of that, we’ve also followed the fact that the international community — the EU, the UK, the US, Canada — have promulgated sanctions against Russia, the likes of which I don’t think we’ve ever seen against a single country. And so to some extent, that’s going to play into the conversation that we’re having today about money laundering and anti-terrorist financing.

So last November 1st, we had Susan and Chris, who are the founders of ArtAML, on the podcast to talk about how the art market in the UK was coping with the anti-money laundering requirements of the EU’s so-called Fifth Directive as implemented in the United Kingdom in 2020. If you missed that episode, it might be worth going back and listening to that first. But we wanted to bring Susan and Chris back on the podcast to discuss a somewhat surprising development in the US regarding anti-money laundering legislation and the art market and its implications for the art market going forward. To set this stage, last November when we spoke with Susan and Chris, we were awaiting a report from the Financial Crimes Enforcement Network, sometimes called FinCEN — an agency within the US Treasury Department on the use of the art market for money laundering and for the financing of terrorism. This study grew out of the Anti-Money Laundering Act of 2020, enacted on January 1, 2021, which applied the Bank Secrecy Act’s money laundering provisions to the antiquities market and directed FinCEN to study the high-end art market to determine whether the Bank Secrecy Act’s anti-money laundering provisions should also be applied to the art market.

I think it’s fair to say that many of the professionals who work in this area, myself included, fully expected the FinCEN report would conclude that the art market should be regulated with respect to money laundering and potential terrorist financing. This outcome seemed inevitable as a result of a somewhat alarming report put out in July of 2020 by the US Senate’s Permanent Committee on Investigations, which focused on the lack of safeguards in place at the major auction houses to prevent them from dealing through an intermediary with Russian oligarchs, whom the US Department of Treasury’s Office of Foreign Assets Control — or OFAC — had placed on its sanctions list. So on February 4th, 2022 FinCEN released its Study of the Facilitation of Money Laundering and the Financing of Terrorism Through the Trade in Works of Art, and to the surprise of many, FinCEN concluded that there is limited evidence of money laundering and little risk of terror financing through the sale of high-value art. And they recommended that Treasury complete its ongoing work against money laundering in other more vulnerable areas, such as real estate. So I’m going to stop there and just start by asking Chris and Susan, did FinCEN get it right?

Susan Mumford:  Well, sounding like a politician actually, I’m not sure if there’s a right or a wrong on this, but what I did find interesting is if you go right to the very — I’m opening the report now — if you go right to the very end of it and I’ll read what it says. They state, “As such,  it is recommended that Treasury complete its ongoing work to close outstanding gaps in the US AML/CFT regime related to beneficial ownership.” As you mentioned, Steve, “real estate and potentially investment advisors and non-financial gatekeepers before potentially turning its attention to the high-value art market.” What I liked about that was a sense that they’re going, we don’t have everything right in these other sectors yet. According to our conclusion, it would be better to work on the harmonized AML scheme in other sectors before we then start padding on new industries.

So I thought that that was a considered approach, and it was taking more of a long-term perspective. And additionally to that, there was a lot of recognition in their report that the online art market and digital art — considering NFTs as crypto assets or however we want to classify them —but that has really exploded as a realm, an important realm of the art market throughout the pandemic. And they’re aware of the risks therein. So it was also clear that that would be incorporated and actually having some extra time to address that would be important. So on balance, I don’t think it was a bad decision.

Steve Schindler:  Chris, did you want to add anything?

Chris King:  Yeah, I think I agree with Susan. I think it was a considered opinion. The interesting thing — the whole point about international harmonization is that it’s going to make communication between European, UK, and American art market participants complicated still, because people over here are going to be asking for beneficial owner information and people in the US may not be wanting to give it. So it sort of sidesteps that difficulty, but if their judgment is that there are other areas that require more urgent attention, then I think that’s fair enough. The interesting thing is that when they talk about art finance services not being regulated, I was very surprised to read that. And I would imagine that if anything gets early, it would be art finance services.

Steve Schindler:  Right, that was one of the areas of concern. Maybe — where I’d like to start are first the factors that FinCEN listed to support its conclusion that maybe the art market wasn’t in need of immediate attention, putting aside digital art for the moment. They cited the infrequent use of cash in high-value art transactions, the regulatory reporting requirements already imposed on financial institutions — through which a lot of high-end transactions run — that buyers are probably known already to large galleries. And I put a question mark there a little bit. And smaller galleries lacked high-price inventory, and that galleries generally are concerned with their reputation. And I think some of that is correct, but I’m wondering how those factors strike you and how they compare with what you’ve seen in Europe or in the UK?

Susan Mumford:  Infrequency of cash payments, I generally agree with. However, with Chris and I being on the frontline, as it were, with ArtAML in terms of what really happens in transactions, we have come across scenarios where art galleries in the UK have been accepting cash and not really thinking anything of it. Which points to a general lack of awareness of risks and it really brings to mind the reality that the art market has lacked this kind of compliance. So there really is a lack of awareness of that being any problem potentially. You can imagine the individuals conducting this study and putting together the findings — that they would understand the inherent risk of cash. But when you’re dealing with the sector like the art market, where you don’t even need to legally belong to say a trade association, you might just really be unaware of what’s happening.

So with that, I think the other point that I would make, and maybe this is less about the UK and more about just general risk is that there does seem to be a move to know where the art is going and artists increasingly expecting to know where a gallery is placing it. And in fact, I’ve recently heard — this was a US gallery in fact — but someone not quite complaining, but really being challenged with the fact that the artist was being so demanding about where the pieces were going, it was potentially causing some commercial issues for an art dealer. That seems to be something that is changing culturally in the art market, and I feel like that’s more a generational move that we’re witnessing.

Steve Schindler:  Yeah, well interestingly enough to me, when I was reading the study, FinCEN distinguishes or breaks down galleries into primary market and secondary markets, which was a sort of sophisticated thing I think for the Treasury Department to be doing. And to your point, they were saying that galleries who are representing artists in the primary market, the first sale of works, have historically had a greater level of concern about where they’re placing works, because they’re trying to enhance the reputation of the artist and to find the sort of prestigious spots for the artist works to go. That really is a factor in galleries deciding where to place works in the primary market. They then went on to say that well, that’s not the case in the secondary market, which I think they viewed as a slightly higher risk, because there — although I think they noted that galleries were concerned with their own reputation and obviously not wanting to be somehow complicit in money laundry without knowing it — they lacked the same sort of concerns about placement of art that galleries in the primary market had.

Susan Mumford:  Agreed.

Steve Schindler:  The other interesting thing I thought was the report discusses various art market players, and among them were the auction houses. And my experience with the major auction houses is that they among the art market participants have the most robust voluntary AML KYC procedures. I have found that dealing with the auction houses now as opposed to 10 years ago is entirely different. And they are very adamant about knowing who the actual beneficial sellers are of art, and that has to be disclosed. And so it’s interesting to me that the report kind of put the auction houses in the category of galleries where maybe they’re more concerned with the price of selling works on the secondary market than with placing them in the right home so to speak. Did that surprise you at all?

Chris King:  No, I don’t think I was particularly surprised by that, because I think certainly if you look at what’s happening in the UK — I think one thing that is interesting is that the legislation may be starting to address some of the disparity in market power between the big auction houses and small players. So where you have a big auction house saying you must provide this information. Well, smaller art market participants now are in a legal position to say, well, I am also required to get this information from you.

Susan Mumford:  So I would add to that to say, one thing I was, I guess, reading into this report was a lot of these discussions were presumably with bigger players. And they were talking about things such as the delineation between sales team members versus compliance team members. And how that’s okay for personal data, not being accessed by nefarious players, people trying to abuse that for commercial use. And I thought, well, actually, that might be the case in an auction house. And they have, as you suggest, they’ve been self-regulating as indicated in the report, albeit potentially ineffectively in some cases. But actually that idea that there’s that delineation between who can access what — sure if you use platforms such as ArtAML, there can be limitations on what user level is able to access what confidential data is in the platform. But there’s so many small players in this market as well. And actually the report on the one hand really does a fantastic job of outlining what is an art fair, what is an auction house, what is a gallery — so on and so forth. But it potentially did make some assumptions based on speaking with the larger auction houses, and we’ve seen the auction houses in the UK already having been regulated as what are called “high value dealers” in the UK who take cash payments. They had a great deal of awareness of AML already. So we’ve actually seen the auction houses being able to handle this pretty well.

Steve Schindler:  Right, and I think the auction houses, in my experience, are structured in a way that makes it easier. So for example, if you’re representing a consigner to an auction house, and maybe the consigner is a trust or a single purpose company owning a piece of art and you have to disclose the beneficial owner, you know that you’re disclosing the beneficial owner of the work to a very small group of individuals. Either the head of compliance or general counsel’s office. And galleries can’t offer that same sort of compartmentalized organization. So I’ve had situations where a client was engaging in a transaction in the UK and ran into a problem. You know, one of the issues when you’re dealing with a gallery is it’s a very sort of decentralized organization, even large international galleries. And so when you disclose information to, say, one of the directors, it’s not entirely clear that that information is not going to somehow seep out into the art world generally.

Susan Mumford:  Absolutely, and that’s the reason for the way that we set up. Say, the ability to have different levels of access to that personal data is being incredibly important. I mean, having been in the art market for more than 20 years myself, I still remember the day that I started to receive invitations for one of the major London galleries. Funny enough with the exact same typo in the address that I had received for another gallery. And guess what, there had been a change of team member, and one individual had moved from the one to the other. So did they take the mailing list and bring it to the new gallery? Absolutely, they did. So you have to be aware of the risk of that, what data might be taken if possible.

Steve Schindler:  Well, of course, one of the propositions, I guess, put forward by the report — they propose some potential regulatory solutions and some non-regulatory options. And when they propose these things, it’s not entirely clear what weight to put on of them, at least in my reading. But one of the things — non-regulatory options that were proposed was urging art market participants “to adopt a private sector information sharing program of ultimate beneficial ownership data to encourage transparency in the market.” And when I read that, I think I chuckled a little bit, because it seems unreasonable to me to expect that galleries are going to readily share information about ultimate beneficial ownership data among themselves. Have you thought about that or had experience with that in the UK?

Chris King:  I think it’s something that people would like to have, but I think there are difficulties with it. And I think the difficulties with it include the fact that who is going to take on that responsibility and how are they going to get paid for doing it? Certainly in the UK, the onus is on the individual art market participant to make sure that the appropriate checks are done. And the difficulty with having a central thing with that legal thing in place in the UK is it means that if you rely on somebody else’s checks — oh, Susan is my customer, and I can see all of her information in the centralized database. Well, what does that centralized database hold? Let’s say it holds her identity document. Well, is that out of date? Has she got a new one? Has it been lost? Does it hold her proof of address? Has she moved? Does it hold her PEP and sanction screening status, and has that changed? So it’s actually quite tricky, because you could be relying on information that’s out of date.

Susan Mumford:  I think the kind of questions that come to my mind are, is it private? Is it public? If we’re talking about a centralized database, I never like the idea of a monopoly. So there do seem to be multiple issues with it to add to what Chris already highlighted.

Steve Schindler:  Not to mention security.

Chris King:  Yes.

Susan Mumford:  There’s that.

Steve Schindler:  Because all of a sudden you have this huge centralized database with all kinds of private information in it that somebody, who is probably not being paid a lot to maintain it, is maintaining and then is obviously very vulnerable to hacking and —

Chris King:  I mean, I think the only way this is likely to happen is if there are — I think a private one is very tricky. I think if governments start to introduce public lists of who owns what then it stands more chance. There’s a lot of — I’ve seen a lot of push towards that, to publish information about Russian oligarchs’ stuff given what’s happening with Ukraine at the moment. But of course there’s an awful lot of wealthy people in the West who wouldn’t want that information to be put out either. So I think it’s difficult. But I mean, yeah. So when I was talking about the difficulty of who’s going to do that, security was absolutely one of the things on my mind. The legal liability you would be taking on for storing a centralized thing of that importance is huge.

Susan Mumford:  And what information someone would be able to view or to download, etc, it brings one of our clients who recently got in touch with us and they said, ArtAML here’s an interesting situation. We have a finance company that’s acquiring a work of art from us. Now we have to conduct our due diligence on that finance company, but they’re now saying that they’re regulated — and even though they don’t need the information from us — well, they’d like to just go ahead and do an AML check on us and go ahead and take photo ID and have all of that sent to them. And I looked at what was sent through to the gallery, and it was quite clear that that financial firm was not digitally savvy. They had a word document that you would print out and put the information in, and presumably email the photo ID documents. And I said, blame ArtAML. Tell them, nope, you don’t need to comply. There’s no need for somebody else to hold our personal data. And my take was, there is just so much of this sensitive data that can be used by nefarious players. It’s a really dangerous area to then start potentially having access. So, you know, it’s clearly opening a can of worms.

Steve Schindler:  Right, it seemed like a non-starter. It seems to me like something that you say when you’re not pushing for the type of regulation that you have in the UK and that we have here in the banking industry, for example. And you sort of suggest this voluntary cooperation, which to me just seems unlikely to really develop. So let’s talk a little bit about the areas of concern that were raised in the report: the emergence of the digital market, peer-to-peer transactions of NFTs with no intermediary, ease of transfer of NFTs — and then within that world, complicit professionals— and then also, as you mentioned earlier, boutique lending firms. So starting with the digital market and NFTs, and I’m just curious what your experience has been. That market has really taken off since —  even more since the last time we spoke, how much of what you do has focused on NFTs, and has that changed the look from your perspective?

Susan Mumford:  NFTs are not, as you know, currently caught within the definition of a work of art in the UK definition, as related to the money laundering regulations. The only AML checks, customer due diligence, that would be conducted related to NFTs would either be voluntary, or if a potential suspicious activity was detected. As a result of that, we’re not really seeing much in context of AML. Chris, would you add anything to that?

Chris King:  Yeah, I mean, I think Susan’s right. We are getting asked about it a lot. There’s a lot of interest in it, but there is huge confusion. NFTs are not art, because you can have an NFT of a Jack Dorsey first tweet or an imaginary flavor of Pringles.

Steve Schindler:  Right, and has there been any move in the UK to include those in the scope of the art market there?

Susan Mumford:  There are discussions taking place, and we’ve heard reference to that. So the Civil Service is just scrambling to catch up with what is happening. And I think one thing that’s really useful that I’m seeing is increasing clarification as to — legally speaking — what exactly is an NFT, and how does that relate to works of art? And I’ve seen this in the US context as well. And my take is very much in reading this report that the US has this big opportunity to incorporate it from day one, which is really going to cover a lot of the increased risk that we now have. And of course, there’s already increased risk in an art transaction if you’ve not met the person face to face. So compare that to the UK, the requirement of what you do to confirm someone’s identity — it’d be you’d have to do more, if you’ve only met the person online, or if they’ve done a remote transaction. So you can imagine that would just increase even moreso with an NFT platform.

Chris King:  And I think the thing that we’ve been saying that was a consultation that we took part in from Treasury end of last year asking about this. I think the conflation of NFTs and art is actually a red herring in this. I would suspect if anything happens, NFTs will be regulated as crypto assets.

Susan Mumford:  Yeah, that was the UK treasury that Chris is talking about.

Steve Schindler:  Right, which makes a certain amount of sense.

Susan Mumford:  And apart from that, the related piece that we are hearing about is payments with cryptocurrency.

Steve Schindler:  Which is very typical, I mean, most typical for the purchase and sale of NFTs. I mean, when you go to an auction now at Sotheby’s for NFTs, they’re taking bids in Ethereum, as well as in different currencies. So that is the huge issue.

Susan Mumford:  Very much so, it’s increased risk.

Steve Schindler:  You know, parenthetically, we decided at the holiday season to mint our holiday card and sell it on one of the platforms, and somebody bought it. The proceeds went to Artists Space, a charity. But I can’t tell you who bought it.

Chris King:  But how many tens of millions of dollars did you sell it for? That’s the most important question.

Steve Schindler:  I can’t say.

Susan Mumford:  Although there was a recent piece in WIRED that was talking about findings from the Department of Justice and actually how officials can ultimately track that. People may not be able to hide their money as much as they think that they can.

Steve Schindler:  Right, let’s just talk for a moment then about Russian sanctions. And it seemed ironic to me that shortly after the release of this report, we’re now facing a situation — an analogous situation where the art world is trying to figure out how to find out whether or not they’re doing business with either a person or an entity on the increasingly growing sanctions list. And it seems to me that the same principles that apply to AML or terrorist financing apply to this problem as well. Which is how do we know who we’re dealing with?

Susan Mumford:  Well, the good news there is that it is possible to run screenings for sanctions for both private individuals and for companies, as you allude to though, the challenge can be getting that information and working it out. And one of the concerns that we had when we were looking at the US situation was actually considering what we’d experienced in the UK. This is before any of the recent sanctions of Russians came about. What we’d seen in the UK was that businesses that are art market participants, it was only when they became directly regulated for anti-money laundering they became aware of existing obligations under the Proceeds of Crime Act. And so only then did many businesses realize that they were not to transact with sanctioned individuals or legal persons of any type. And we’ve answered a number of times, “what on earth does this mean, sanctions?” And that can be quite surprising to people who are very familiar with the concept of sanctions. You would just think surely everyone knows. So whereas AML is directly regulating a market. Of course, it not being legal, not being permissible to transact with somebody who’s sanctioned, that is across sectors. And so when the Russian situation started unfolding recently, I was immediately turning my thoughts to what we’d seen in the UK. And I thought, my gosh are US art businesses going to be aware?

Sure, they may not be regulated for having to conduct due diligence for AML, but are they actually aware that they’re not allowed to transact with sanctioned people or sanctioned companies? And they are able to run screenings, if they’re concerned. And in fact, we are rushing a solution to be able to offer just standalone sanction screenings in case people do think, “is this potentially going to be a concern?” And it’s really important that providers are keeping up to date systems. So we use a company called ComplyAdvantage, and they are literally working around the clock to keep the databases up to date. And they made a distinction recently about the difference in adding someone to their database in terms of somebody who’s sanctioned based on a media announcement, versus it actually being officially changed as a status for someone.

Steve Schindler:  It’s still not legal to be doing business with individuals or entities on OFAC’s list of prohibited transactions. And it’s also not legal to be involved in money laundering. What we’re really talking about are procedures and processes that either are required to be in place or not in order to make that less likely. And I think, with respect to sanctioned individuals and entities, one issue is what do you do when you’re dealing with an entity whose beneficial owners you don’t know? And what duty do you have to inquire? And that is the sort of gray area I think for galleries probably.

Chris King:  I think at the moment there are two aspects here. One is that, what are they legally required to do? But the other thing, since we’ve been talking a bit about the reputational stuff, there’s also an issue about who do you want to be selling art to anyway in a wider sense? Never mind if this person is sanctioned, but if they are a wealthy Russian with who knows what connections with the government, would lots of people in the West want to be transacting with that person anyway? I don’t know. I mean, that’s obviously up to the individual gallery, but I think it’s something that needs to be thought about as well.

Steve Schindler:  Right, I think that is going to be an issue. And just like, there’s going to be a lot of boycotts of cultural events and that sort of thing that we’re starting to see that are not legally required. But just organizations want to stand up and support Ukraine and not be seen to be transacting any kind of business or engaging with Russia at all at this point.

Susan Mumford:  Well, and what’s also definitely relevant here is the fact that, of course, other sectors, and some other sectors— a move towards transparency has been happening for a number of years. Whereas in the art market, because it’s not there yet, it can then feel very awkward to be asking questions about who are the owners, what does this company structure lead? And because the US is behind in that sense, I can’t imagine that being a more awkward conversation. Although we hear again and again from UK and EU based businesses, actually in their experience when they start asking, it’s fine. Now, if somebody’s trying to hide something, you might find a pretty complex company structure. In which case, you might find yourself going actually we need to either engage a firm to help us dig into this, or just maybe step away from it.

Steve Schindler:  Right, and I think the reputational thing is definitely there. Even here where it’s not a requirement, we get calls certainly from clients who say, what do you think of this? Or this was proposed to us. And it’s not exactly like having a system in place, but there is definitely sensitivity to seeing red flags and understanding that if what’s being proposed seems unduly complicated or doesn’t really line up with where the parties are — you know, money being wired to funny places — I think galleries are sophisticated enough now, just sort of to understand that. The point also that you raised, which we can’t really use at this point, if it’s the law, right, then it’s easy to say to your client, “I need this information. It’s the law. We have to do it.” When it’s not, and not everybody is doing it, it becomes more difficult.

Susan Mumford:  And what it is the law of course is — as you were referring to, is under OFAC, not transacting with a private individual or entity that is sanctioned. And actually one thing I think could happen is the whole concept of compliance in the art market could start to make a bit more sense with what’s happening right now. Because beforehand it was perhaps more of a concept that you would go, well, that’s a bit abstract. What does that mean? And actually, we’re seeing all over the headlines these sanctions coming out, and you go, “actually, that’s what it is.” There are some criminal players out there targeting the industry, and that’s what’s being prevented or an attempt thereof.

Steve Schindler:  Right, I agree with you. I think it will also just increase the visibility of how much Russians and Russian, call them oligarchs or kleptocrats or whatever you want to call them — friends of Putin — are very much enmeshed in the art market and the high-end art market. And I think this will give it a lot more visibility and make life much more difficult for them.

Susan Mumford:  And then a lot of this then goes back to putting art in really excellent collections, places that you want the art to go. And that means it’ll be good ultimately for the artist, whether they’re living or not and have potential then for future sales as well.

Steve Schindler:  And that’s it for today’s podcast. Please subscribe to us, wherever you get your podcasts and send us feedback at podcast@schlaw.com. And if you like what you hear, give us a five-star rating. We are also featuring the original music of Chris Thompson, and finally, we want to thank our fabulous producer, Jackie Santos, for making us sound so good.

Katie Wilson-Milne:  Until next time, I’m Katie Wilson-Milne.

Steve Schindler:  And I’m Steve Schindler bringing you the Art Law Podcast, a podcast exploring the places where art intersects with and interferes with the law.

Katie Wilson-Milne:  The information provided in this podcast is not intended to be a source of legal advice. You should not consider the information provided to be an invitation for an attorney-client relationship, should not rely on the information as legal advice for any purpose, and should always seek the legal advice of competent counsel in the relevant jurisdiction.


Music by Chris Thompson. Produced by Jackie Santos.