Introduction
Crimes committed against and through works of art encompass a wide array of offences and offenders. The existing academic literature and practitioner strategies around prevention, detection, investigation and prosecution of art crime coalesce around three broad and principal subject areas: art theft and vandalism; art fraud and forgery; and the plunder, looting and destruction of antiquities. More recently, research on art crime has also included money laundering and terrorism financing in the art market.Footnote 1 The latter offences are not so much offences against art – as with vandalism, theft or looting; rather, they take advantage of art's potentially high value and lack of transparent trade practices and are therefore committed ‘through’ art. Another area that could be counted within this category is art fraud and forgeries, which has traditionally been researched under crimes against art. In addition to the classification problem, uncertainty and speculation continue to exist in regard to the definitional boundaries of art crime as well as its prevalence in different communities and settings. There furthermore continue to be uncertainties in relation to what ‘art’ itself is.Footnote 2 The aim of this paper is hence not only to assess recent developments in the context of anti-money laundering (AML) laws, but also to position the art market as a new specific field within money laundering research and art crime research and discuss which of these two areas is better suited to accommodate the specific challenges of money laundering in the art market.Footnote 3 This focus is particularly important and timely now, as concerns are increasing that the vulnerability of the market is exploited to further the financing of terrorist groups and the laundering of proceeds of crime.Footnote 4 Indeed, in Rachmaninoff v Sotheby's and Teranyi, it was recognised that
The public and the law have increasingly come to recognise the potential for abuse by criminals of works of art, and of those who deal in them (consciously or unconsciously), for money laundering, and for disposing of the proceeds of crime. The less the legal risks involved in committing a work for auction, the more attractive the market in works of art and manuscripts becomes for criminals.Footnote 5
The art market is furthermore a newly regulated market, which opens opportunities for longitudinal research on the implementation and application of AML in this field and comparative studies with other markets in the future.
Against this backdrop, this paper critiques recent efforts to expand AML rules to art dealers, and establishes parameters that distinguish the art market from other markets falling under AML regulations. However, the study aims to equally draw out similarities between the markets that could make the present research findings applicable to AML regimes generally. A further aim of this study is to position money laundering through art as a crime within the existing art crime research that is mainly focusing on (four) crimes against art rather than crime through art.Footnote 6 This paper is concerned exclusively with a crime committed through art, which could in the future be included in art crime research, provided there are differences to other markets in the AML field (otherwise it would better be placed within the AML discipline). Another category worthy of being included in art crime research that can be labelled crime through art is that comprising the multiple ways of committing tax offences with art investments, import, export, etc. Crimes committed through art could hence become a distinct area of art crime research if the modi operandi were so distinct as to justify their categorisation as art crimes rather than crimes using art as a means to commit them.
While it is commonly believed that the art market is a legal void, the reality is that it is significantly regulated. A recent legal report notes that – as of February 2015 – there were 167 laws and regulations that applied to the British art market.Footnote 7 The market is today subject to deeper scrutiny than ever before, particularly in the context of increased concerns of money laundering and terrorist financing. While there is a long history of literature on regulating the art market,Footnote 8 this paper adds an important contribution on (preventing) art crime, by examining the expansion of AML rules to art dealers under the EU's Fifth Anti-Money Laundering Directive (Fifth AML Directive) (agreed in 2018)Footnote 9 and the (US) Illicit Art and Antiquities Trafficking Prevention Bill.Footnote 10 The UK government has announced that it will implement the Fifth AML Directive by 10 January 2020,Footnote 11 thus this paper goes on to analyse how such rules will impact upon art dealers by examining the Proceeds of Crime Act 2002 (POCA 2002) and the UK Money Laundering Regulations 2017 (ML Regulations 2017),Footnote 12 bearing in mind the government's stated emphasis on achieving a proportionate balance between managing the burden on business and actively discouraging money laundering/terrorism financing.Footnote 13 While there is a developing literature on the influence of organised crime within the art market,Footnote 14 as well as analyses of the vulnerabilities of that market to money laundering,Footnote 15 this paper is the first to subject the AML regime to analysis in this context.
To date, much of the AML focus has been on sectors such as banks, lawyers, and estate agents,Footnote 16 with little attention on the art market. Apart from some notable exceptions,Footnote 17 the application of the AML regime to art dealers remains under-researched. Moreover, as art dealers have not been the target of law enforcement to the same extent as other sectors, this has inevitably created a gap that can be exploited by criminals. Indeed, the sector is not known for reporting suspicious activity.Footnote 18 Chappell and Hufnagel have criticised prosecutors’ reluctance ‘to utilise more flexible and modern rules designed to combat money laundering and organised criminality in the art crime arena’.Footnote 19 Ulph and Smith acknowledge, though, that ‘[m]oney laundering measures cannot be presented as a panacea for all problems’.Footnote 20 There are obvious difficulties in relation to obtaining (admissible) evidence and bringing a successful prosecution. There may not be sufficient motivation or inclination on the part of law enforcement authorities to pursue an investigation or prosecution. There may be a lack of resources available to police and prosecutors, particularly at a time when they are stretched and other priorities dominate (for example terrorism or drugs). Ultimately, prosecution of art dealers for money laundering (or failure to comply with AML obligations) does not appear to be a priority for law enforcement in the UK. Moreover, the AML reporting rules can prove problematic in practice, as they can negatively impact on business and/or relationships with clients. Against that backdrop, this paper asks: on what grounds has the AML regime been expanded to include art dealers? Furthermore, it explores how AML rules will impact upon art dealers, both through the criminal law offences contained in POCA 2002 and the preventive measures under the ML Regulations 2017.
Debates as to regulation in the market, and recent developments purporting to bring art dealers within the remit of the AML regime, thus provide the impetus for this paper. We first outline vulnerabilities in the market, before considering efforts to regulate the market. The failure of regulatory efforts thus far, including self-regulation, has resulted in state intervention and the extension of AML rules to art dealers.Footnote 21 We consider recent legislative developments in both the US and the EU to illustrate the expansion of the AML regime globally. This paper goes on to analyse the twin-track approach to AML in the UK, namely criminal law (POCA 2002) and preventive measures (ML Regulations 2017), and how that relates to art dealers. This section demonstrates, first, that art dealers are exposed to criminal prosecution by virtue of normal commercial activities and, secondly, that if they do comply with the provisions of POCA 2002 such compliance can impact upon their business. It then considers the implications of the preventive obligations under the 2017 Regulations. The paper then utilises the AGILE framework to critique the expanding AML regime.Footnote 22 Ultimately, we remain sceptical as to the continued expansion of the AML regime which brings many unanticipated consequences.
1. Money laundering vulnerabilities in the art market
It must be acknowledged at the outset that money laundering does happen in the art market. While we do recognise that there are vulnerabilities, we do not attempt to assess the extent of money laundering in the market. Indeed, that would be almost impossible.Footnote 23 Our aim in this section is simply to outline the money laundering vulnerabilities in this market. Discussion deliberately extends beyond the UK: while the limits of the law are jurisdiction-specific, the techniques used in laundering can resonate across jurisdictions. An important caveat must be entered at the outset though: much of the discussion in this section draws upon cases of money laundering in the art market that have been successfully identified or have come to the attention of criminal justice agencies. It might be expected that other money laundering techniques have been utilised in the art world but have not yet attracted attention from law enforcement.
An obvious vulnerability seems to be the lack of AML rules in the art market, with many prominent commentators and officials voicing criticism in this regard.Footnote 24 Unlike other markets that are regulated by AML, in the art market ‘[y]ou can buy something for half a million, not show a passport, and ship it. Plenty of people are using it for laundering’.Footnote 25 There are many examples where the art market appears to have been used either for spending criminal proceeds or for ‘cleansing’ proceeds of crime.Footnote 26 For instance US authorities have alleged that money diverted from the 1Malaysia Development Berhad fund has been used to purchase items of art, including a $3.2m Picasso and a $9.2m Basquiat.Footnote 27 Another example is that of the founder and former president of Banco Santos (Brazil), Edemar Cid Ferreira, who was convicted of crimes against the national financial system and money laundering. Ferreira had accumulated a substantial art collection valued in the tens of millions of dollars, including Hannibal by Jean-Michel Basquiat.Footnote 28 There are also many examples of politically exposed persons (PEPs) using (allegedly) misappropriated funds to purchase art.Footnote 29
Another vulnerability in the market is the emphasis on anonymity and/or a lack of transparency.Footnote 30 Indeed the courts have suggested that: ‘There is a dark side to the confidentiality surrounding the identity of an auctioneer's principal’.Footnote 31 Stretching back to the eighteenth century, items would be sold without revealing the name of the seller (ownership was referred to simply as ‘property of a gentleman’ or ‘property of a lady’). Gradually, such anonymity was extended to also include buyers, supposedly to protect them from becoming targets of theft.Footnote 32 Anonymous sales also had the effect of getting around the nemo dat rule.Footnote 33 Today, ‘[i]t is not unusual for one transaction to use several intermediaries, without disclosing the names of the buyer and seller’.Footnote 34 Attempts to challenge this before the courts have met with mixed responses.Footnote 35 Interestingly, in 2017 Christies amended its policy on anonymity and now requires agents to tell it the name of the owner they represent.Footnote 36 In 2018, the Fifth AML Directive emphasised the importance of transparency in the financial system: ‘This Directive aims not only to detect and investigate money laundering, but also to prevent it from occurring. Enhancing transparency could be a powerful deterrent’.Footnote 37
A third vulnerability relates to the provenance of a particular item, ie the history of ownership. A full history is valuable in transparency and title; in contrast, gaps in provenance might raise questions. Or, where provenance is traced to a particular source, this might give rise to doubt about the veracity of title or ownership.Footnote 38 It was emphasised, in Kurtha v Marks, that ‘[a] dealer in valuable works of art who pays in large amounts of cash, keeps no records, and asks no questions as to provenance of his supplier, exposes himself, and those who buy from him, to other very serious risks’.Footnote 39 The prospect of prosecution for money laundering offences was specifically identified by the court.Footnote 40 In Davis v Carroll, it was stated that ‘[i]t is a basic duty of any purchaser of an object d'art to examine the provenance for that piece’.Footnote 41 The above judicial comments can equally impact dealers and individuals (eg dealers can also be buyers at one point). While private and public policing mechanisms such as the Art Loss Register or the Interpol Stolen Works of Art database can prove useful, difficulties in ascertaining provenance persist,Footnote 42 and, as a result, full transparency is not always possible. In this way, the art market is attractive to criminal elements.
A fourth reason why art has become more attractive to criminals, and why the markets are vulnerable to money laundering, stems from the commoditisation of art.Footnote 43 For example, in 2016 ‘the overall value of all sales in the British art and antiques market was just under $12 billion (£9.2 billion)’.Footnote 44 Globally, art sales amounted to $63.8 billion in 2015.Footnote 45 As prices have increased, art has become a more desirable target of crime (including theft, forgery, and money laundering to give some examples).
Related to the above, and given portability of items, the art market is particularly vulnerable to trade-based money laundering (TBML). The 2017 National Risk Assessment defines TBML as ‘involv[ing] the exploitation of the international import and export system to disguise, convert and transfer criminal proceeds through movement of goods as well as funds’.Footnote 46 In the art world, it is relatively easy to alter paperwork – most obviously in relation to the actual value of pieces of art. An example of where art has been moved across borders with a lower than actual valuation is that of Basquiat's Hannibal: the painting was declared as being worth US$100, yet was worth an estimated US$8m.Footnote 47 This is one type of activity that could be analysed within the fields of money laundering or tax offences or, if the alteration of value is specific to art objects, within art crime research. TBML is, of course, dependent on trade. It has been suggested that post-Brexit – as the UK seeks to increase trade with non-EU countries – the opportunities for TBML will increase.Footnote 48
The final vulnerability that we mention here is the use of free ports. Amongst the most well-known free ports are those in Switzerland, Luxembourg, Hong Kong and Singapore.Footnote 49 While there have been efforts at regulating free ports,Footnote 50 for example by requiring that cultural goods transiting through them be declared to prevent trafficking in illicit cultural property, such requirements are almost impossible to enforce. Free ports have become important storage facilities and showrooms for art, whether legally obtained or otherwise but, as the FATF points out, the cloaked nature of free ports lends itself to potential use for money laundering.Footnote 51
It is axiomatic that the art market has similar vulnerabilities as exist in other markets – such as the high-value dealer sector and the property market.Footnote 52 Indeed, that is expressly recognised by the UK government in its consultation on the Fifth AML Directive.Footnote 53 Yet, it is also stressed that
there are potential money laundering risks that are more unique to the art trade; for example, paintings and drawings can be attractive to money launderers as they can be easier to store and transport. The value of artworks can increase rapidly, meaning that profit can be gained through the act of short term money laundering actions. There is also an element of opacity, or lack of transparency, that is often cited as an issue in relation to art transactions as well as problems in ascertaining the provenance of goods.Footnote 54
Given the vulnerabilities to money laundering, it is perhaps unsurprising that policymakers have responded to expand the AML regime to encompass art dealers (though whether it is appropriate for the AML regime to be expanded in this way is an entirely separate question, not least given significant criticisms that have been levied against AML).Footnote 55 We now turn to consider regulation in the art market as well as recent developments in the context of AML.
2. Regulating the art market
(a) A failure of regulation?
Debates as to regulation in the art market have been ongoing for quite some time.Footnote 56 Such regulationFootnote 57 can take many forms, most notably state- or market-based. State regulation can include import/export restrictionsFootnote 58 and the criminal law (whether generally applicable offencesFootnote 59 or ones specific to, say, cultural propertyFootnote 60). The market itself provides its own restrictions in how dealers operate, for example through contract or tort.Footnote 61 There have also been extensive debates as to the role of self-regulation in the art market. Most notable are the Basel Art Trade Guidelines which stressed: ‘A so-called “self-regulation initiative” has the advantage of pre-empting and potentially influencing formal regulation that is increasingly likely to be introduced in view of the general tightening of regulatory frameworks in related matters’.Footnote 62 Notwithstanding, the market displayed ‘a pronounced lack of interest’ in implementing proposed guidelines, which led to the conclusion that the art market is not ready for self-regulation and that it may be for legislators and the courts to intervene and better regulate the art sector.Footnote 63
It was noted, however, that ‘in principle market operators agree on the need to take self-regulatory action …, under the condition however that such collective action does not directly undermine the commercial interests of their trade. In other words, what seems legally and morally appropriate continues, at least at this present time, to be seen as economically harmful’.Footnote 64 Although the Basel guidelines were proposed in 2012, no market participants have thus far agreed to implement them.Footnote 65 On the other hand, there are doubts as to whether state regulation is indeed appropriate to the art market:
many would question whether regulation could effectively deal with many of the intricacies of the art market, let alone its global nature. As has been seen in other industries, more regulation inevitably imposes higher costs on companies, forcing them to shift resources towards meeting compliance requirements, arguably at the expense of other activities. This might not be a problem for the biggest and most powerful operators in the art market, but for the thousands of smaller companies and individuals, increased government regulation could make their business unviable.Footnote 66
Against this backdrop, and in light of concerns relating to money laundering and terrorism financing, steps have now been taken to bring art dealers within the ‘regulated sector’Footnote 67 of the AML regime, as discussed below. This development is further evidence of ‘a tendency to see regulatory issues in terms of risks and to see control issues as questions of risk management’.Footnote 68 The rationales for application of the AML regime to the art market link back to traditional arguments in favour of ‘market failure’ regulationFootnote 69: ‘Regulation in such cases is argued to be justified because the uncontrolled marketplace will, for some reason, fail to produce behaviour or results in accordance with the public interest’.Footnote 70 Indeed many in the art market have argued in favour of greater self-regulation, or at least better behaviour by dealers, anticipating quite rightly that failure to do so would inevitably result in state intervention.
(b) The expansion of AML
The AML regime encompasses both a repressive (ie criminal law) and a preventive approach.Footnote 71 The criminal law provisions (detailed later) apply to all. The preventive approach only applies to those in the ‘regulated sector’. There are two developments influencing why art dealers are now being brought within the sector. First, in relation to terrorist financing,Footnote 72 the UN, for example, has expressed concern that terrorist groups
are generating income from engaging directly or indirectly in the looting and smuggling of cultural heritage items from archaeological sites, museums, libraries, archives, and other sites in Iraq and Syria, which is being used to support their recruitment efforts and strengthen their operational capability to organize and carry out terrorist attacks.Footnote 73
The UN has called upon states
to introduce effective national measures at the legislative and operational levels where appropriate, and […], to prevent and counter trafficking in cultural property and related offences, including by considering to designate such activities that may benefit organized criminal groups, terrorists or terrorist groups, as a serious crime in accordance with article 2(b) of the UN Convention against Transnational Organized Crime.Footnote 74
Second, in February 2018 criminal charges were filed alleging that Personnages 1965 by Pablo Picasso was used in attempts to launder proceeds of crime. With an invoice price of £6.7 million, the potential for money laundering is obvious. In that case, it had been suggested that the art market was selected because it is ‘the only market that is unregulated’.Footnote 75 Unsurprisingly, that indictment seems to have sparked a response in the US. The House Financial Services Committee held a closed-door session in April 2018, which specifically looked at the attempted money laundering allegations. Claims that the art market is used to launder criminal money or to finance terrorist activities inevitably have led to questions as to the failure of regulationFootnote 76 and calls for greater regulation in the market. To put this another way, to address under-regulation (whether actual or perceivedFootnote 77) the AML preventive regime is to be extended to art dealers.
The Illicit Art and Antiquities Trafficking Prevention Bill was introduced on 18 May 2018. While the Bill ultimately was not enacted by the end of the 115th Congress, it is expected to be brought back before the current Congress.Footnote 78 The Bill is sparse, simply providing that ‘dealers in art or antiquities’ are to come within the remit of AML obligations (ie the list of regulated financial institutions under the Bank Secrecy Act 1970).Footnote 79 If that Bill does pass into law, then art dealers would have to comply with AML obligations, such as: introducing compliance programmes; carrying out customer due diligence (CDD) checks on clients; establishing procedures for monitoring and reporting suspicious transactions; and developing a risk based approach. The proposed changes would bring art dealers into line with other sectors. According to the Representative who introduced the Bill,
Terrorist organizations around the world continue trafficking art illegally to fund their criminal activity. This commonsense legislation will help reduce international money laundering and crack down on terrorist organizations like ISIS.Footnote 80
Unsurprisingly, the Bill has attracted criticism, for example on the grounds that: ‘the basic justification for this legislation – that art and antiquities are used to fund terrorism – is unproven. The premise for this legislation, and this is extremely important, is not based on fact but unfounded opinion’.Footnote 81 Others, however, have welcomed the Bill on the grounds that ‘addressing money laundering in the art market and ensuring that dealers know their clients is a positive development in [a market] that is very resistant to regulations and transparency’.Footnote 82
In the EU change is also evident. The Fifth AML Directive was agreed and entered into the Official Journal on 19 June 2018, for implementation by Member States by January 2020.Footnote 83 This Directive, inter alia, purports to bring art dealers within the remit of the regulated sector – in other words, once implemented in domestic law, art dealers will have to comply with AML obligations. Article 1(c) provides that the following are to be added to the list of those who must comply:
(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 a 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 transaction or a series of linked transactions amounts to EUR 10 000 or more.
The rationale underpinning such changes can be traced to claims that cultural goods are a source of income for terrorist or organised crime groups.Footnote 84 A 2017 report from the European Commission noted that ‘easily tradable “lifestyle” goods’, such as cultural artefacts, are ‘high-risk, because of weak controls’.Footnote 85 It continued: ‘Specific concerns have been expressed about looting and trafficking of antiquities and other artefacts: looted artefacts could serve as a source of terrorist financing – or alternatively artefacts are attractive as placement for money laundering’.Footnote 86 The report specifically noted that there are ‘current shortcomings in the art sector’.Footnote 87 A 2016 Impact Assessment equally stated that combating illicit trafficking in cultural goods ‘would disrupt an important source of revenue for organised crime and terrorists and would, in general, protect world cultural heritage’.Footnote 88 As in the US, the EU developments have attracted criticism, the Confedération Internationale des Négociants en Oeuvres d'Art (CINOA) contending:
The amendments are built on the false assumption that the European Union is subject to a high level of trafficking in cultural property that is funding illegitimate interests… Most art market businesses are SMEs with turnovers of well under €1m and this [legislation] would add a disproportionate burden to their time and expenses in administrative terms, while potentially losing them business.Footnote 89
Moves to include art dealers within the AML framework are further evidence of a wider trend, in ‘policing beyond the police’Footnote 90 or the ‘responsibilization strategy’,Footnote 91 whereby private actors act as ‘front-line workers’ in efforts to tackle money laundering.Footnote 92 In her study involving bank compliance officers, Verhage reports that ‘compliance and AML can be seen as a type of outsourcing by the government’.Footnote 93 Indeed the UK AML/CTF Action Plan specifically emphasises that: ‘The private sector forms the first line of defence against money laundering and terrorist financing’.Footnote 94 Given that private actors act as gatekeepers to the financial system, then – so the reasoning goes – they ought to be required to play a role in protecting the integrity of the financial system.Footnote 95 But is it really their responsibility? Banks and others have performed this role for over two decades but, as Verhage reports, there is no consensus as to whether AML is a private sector task.Footnote 96
Before turning to consider the UK AML provisions, it is important to stress that the extension of the AML regime, to encompass yet more actors, is a political decision. Overlooked, however, are considerations of enforcement. One would be hard-pressed to suggest that the AML regime operates effectively or efficiently,Footnote 97 and this will be further exacerbated by extending the regime without taking into account enforcement issues.Footnote 98
3. The UK AML regime
(a) Proceeds of Crime Act 2002: money laundering offences
Given the government's view that there should be a proportionate balance between managing the burden on business and actively discouraging money laundering/terrorism financing,Footnote 99 it is important to consider both the criminal law approach (POCA 2002) and the preventive approach (ML Regulations 2017). Of course, art dealers are already subject to the money laundering offences under POCA 2002. When the Fifth AML Directive is implemented in UK law, art dealers will also be subject to the ML Regulations 2017 (expected in January 2020).Footnote 100
The money laundering provisions under Part 7 of POCA 2002 came into force on 24 February 2003.Footnote 101 The principal money laundering offences are: s 327: concealing, disguising, converting, transferring or removing from the jurisdiction criminal property; s 328: entering into or becoming concerned in an arrangement which she knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person; and s 329: acquiring, using, or having possession of criminal property. As is immediately clear, all three principal money laundering offences require conduct involving ‘criminal property’. According to s 340:
‘Property is criminal property if –
(a) it constitutes a person's benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly), and
(b) the alleged offender knows or suspects that it constitutes or represents such a benefit’.Footnote 102
It has been said that anti-money laundering efforts ‘can only be truly effective if banks, financial institutions, and professionals […], are compelled to disclose suspicious transactions to law enforcement authorities’.Footnote 103 To this end, alongside the principal money laundering offences mentioned above, POCA 2002 also contains offences for ‘failure to disclose’ by a person in the ‘regulated sector’,Footnote 104 by a nominated officer in the regulated sector,Footnote 105 or by other nominated officers.Footnote 106 It is also an offence to ‘tip off’ that a disclosure has been made to relevant authorities.Footnote 107
At this point it is useful to consider how the POCA 2002 offences impact art dealers. As Ulph and Smith note, ‘As the principal money laundering offences are triggered by normal commercial activities involving transferring, acquiring and possessing goods, money and other property, traders in art and antiquities and their professional advisers are at risk of prosecution’.Footnote 108 A straightforward illustration of how dealers can become involved in money laundering is where a client asks a dealer to ‘mind’ some money for a few days. If the dealer puts that money in a drawer in their office, then they are concealing the money.Footnote 109 If the client later asks the dealer to lodge the money in their company account and to then transfer that money to a bank account abroad and the dealer does so, then they have converted the money (for example from sterling to US dollars). Transferring the money also constitutes an offence, as does the removal to a foreign jurisdiction. Clearly, s 327 applies. There is involvement in a money laundering arrangement, so s 328 applies. And the acquisition, use or possession of criminal property is also evident here, thus s 329 also applies. This example is a relatively straightforward illustration of how the money laundering offences can apply. However, it might be expected that a money laundering scheme would be more elaborate. If the dealer were to create, say, various transactions – such as the sale and purchase of art – in order to give the impression that money comes from legitimate sources this would, again, constitute an offence.Footnote 110
If a dealer holds money in their client account for the purposes of purchasing a painting, but later suspectsFootnote 111 that that money might constitute proceeds of crime and goes ahead with the purchase, they can be held criminally liable, for example under s 328. To avoid criminal liability, the dealer would have to make an authorised disclosure (or demonstrate that they intended to do so but had a reasonable excuse for not doing so)Footnote 112 or request consent to proceed with the transaction.Footnote 113 And, of course, the dealer cannot say anything in this regard to the client due to the tipping-off offence.Footnote 114 If a dealer does request consent to proceed with a transactionFootnote 115 but, while pending a response from the NCA, the client instructs the dealer to purchase a particular painting immediately, the dealer will face a quandary.Footnote 116 If they proceed with the transaction without consent, then they can be held liable under s 328. If they do not, then they could face action from their clientFootnote 117 (as well as potential loss of reputation if they are seen as incompetent in their dealings).
After making an authorised disclosure and requesting consent to proceed with a transaction, the dealer should wait either for consent or until the end of the ‘notice period’,Footnote 118 after which they can proceed with the transaction as normal. However, if consent is refused, a ‘moratorium period’ of 31 days commences,Footnote 119 which could present practical difficulties. Indeed, it has been said that: ‘It would be a very rare occasion where a lengthy delay would not cause problems, including financial ones, for all the persons involved’.Footnote 120
The money laundering offences do not only apply to money. If, for example, a person approaches a dealer to sell a painting and the dealer knows or suspects that the painting is stolen; or a person visits a dealer and brings some antique items that she wishes to be put up for sale and, say, that person is from a high-risk jurisdiction, or there are fresh dirt marks on the items, or the person is vague when asked about the provenance of the item, then the dealer should be on alert. In such scenarios, the dealer should report the matter to the authorities (and request consent to proceed) – assuming that they are willing to act for that person in selling the painting or antique items. Even if the dealer is not willing to accept this business, but the painting/items had been left with them overnight for examination, they could still be liable for an offence if they return the painting/ items the next day without doing more. In such circumstances, the dealer should make an authorised disclosure.
The breadth of the definition of ‘criminal property’ is noteworthy here. It has been said that this definition (set out above) is ‘so widely cast that it encompasses all crimes, and extends to any direct or indirect “benefit” derived from criminal conduct’.Footnote 121 So, for example, if an art dealer learns that a client who runs a lorry-driving business has turned a blind-eye to his drivers ignoring so-called drivers’ hours,Footnote 122 and the client is using money earned from that business to purchase a painting, then the art dealer must report this issue to the authorities (as the money in question represents criminal property) and request consent to proceed with the purchase.
Significantly, the Law Commission recently conducted a review of the AML/CTF ‘consent’ regime.Footnote 123 Their recommendation was that the consent regime be retained, albeit ‘with improvements to render it more efficient and effective’.Footnote 124 It was acknowledged that there is a need for balance in how the disclosure regime operates.Footnote 125 It remains to be seen what impact – if any – the proposed reforms will have.Footnote 126
(b) Money Laundering Regulations 2017
The ML Regulations 2017 were brought into force on 26 June 2017.Footnote 127 According to the 2017 National Risk Assessment, these Regulations ‘place stringent requirements on relevant persons for the purpose of preventing and detecting money laundering and terrorist financing’.Footnote 128 Those subject to the ML Regulations 2017 have gradually expanded since 1991, when the first EU AML Directive was adopted,Footnote 129 and now a wide range of actors come within the remit of the current rules. To date, however, art dealers do not come within the remit – unless they fall within the definition of ‘high value dealers’.Footnote 130 In a 2015 report, Transparency International (TI-UK) identified shortcomings in the art sector, including: no thematic reports on AML compliance within the sector; no known cases of enforcement action against auction houses or high-end art dealers; a low number of suspicious activity reports filed by the sector; limited knowledge of compliance issues due to a lack of information from HMRC; a general lack of awareness of AML obligations in the sector; and high value dealers are only required to carry out AML checks when items are paid for in cash.Footnote 131 Given that art dealers do not fall within the regulated sector, the money laundering ‘weaknesses’ identified by TI-UK could be swiftly rebutted. For example, it is not surprising that there is a low level of SARs emanating from the sector given that there is no obligation to file such reports – unless the dealer is classed as a ‘high value dealer’.Footnote 132 It is trite to criticise the sector on these grounds given the absence of any legal obligation to comply with AML.
That, however, is soon to change. When the Fifth AML Directive is implemented in the UK, art dealers will become part of the ‘regulated sector’ and will have to comply with AML obligations under the 2017 Regulations. Some of the key changesFootnote 133 that will be faced by art dealers include carrying out risk assessments (reg 18);Footnote 134 establishing and maintaining policies, controls and procedures to mitigate risks (reg 19);Footnote 135 appointing a senior individual to ensure compliance, to screen employees, and to establish an independent audit function (reg 21); appointing a nominated officer (reg 21); establishing systems to respond to enquiries from financial investigators or law enforcement officials (reg 21); training and awareness requirements (reg 24); where classed as a high value dealer, requirements to be ‘approved’ as a beneficial owner, officer, or manager of a firm, or as a sole practitioner by the supervisory authority (reg 26);Footnote 136 doing CDD checks (reg 27);Footnote 137 ceasing transactions where CDD cannot be done (reg 31); doing enhanced CDD checks and enhanced ongoing monitoring, where transactions involve a person in a high-risk third country or a PEP (reg 33);Footnote 138 doing simplified CDD where there is low risk (reg 37); reliance on third parties (reg 39); and maintaining records (reg 40).
Failure to comply can result in a civil penalty and/or a public statement being issued censuring the dealer (reg 76). A penalty can also be imposed on an officer of the company for AML failures (reg 76). Supervisory authorities can suspend or remove authorisation to carry on business (reg 77), impose restrictions (reg 77), or impose prohibitions on management (reg 78). Part 8 also sets out, inter alia, powers that supervisory authorities have in AML information gathering and/ or investigation, eg powers to require information (reg 66), entry, search and seizure (regs 69–70), and retention of documents (reg 71). The ML Regulations 2017 also set out criminal offences (regs 86–88, 92).
One positive aspect of applying the AML requirements to the art market will be an increase in transparency, one of the stated aims of the Fifth AML Directive. Related to this is that being part of the regulated sector is itself an important change: as the 2018 Strategic Assessment of Serious and Organised Crime stated: ‘The risk to regulated sectors from money laundering is heightened when interacting with the unregulated sector, where similar money laundering risks exist from a lack of due diligence and awareness’.Footnote 139 Thus, being part of the regulated sector might increase trust by customers and potentially increase business. However, there are also negative consequences. For example, given that many big dealers and auction houses are already complying with the AML regime,Footnote 140 the impact of new requirements will be disproportionately felt by small businesses. A further consequence, especially for small businesses, is that complying with AML obligations is not cheap and the costs will be borne by dealers.Footnote 141 There are obvious costs in terms of time, salary, training, implementing policies and procedures, IT, and access to relevant databases (though, of course, in many instances the costs of compliance are simply passed on to customers). In addition, there are unintended consequences of AML. So, for example, dealers might become more risk averse leading to ‘de-risking’.Footnote 142 In other sectors, there is evidence of, inter alia, remittance firms being de-banked and correspondent banking accounts being closed due to banking sector concerns as to AML compliance.Footnote 143 A further consequence is that art dealers might end up engaging in KYCC (or, knowing your customer's customer)Footnote 144 – which might enhance transparency, but also increases costs. Given its impacts, any extension of the AML regime ought to be justified, yet, as we argue below, the AML regime fails in this regard.
4. AML: an AGILE response?
In terms of the repressive aspect of AML, in the UK art dealers are subject to the criminal law provisions under POCA 2002.Footnote 145 In other words, dealers can be prosecuted for money laundering offences – yet, the reality is that prosecutions of art dealers are rare. In terms of preventive aspects of AML, change is afoot. Art dealers are now to be added to the list of regulated sectors in both the US and the EU, reflecting a wider trend in the responsibilisation of private actors in combating money laundering. There are concerns with this expansion of the AML regime. It is not our intention in this paper to dispute that the art market is vulnerable to money laundering. Indeed following recent, and high profile, claims that the market is being used for money laundering and that antiquities are being sold to fund terrorist activities, it is perhaps unsurprising that the market is now facing regulation in this regard. The justifications are, nevertheless, not entirely convincing. Moreover, the continuing expansion of the AML regime and the list of actors/sectors subject to stringent requirements is difficult to justify, not least given sustained concerns as to efficacy.Footnote 146 To critique the expansion of AML, this section adopts La Vigne's analytical approach to regulatory measures against crime: AGILE (adaptable; germane; incentive-based; legitimate; and evaluated).Footnote 147 Applying this analytical approach, we argue that the extension of the AML regime is not justified.
Regulatory responses must be adaptable to specific crime problems and their situational contexts. And regulators must also adapt to evolving contexts. The experience of AML illustrates the regime's adaptability over the past three decades, both in relation to displacement into different sectors and to the proceeds from different types of criminal activities. Initially the focus of efforts to follow the money centred on proceeds related to drug trafficking, and the laundering of such proceeds through banking institutions. Over time, the regime has expanded beyond banks to other financial institutions and designated non-financial businesses and professions (DNFBPs). Thus, today the regime extends to lawyers, estate agents, accountants, casinos and more. And, as this paper demonstrates, AML is now being extended to the art market. Further, AML is no longer concerned solely with proceeds of drug trafficking; in essence it encompasses all ‘dirty money’ (including, of course, proceeds of white collar crime). Thus, it can be seen that AML, globally, has proved adaptable, extending far beyond what could have been envisaged in 1989 when the FATF was established.
A successful regulatory response must also be germane to actors, places, and jurisdictional contexts. It is ‘critical to identify the people who are best positioned to identify and implement regulations, along with the tools and resources they need to be successful’.Footnote 148 Debates about AML, its reach and effectiveness are attracting particular attention in this regard, most recently with suggestions that there is a need for an EU-wide AML body.Footnote 149 As Tom Keatinge of RUSI argues, ‘despite the transnational nature of most money-laundering schemes … the global response remains trenchantly national’.Footnote 150 In terms of key (national) actors, most notable here is the role of law enforcement agencies (such as the National Crime Agency and the Metropolitan Police in the UK) and AML regulators (such as HMRC and the newly-established Office for Professional Body Anti-Money Laundering Supervision (OPBAS)). Those subject to the AML regime are also key, given that they are tasked with policing the front-line.Footnote 151 An oft-overlooked actor is the legislator or public official. La Vigne notes that these ‘are the least proximate to crime problems and yet have the greatest means of developing new regulations to combat them, particularly in the context of organized crime’.Footnote 152 In the AML context, it is important to also mention the role of international authorities, most notably the FATF and the EU. The FATF Standards and the various EU AML Directives have directly influenced the continued – at times unrelenting – expansion of national AML regimes globally. And, crucially, these international authorities play a central role in monitoring and accountability, such as through the Mutual Evaluation Report (MER) process.Footnote 153
While it might be self-evident to say that a successful AML regime demands coherence, if not cohesion, amongst these actors the reality is otherwise. It is no surprise then that AML is regarded by many as failing.Footnote 154 There is often limited coherence, or consistency, between different state actors (eg police and regulators); legislators (whether at the national or international level) appear steadfast in determinations to expand the AML (and CTF) regime too often with little consideration given to enforcement; private actors tasked with policing the front-line are all too often – and understandably – reluctant to take on such a role for a variety of reasons (eg financial costs; not regarding AML as properly being their role; not having the capacity or ability to undertake such a policing task); the law (in the form of both primary and secondary legislation) is often overly complex; too often the emphasis is on ‘box-ticking’ (eg for private actors, to comply or at least be seen to comply with their AML obligations; for national governments, to satisfy the FATF MER process). Indeed, given that the objectives of AML are themselves unclear,Footnote 155 the lack of coherence should come as no surprise.
The next consideration is incentivising compliance. As La Vigne states,
Regulations alone are toothless absent effective enforcement, but enforcing regulations is a labor-intensive and expensive undertaking. Understanding and responding to the underlying incentive structures of the actors that regulations aspire to influence can enhance the reach and effectiveness of such measures.Footnote 156
Central here is who ought to undertake AML – law enforcement agencies or private actors. As noted earlier, there is significant dispute in the AML context as to the responsibilisation of private actors. And, it must be noted, there are benefits to AML compliance, such as preventing the firm being the ‘victim’ of money laundering activity; protection against reputational risks; preservation of integrity; use of compliance information in developing new services or marketing activities; and raising awareness of risks amongst employees and enhancing professionalism within the firm. On the other hand, there are significant drawbacks to AML compliance, such as scaring off clients; conflicts between compliance and other (profit-making) aspects of business; and the bureaucracy involved in compliance.Footnote 157 Moreover, it might be cheaper for a particular company to not comply with their AML obligations and to pay the subsequent fine if discovered. (Of course potential criminal prosecution is another consideration in such circumstances). Thus, some suggest, there may be a need for the state to incentivise compliance.Footnote 158 In the UK AML regime, however, there is no such incentivisation; rather the approach is to use the stick (ie the threat of sanction) to ensure compliance. Experiences to date would suggest that this approach is not working.Footnote 159
It is well established that legitimacy is important in ensuring compliance,Footnote 160 however the term ‘legitimacy’ remains contested.Footnote 161 Essentially, legitimacy is concerned with questions of normative compliance with laws and rules, and whether the regulated people recognise those laws (and enforcement bodies) as being rightful and just. Ultimately, if laws and rules are not seen as legitimate, then people are unlikely to comply.Footnote 162 An empirical evaluation of the legitimacy of AML in the art market is beyond the scope of this paper, not least given that the AML preventive regime does not (yet) apply to most art dealers.Footnote 163 Instead, we focus on some ways that the AML regime has been counter-productive or has had unintended consequences. For example, as Grabosky states, ‘A common outcome of regulatory policy is the tendency for non-compliance to be displaced into other areas within or beyond a regulatory jurisdiction or policy domain’.Footnote 164 As already mentioned, the initial focus of AML was on ‘dirty money’ in the banking sector. One of the effects of that emphasis was to displace money laundering to other sectors. Subsequently it was deemed necessary to extend the AML regime beyond banks, to also encompass DNFBPs. One effect was to infringe on legal professional privilege, where solicitors are now expected to report any suspicious transactions by their clients, an issue that has proved particularly controversial.Footnote 165 Even within the banking sector there have been unexpected consequences, such as the closing of accounts of remittance firms.Footnote 166 Inevitably, this impacts upon the market, with the potential for smaller remittance firms, in particular, being forced out of business or for firms having to open lower quality accounts elsewhere.Footnote 167 In other instances, there have been claims that banks have closed customer accounts on the basis of nationality.Footnote 168 Such consequences inevitably undermine the legitimacy of the AML regime.
Finally, it is important that the AML regime be subject to evaluation. We consider evaluation in two respects: first the value of cost-benefit analysis (CBA); and, then, the need for ongoing evaluation. The difficulties in measuring AML efforts must be acknowledged. Simply counting the number of suspicious activity reports received in a particular time period,Footnote 169 for example, is virtually meaningless. Too often, policy documents simply presume the need for, and value of, increased AML rules, often without any supporting evidence. Indeed, as noted earlier, one of the criticisms levelled against extending the AML regime to art dealers is that ‘the basic justification for this legislation – that art and antiquities are used to fund terrorism – is unproven. The premise for this legislation, and this is extremely important, is not based on fact but unfounded opinion’.Footnote 170 One tool that can prove useful in evaluating state intervention is CBA,Footnote 171 and some commentators argue in favour of applying CBA to AML.Footnote 172 CBA does, however, have its detractors, on the basis of, inter alia, not everything is quantifiable; numbers don't tell us everything; there may be a lack of neutrality in analysis; how do you carry out a CBA when goals are not always clear; full and accurate data may not be available; it is difficult to include displacement effects in a CBA; and there are difficulties in measuring ‘benefits’ and ‘costs’.Footnote 173 The difficulties of applying CBA in the AML context are starkly evidenced in the ECOLEF project (examining the legal and economic effectiveness of AML in 27 EU Member States).Footnote 174 Given the limited information available, and the wide variations even when statistics were available, a comprehensive CBA proved impossible. Instead, the authors conducted a CBA for a hypothetical countryFootnote 175 based on the available statistics. Even then, they conclude, ‘it is possible to estimate most of the costs, but hardly any of the benefits’.Footnote 176
It scarcely needs reminding that ongoing evaluation is key in terms of ‘feedback mechanisms, monitoring systems and contingency plans, in the event that negative consequences start to become apparent’.Footnote 177 Or, in the words of La Vigne, ‘ongoing evaluation is paramount to assess implementation fidelity, identify backfires, and adapt regulations to minimize those unintended impacts’.Footnote 178 And this is evident in the FATF MER process, though not without strong criticisms.Footnote 179 Three decades after the FATF was established (1989), however, we cannot say with any certainty whether AML works or not.Footnote 180 This is perfectly summed up by Vettori: ‘Although the international community began to focus its attention on money laundering a rather long time ago, there is still very little scientific knowledge about the effectiveness and efficiency of the countermeasures adopted to combat the phenomenon’.Footnote 181 And yet, the AML regime continues to expand. As Grabosky emphasises, ‘interventions whose effects may not become apparent until after the significant passage of time are less amenable to corrective feedback’.Footnote 182 This is indeed true in the AML context, where – rather than taking a step back and re-visiting the AML regime itself – policymakers instead call for yet more regulation.
Conclusion
There are a number of important conclusions that can be drawn from this paper. First, we need to take account of the art crime literature and distinguish between crimes committed against art and crimes committed through art. The former have been addressed by a small but growing academic community, focusing in particular on vandalism and iconoclasm, art theft, fraud and forgeries and looting of art, antiquities and cultural heritage more generally.Footnote 183 Crimes committed through art, however, have rarely been analysed (with the exception of art fraud/forgery) and they could be considered within the literature on other crime areas in which art is being used as a means to commit the offence, such as money laundering or tax offences. One reason why art crimes are considered particularly heinous is that art and antiques are more than just a high-value good that can be replaced. It could even be considered that art knows no individual ownership and should be available to the public as it defines the identity of a particular culture and is therefore of value for both the individuals belonging to these cultures and anybody who wants to learn about them. Art also has a historical value that is not observable to the same extent in most other commodities. One might therefore even claim that art is not a commodity, and special considerations should apply as recognised in UN Conventions and other legislation protecting it.Footnote 184
Applying this rationale to crimes against art such as theft, vandalism and iconoclasm or looting is straightforward. Applying it to crimes committed through art such as, eg, fraud and forgeries is, however, not so simple. Art fraud does not steal a piece of history or take away from a culture's heritage. If anything, it adds to those. In the literal sense, art fraud is a crime committed through art and not against art. Nevertheless, it has without fail been included in the art crime literature but rarely receives specific mention in fraud research. A justification for this categorisation can be found in the literature as art fraud alters art history and can be detrimental to an artist's oeuvre.Footnote 185 We suggest, however, that the reason it is included as an art crime is that its modus operandi is art specific and not easily comparable to any other type of fraud, at least not in the high-end sector where only unique forgeries are created. The distinguishing factor for determining that a crime falls within art crime is hence not that the crime is committed against art rather than through it, but that the modus operandi is art specific. To count other crimes committed through art as being part of the field of art crime it hence needs to be proven that they distinguish themselves clearly through the use of art for the commission.
However, distinguishing money laundering in the art market as art crime might detract from its qualities for comparison in the AML literature. As we have seen in this paper, art crime is not that specific and can be compared to other markets regulated by AML. And it is evident that using art for money laundering purposes is certainly not a crime against art. The fact that money laundering in the art market is comparable to other sectors, and AML regimes are being expanded to include art dealers, also shows that the crime is not art specific and belongs rather to AML research. All downsides of the AML regime that manifest in other sectors are now feared to apply to the art market, showing the high level of similarities between markets. These include the disproportionate burden of AML for smaller dealers, the straining of the relationship between dealers and customers and the subjectivity that will yet again be involved in the filing of STRs. The lack of efficiency that can generally be bemoaned in the application of the AML regime is hence very likely to also manifest itself in its implementation in the art market. It follows that this is a very important research area for AML at the moment, as due to the similarities with other markets, general lessons can be learned when observing how AML is now applied in the art market.
By contrast, we have pointed out that the art market and money laundering through art are different. It appears to be potentially even easier to commit money laundering offences through art than through other commodities, as the market has specific methods of trade that distinguish it from other sectors. Also, the mobility of art objects has specific consequences for money laundering and for crimes committed through art more generally. These differences might not be sufficient to distinguish money laundering in the art market as an art crime, but they are certainly helpful in comparison to other sectors for AML research and policy development. By following closely the implementation process and application of the legislation discussed above on the art market, valuable insights can be gained for AML within a contained and comparatively small sector. Due to similarities with other markets these will have the potential to be generalised and apply to other sectors. Due to their differences they will also give valuable insights into art crime research and the specifics of art market operations in relation to crime. Thus, this developing area offers significant scope for the study of implementation, and application, of AML in the art market from the outset, whether by AML or art crime scholars. Further, as evident in this paper, AML and art crime scholars might collaborate and cross some of their disciplinary boundaries.
