The U.S. art market is facing mounting scrutiny from the U.S. Treasury Department’s Office of Foreign Assets Control – (“USTD”) and (“OFAC”) respectively – over the adoption of regulatory compliance measures for businesses. Yesterday, OFAC issued an Advisory urging “galleries, museums, private art collectors, auction companies, agents, brokers, and other participants in the art market” to develop risk-based sanctions compliance programs in light of the high-value of works dealt with.
As the Advisory posits, certain features of the market for high-value works make it attractive to those engaged in illicit financial activity, including a lack of transparency and a high degree of anonymity and confidentiality. These ‘certain features’ include established trade practices, such as opacity of buyer and seller identities, artwork provenance, and the secretive nature of deals generally.
High-value art transactions – which OFAC considers as dealings in artworks at an estimated value of $100,000 or more – may enable blocked persons to bypass the U.S. market and financial system in breach of OFAC regulations – namely, OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”). Art market participants (AMPs) and other luxury goods dealers, who are routinely viable channels for maligned actors to launder money, are therefore advised to develop “risk-based due diligence” protocols.
To assist art businesses in meeting their sanctions compliance obligations, the Advisory refers to OFAC’s published framework for the five essential components of a risk-based SCP. “Depending on the company’s size and sophistication organizations are advised to implement the key elements of compliance as follows: (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.”
The U.S. Treasury Department have previously alerted art dealers to the schemes of illicit actors. In July 2020 the U.S. art industry came under the microscope in a Bipartisan Senate Report released by the Permanent Subcommittee on Investigations, which called the marketplace “the largest legal, unregulated market in the United States”. The investigation revealed how billionaire oligarchs Arkady and Boris Rotenberg evaded U.S. sanctions through illegal art purchases, and the extent to which an unregulated industry, obscure shell companies and loopholes in legislation had undermined U.S. security laws. Among other reforms, the Report calls for the Bank Secrecy Act (“BSA”) to include art dealers in its list of business sectors that are subject to anti-money laundering (“AML”) regulations.
In another example, a March 2020 report to the United Nations North Korea Panel of Experts describes galleries and exhibitions in Beijing and Hong Kong hosting works of art produced by the UN-designated Mansudae Art Studio based in Pyongyang. Given the precarious nature of such transactions, OFAC in 2019 set out the crux of AMP sanctions obligations in an online FAQ, stating “[art market participants] must ensure they do not engage with persons listed as Specially Designated Global Terrorists (SDGTs) on OFAC’s SDN List or with persons otherwise blocked pursuant to Executive Order 13224, unless authorized by OFAC U.S.”
Critically, the Advisory points out that the “Berman Amendment” – an exemption to the International Emergency Economic Powers Act (IEEPA) and the Trading with the Enemy Act (TWEA) which safeguards American’s rights to exchange “information or informational materials” including “artworks” – does not provide latitude to deal illicitly in artwork and escape OFAC regulation and enforcement. “To the extent the artwork functions primarily as an investment asset or medium of exchange,” OFAC will enforce the sanctions law.
Thankfully, members of the art community can perform due diligence using OFAC’s online search engine, which will “provide the names of, and identifying information for all individuals and entities or sanctions lists”, in addition to broader internet research on the prospective seller or buyer, as art lawyer Thomas Danziger suggests. Danziger also notes the importance of contracts as a legal instrument, so it may be prudent for AMP’s to include clauses that prohibit money laundering and other acts. Finally, OFAC’s FAQ also recommends the option – which may require tailoring depending on the business – of commercially available screening software packages.
In sum, not only has the federal government become sensitive to the art market’s lack of transparency, but even the issuance of this advisory, while not legally binding, may be hinting at the introduction of tougher regulation on the U.S. art market. It also strongly indicates OFAC’s enforcement posture and its likely response if an art market participant were to commit a sanctions violation. To anyone considering a high-value art transaction with a blocked person – seek guidance or a license from OFAC.