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Theodore Kobus, Craig Hoffman Named to Cybersecurity Docket’s Incident Response 50 for 7th and 3rd Time, Respectively

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On Jan. 1, 2021, Congress passed the Anti-Money Laundering Act of 2020 (AMLA) which expanded the definition of “financial institution” to impose anti-money laundering (AML) requirements on persons “engaged in the trade of antiquities, including an advisor, a consultant, or any other person who engages as a business in the solicitation or the sale of antiquities.”<a href="#1">[1]</a> The AMLA also directed the Secretary of the Treasury, in coordination with the FBI, the Attorney General and Homeland Security Investigations, to launch a study to identify potential money laundering risks throughout the entire art market.<a href="#2">[2]</a>  On Feb. 4, 2022, the Treasury Department released its findings on the money laundering risks related to high-value art and recommended regulatory and nonregulatory practices to address these risks.<a href="#3">[3]</a> The study found that the high dollar values of single transactions, ease of transportability of works of art, long-standing culture of privacy in the market, and use of art as an investment could make the market ripe for money laundering. Cash purchases, lack of transparency into private transactions, subjectivity of prices and use of shell companies further increase susceptibility to money laundering. The Treasury Department noted three common money laundering schemes likely to affect the high-value art market: (1) offering and accepting art as payment to integrate illicit proceeds into the financial system; (2) buying art with illicit proceeds, holding it for extended periods of time and later selling it for a profit; and (3) using art as collateral for loans to disguise the original source of the funds.  The study assessed vulnerabilities across different market participants, including auction houses, galleries, art fairs, online marketplaces, museums, universities, nonprofits, third-party intermediaries, art financiers, banks and art storage facilities. The study recognized that each type of market participant faces different levels of risk. For example, some institutional participants like art auction houses and galleries that have due-diligence procedures for identifying potential buyers have a lower money laundering risk than do participants in the online art market, such as exchanges that host digital art transactions. The Treasury Department recommended that art financiers and intermediaries adopt similar procedures to identify the buyer in a transaction to reduce money laundering risk.  Significantly, the study found that the emerging online art market creates new money laundering risks. After the onset of the pandemic, online art sales soared to $12.4 billion in 2020, more than double the online sales of the previous year, through gallery and dealer websites, online art fairs and viewing rooms, and social media platforms. The virtual nature of the market creates more obstacles to verifying buyer identity, strains resources of smaller institutions and makes it difficult to regulate peer-to-peer transactions in third-party marketplaces. Additionally, technological innovations in the digital art space, like non-fungible tokens (NFTs) based on blockchain technology, create unique and unprecedented challenges to AML practices. In the first three months of 2021, NFTs generated $1.5 billion in trading and grew 2,627 percent over the previous quarter. Direct peer-to-peer NFT transactions and the ability to instantaneously conduct cross-border transactions make the digital art market susceptible to exploitation without associated costs that would typically raise regulatory flags. The study recognized that fraudsters could use illicit funds to purchase an NFT, engage in multiple resales among themselves to project legitimacy and artificially inflate the NFT’s price, and eventually sell the NFT to a buyer for clean money. The differences in the structure and operation of NFT platforms make it difficult to implement standardized due-diligence protocols and identify these types of transactions.  To address money laundering risks in the traditional and digital art markets, the Treasury Department recommended several regulatory and nonregulatory actions for market participants and government agencies, including:  <ul> 	<li>Market participants could create information sharing programs to enable buyer transparency and grant government access to information in investigations.</li> 	<li>Government agencies could increase their focus on financial crimes involving high-value art in guidance and training for law enforcement to better understand how to identify and investigate such transactions.</li> 	<li>FinCEN could seek more detailed information from institutional market participants to disincentivize criminals to launder funds through that market or impose comprehensive AML measures on certain art market participants.</li> </ul>  <a id="1" name="1"></a>[1] H.R. Rep. No. 6395, Public Law 116-283 (2020).  <a id="2" name="2"></a>[2] AMLA, § 6110(c).  <a id="3" name="3"></a>[3] U.S. Dep’t of Treasury, Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art (2022), <a href="https://home.treasury.gov/system/files/136/Treasury_Study_WoA.pdf">https://home.treasury.gov/system/files/136/Treasury_Study_WoA.pdf.</a>

Treasury Department Releases AML Study on the Art Market

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