Guidelines on combatting Money Laundering and Terrorist Financing

These Guidelines aim to:

• raise awareness in the art market of the threats and risks of money laundering and terrorist financing;
• provide a general framework and understanding of “risk based” anti-money laundering and terrorist financing measures, including the key elements of client, artwork and transaction due diligence;
• help Art Businesses:
  • implement “risk based” anti-money laundering and terrorist financing measures appropriate to the size and nature of their business;
  • identify “red flags” (indicators of suspicious activity) and take appropriate action in response.

Ultimately these Guidelines aim to facilitate transactions in artworks (rather than hinder them) by encouraging responsible practices by all art market participants.

In these Guidelines, we use the term “AML” to refer to measures designed at combating both money laundering and terrorist financing.

These Guidelines are intended for anyone operating in the art market (“Art Businesses”). They are most relevant to those Art Businesses involved in transacting sales of artworks, including but not limited to:

• dealers,
• galleries,
• auction houses;
• art advisors, brokers and other intermediaries; and
• other professionals advising clients on transactions.

Art Businesses providing ancillary services (including but not limited to transport, storage, insurance, inspection and restoration), whilst not directly impacted, may choose to adopt all or some of these measures as a matter of best practice.

Money laundering and terrorist financing are international concerns. They threaten the integrity of the international financial system and its markets, including the art market. As such they are a priority for the Financial Action Task Force¹ and the United Nations Security Council² who continue efforts to raise awareness of money laundering and terrorist financing threats and measures which can be adopted to combat them.

The art market can play its part in combatting money laundering and terrorist financing threats, by being aware of these risks and the methods and techniques used by criminals to disguise the illegal origin of their wealth or the illegal destination and purposes for which it is being used.

Money laundering is the process by which proceeds of crime are « cleaned » i.e. introduced into the legitimate economy to disguise their illicit origin, with notably the aim to prevent their confiscation by law enforcement authorities. To launder the proceeds of criminal activities, such as human trafficking, forced prostitution, drugs, extortion, corruption, white collar crime, armed robbery and theft, criminals use multiple economic operations to introduce these illicit funds into the financial system. Such operations include purchasing and selling currencies and investing in luxury items, real estate, art and similar high value items in attempts to disconnect the proceeds from the illicit activities by which they were acquired. Money launderers rely on anonymity and deception to cover their tracks, disguise the origin of their funds and hide the real purpose behind their business and transactions. Any person or entity involved in business operations aimed at laundering money can be charged with committing a criminal offense.

Terrorist financing refers to activities that provide funds or financial support to individual terrorists or terrorist groups enabling them to carry out their deadly actions. Even if such funds have a legitimate origin, the purpose for which they are used is illicit. Those seeking to finance terrorism resort to the same strategies, schemes and covert operations that money launderers employ to disguise the intended illicit purpose of the funds and anonymize the beneficiaries.

Money laundering and terrorist financing operations fuel crime and corruption. They cannot be carried out without the blind participation of professional intermediaries. Individuals and businesses who are unprepared, unaware or unwilling to be aware of the origin and/or the destination of the money and assets they handle, contribute to illicit proceeds infiltrating the global economy.

Money laundering typically involves the following three phases,

• Placement;
• Layering; and
• Integration

Depending on the techniques used, these phases can occur simultaneously or concurrently.

Placement

Placement describes the process by which money launderers introduce illegal profits (often in the form of cash) into the financial system.  This can be done by breaking up large cash amounts into smaller less conspicuous sums that are then deposited into one or more bank accounts.  The aim of the launderer at this stage is to:

• distance the illegally obtained cash from the source of its acquisition to avoid detection of the underlying criminal activity; and
• make the funds more liquid enabling them to be transferred or transformed into other financial assets (e.g. cheques, money orders etc.).

Layering

Layering is the process of hiding the illicit source and ownership of funds by using a complex system of transactions and transfers to create multiple layers between the illicit source and the funds.  Once cash has been successfully placed into the financial system (see Placement above), launders engage in multiple complex transactions and transfers to disguise and confuse the audit trail and any criminal investigation. Examples of layering include:

• using multiple banks and accounts;
• using professional intermediaries to carry out transactions;
• converting cash into money orders, letters of credit, wire transfers, stocks, bonds;
• purchasing valueable assets such as art or jewelry;
• transferring money electronically in and out of the offshore bank accounts of bearer share shell companies;
• complex dealings with stock and commodities;

Integration

Integration is the final stage of the money laundering process whereby the laundered funds are re-introduced into the legitimate economy which the appearance of having derived from a legitimate source. At this stage it is very difficult to distinguish funds of a legal and illegal origin.

Certain features of the art market make it vulnerable to abuse by criminals seeking to launder the proceeds of crime or finance illegal activities. These include:

• High value goods;
• International market and networks;
• Common use of intermediaries or proxies for transactions;
• Common use of foreign / offshore structures and accounts;
• Culture of discretion. Buyer and Seller often unknown to each other;
• Buying an artwork, artefact or antiquity legitimises cash or funds and converts them into an asset that gains value and can be sold at a later date.

Art Businesses could unwittingly become involved in Money Laundering and/or Terrorist Financing schemes and techniques. They therefore need to be vigilant to Money Laundering, Terrorist Financing and illicit trafficking activities and adopt measures to counter them.

If an Art Business engages in a transaction, knowing or suspecting that a client’s funds or property are the result of criminal activity, it could commit a money laundering or terrorist financing offence. The penalties are severe and may entail:

• criminal liability, including fines and imprisonment;
• reputational damage;
• restrictions imposed on the Art Business’s ability to operate freely, for example the loss of operating licenses.

Adopting measures to detect and prevent Money Laundering and Terrorist Financing is important to identify and stop criminal and terrorist activity and to protect the reputation of Art Businesses and the art market.