Particular Art Market Vulnerabilities to Money Laundering

Particular Art Market Vulnerabilities to Money Laundering

Written by Rena Neville, Head of FCS Compliance – Art Division

The art market is particularly vulnerable to money laundering abuse. Cases in France and the US illustrate some of these risks; the same risks that had been previously identified by the UK’s National Risk Assessment Report.

In March 2024, in France, Mr Guy Wildenstein was recently found guilty of tax fraud and money laundering.  While in 2023, the US indicted a Lebanese collector, Mr Nazem Ahmad, who has been accused of violating terrorist-related sanctions and money laundering.

Three of the techniques used in both cases are similar to those identified in the UK’s last National Risk Assessment Report of 2020. The top risks present in the French and US cases include:

1. Opaque Ownership (offshore structures that hide ultimate beneficial owners)
2. Use of intermediaries (agents, advisors, etc) and
3. International parties

In the US, Mr Ahmad was sanctioned in 2019 as one of Hezbollah’s top donors. In 2021, he is accused of, among other things, using intermediaries and agents to act on his behalf to buy art commissioned through a Chicago art gallery.

In France, Mr Wildenstein was found guilty in 2024 of tax fraud through the use of an extensive set of international trusts and offshore companies.

Taken together the cases underscore the need for art market participants (AMPs) to be vigilant to the risks outlined in the UK’s National Risk Assessment.

Other risks identified by the National Risk Assessment, but not present in these particular cases, are:

• Third party or complex payment methods
• Discretionary prices, i.e. not set by market forces
• The fact that the value of art varies greatly, making it attractive to varying levels of criminals and
• The risk of laundering money through a small number of high value purchases or a large number of low value purchases

The first three numbered red flags (or risks of opaque ownership, intermediaries and international parties) that were present in the Ahmad and Wildenstein cases are more challenging to resolve than the risks identified in the bullet points.

Indeed, the first three risks are often present in the case of sophisticated, wealthy collectors who have taken specialist legal and financial advice to legally minimise their tax liabilities. Distinguishing between these types of clients and transactions and those clients or transactions that may be vehicles to evade taxes; violate sanctions, or to commit money laundering, is particularly challenging for AMPs. Nevertheless, having alerted the market to these risks, the UK government may be less forgiving if an AMP fails to recognise or address them.

Arguably, the art market is better placed to resolve the first two bullet point risks – third party payments and unusually complex payment methods. These risks are consistently identified by the UK and other authorities as red flags.

To minimise these risks, many AMPs have publicly adopted a policy whereby they will not accept third party payments.  Having a stated public policy helps to reduce the risk of offending a client and avoids the dual risks of third party payments and odd or unusually complex payment methods.

The ‘discretionary pricing’ risk is also fairly straightforward for an experienced, well-informed AMP to spot and to make a judgement call.  Pricing legitimacy has become easier to assess as more and more prices are publicly available on the internet.

The last two bullet point risks are more difficult to resolve. These include the wide spectrum of prices for various works of art and the risk of a criminal buying many low value items or a few high value works to launder money.

AMPs’ business judgement and experience may help in resolving these risks. The ability to judge what is reasonable behaviour for a collector comes from an adept client-facing person sensitively asking the client questions, as well as generally gaining insight into the reasonable financial means of the collector with whom they are working.

The National Risk Assessment is unlikely to be updated in 2024. Although it is impossible to predict which risks the UK will identify as making the art market most vulnerable, one might speculate that these cases may influence their decision.

Until the new National Risk Assessment is available, it is important for UK AMPs to be vigilant in identifying and acting on the risks currently outlined in the most recent assessment.  The goal is to steer clear of liability, fines or reputational damage.

^{Written: April 2024}