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Excerpts from an article on the problem of money laundering and art, followed by links to a couple of related articles:
Self-Regulation in the Art World and the Need to Prevent Money Laundering
Fausto Martin De Sanctis*
Federal Appellate Judge in Sao Paulo, Brazil
Received date: September 09, 2014; Accepted date: September 23, 2014; Published date: September 30, 2014
Citation: Sanctis FMD (2014) Self-Regulation in the Art World and the Need to Prevent Money Laundering. Bus Eco J 5:108. doi: 10.4172/2151-6219.1000108
Copyright: © 2014 Sanctis FMD. This is an open-access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original author and source are credited.

There are reports of crimes committed by employees of museums and specialized companies, usually from collectors and dealers. Investigations in the United States, for instance, show that most (80% to 90%) of the crimes committed in this field are perpetrated by participants in the market, including curators, collectors, volunteers, dealers, appraisers and even professors. The small remainder is attributable to ordinary criminals who know practically nothing about the object of their crimes—other than what they have heard in the media about how easy they are to steal and how much they are worth. Forgers and distributors of fakes, on the other hand, require knowledge and connections in the art world, and sometimes emerge from the artistic milieu or are themselves professionals in restoration.
An important consideration is the confidentiality surrounding dealings in art, except, of course, where dealers are concerned. Buyers and sellers do not seek exposure. Sellers are often embarrassed at having to part with their treasures, and buyers, mindful of this, will avoid adding to their displeasure. Dealers, in turn, are protective of their margins, and prefer not to disclose them.

A general lack of transparency as to how prices are arrived at is a characteristic of this market. We often do not know, for instance, the true worth of museum pieces. Art dealers are by no means consistent either. Some will cut prices to attract customers, while others will categorize or label their items with little regard for market niceties.

Constant forgery of works of art has resulted in a decreased interest on the party of serious buyers. They are increasingly skeptical of an artworks’ authenticity and disinclined to blindly trust many dealers, whether because of the quality of the forgery or misgivings about their intentions.

Fences or forgers engaged in selling the proceeds of crime to an unsuspecting public have also played an important role. Criminals pass forged or stolen items along to fences who in turn sell them to the unwary.

The use of fake identification documents is an added complication. A fence with a fake ID can ask a buyer to call the bank to have a payment order made out to the seller’s fake name. That way the seller is able to skirt bank security procedures.

For example, the two largest auction houses in the world, Sotheby’s and Christie’s, are self-regulated and required to act in good faith in the interest of their clients or consignors. Both have accepted cash payment and are not under any specific obligation to report suspicious operations. Sotheby’s does not prohibit cash payments, but does subject them to unspecified legal restrictions, whereas Christie’s does not even mention any limitations on cash payments, which may be made by electronic transfer, payment order, cash or check.
The issue we face today is that both stolen and legitimate artworks may attract criminals seeking to launder dirty money by exploiting a market that is little known, hard to understand, easily manipulated (by its own actors, such as collectors and dealers), and fraught with problems (theft, robbery, forgery, laundering).

Although traditional money laundering methods, such as the purchase of commodities and real property through the financial system (especially parallel or clandestine financing), through third parties (stooges), and through offshore banks or hawala systems, to drive a wedge between the money and its origins, have long served organized crime, it has moved into other areas, less closely watched and having fewer rules.

As explained by Fletcher Baldwin Jr., a “novel way is through the use of art. Although it sounds strange to think of drug traffickers and arms dealers purchasing famous Renoir’s and Picasso’s, the use of art to launder money is not as strange as it seems; and in fact, it is extremely effective.”

When consigning a piece to an international auction house, a consignment document is issued that contains the name, address and telephone number of the consigning artist, a description of the item or items, price set by the artist, date negotiated, percentage agreed upon between artist and consignee and their signatures, but it says nothing about forms of payment.

Because artworks are considered duty-free, the accompanying fiscal document ought to contain the name of the creative artist, if known, and declare whether they are originals, replicas, reproductions or copies, and evidence may be required that they match those on the import declaration. U.S. customs law has been organized into a Harmonized System, requiring uniform descriptions of goods bought and sold in world trade. A classification system is now proposed for transporters, importers, exporters, customs, and recordkeeping for a high level of uniformity in fees and statistical data. The resulting more objective definitions will allow better measurement and observation on the part of Revenue authorities, reducing the chances of defective descriptions in import and export documentation, and improving the exchange of information among customs authorities, generating more reliable figures, to track all movement of goods across national boundaries.

It is entirely up to international auction houses whether to make out a Suspicious Activity Report if they determine that a payment is not made in good cleared funds. They may require, under penalty of cancellation (in which case the piece may be sold to outside parties), evidence that no money laundering or funds for financing of terrorism are involved (Paragraph 4(c) of Christie’s Standard Sale Contract). It is clear, however, that Christie’s, for instance, only allows payment by the person listed on the invoice—and not a third party.

On the other hand, there are not necessary questions about the origin of the buyer’s money once handed over or deposited, because there is no legal obligation to conduct customer due diligence. And some of them only take payment from those named on the invoice. This could, however, be some third party hired by someone who would rather remain hidden.

Money laundering through art still sparks little interest, given the exacerbated criminality that exists. Nor does the market comply with its obligation to report suspicious transactions (in case of obligation), in part because of lax inspection. There appears to be considerable interest in conducting investigations in the United States, but this comes about after the discovery of some violation of revenue or customs laws, or of suspicious payments through banking institutions.

Examples abound worldwide, and even in Brazil, showing that artworks are transferred into or out of the country for use in the international market, with little apparent regard for the origin of the funds used to acquire the pieces, but concerned entirely with the art itself, as its sole qualification.

Citing Marianne James, Hannah Purkey shows that groups as different as Americans, Italians, the Russian Mafia, the IRA and Colombian cartels are believed to have laundered illegal money through the use of art because of its facility of transport, its high value and its lack of regulation or control.

The approach might, together with others, result in the conception of an efficient legal system that allows preventing money laundering in the art world as well as the apprehension or recovery of purloined, stolen, forged or genuine works of art procured with the proceeds of earlier crimes.
One might invoke the conscious avoidance doctrine, that is, a traditional rule in the United States whereby knowledge is imputed to anyone who engages in willful blindness.
University of Florida professor Fletcher Baldwin Jr., and University of Ohio professor Hanna Purkey, draw an important parallel between real estate and art. Real estate offers some of the best-known methods for money laundering because the properties involved are themselves relatively high in value, are often the subject of speculation, and can even be paid for in cash. There are other similarities between real estate and art. Both are classed as non-financial, and therefore lack the regulation and rigid, standardized controls in place for the financial sector.

One important difference is that art may be transported, appraisers or dealers are easily bought or even made up—inasmuch as no license or qualification is required of them (reputation and experience being sufficient)—and no authorization is even required for dealing in art.

In turn, regulatory agencies pay little attention to the art world.

In the United States, the Patriot Act has properly regulated the real estate market to exclude all criminality, and requires real estate agents to report cash operations of $10,000 or more. Although it does impose reporting requirements on non-financial sectors, Section 365 places no such requirement upon art dealers, as it did for banks, casinos, car dealers and currency exchanges.
The romantic view of art (utility, historical record, expression, imagination and beauty) has no parallel in current practices, especially in a world in which unlawful conduct, including the proceeds of drug trafficking, once restricted to certain industries, now makes inroads in the field. To make matters worse, criminal methods have changed radically in pernicious crimes, such as money laundering.

Its current business sophistication, unprecedented international market, the huge sums involved and its use as an investment by persons indifferent to it and even by criminals would once have been unthinkable.

International auction houses in the United States all follow the Uniform Commercial Code, which does not restrict the use of cash as a form of payment. They may therefore accept cash payments, irrespective of knowledge of illegality or whether the money comes from unlawful activity—this despite the requirement that they act in the best of good faith.

Because they are self-regulated, it is easy to shift responsibility to the consignor and assume no obligation toward the international community.

Observe that according to Erin Thompson, traditional confidentiality has allowed dealers and auction houses to omit information about prior owners. A research paper on Sotheby’s and Christie’s showed that from World War II to the year 2000, some 95% of the objects handled in London came with no indication of where they were found, and 89% listed no historical information. Similarly, less than 1% of Mayan objects auctioned by Sotheby’s from 1971 to 1999 were listed with any indication of where they were found. It concludes by stating that “the great majority of antiquities sold to private collectors in the last fifty years have no provenance.”

Note that the lack of provenance means that the piece is not accompanied by documentation on where it was found or a paper trail showing past ownership (to say nothing of the money flow involved). Still, it cannot be categorically stated that the object was necessarily exported illegally from its country of origin.

Lack of proper rules, monitoring or even interest has caused many launderers to look to this market as a means of cleaning their dirty money, since prices may be established, manipulated and altered at any time.

It is true that dirty money gradually and on a large scale began discovering art and real estate.

Increasing the flow of illegal money allowed organized crime to move in, followed by harmful consequences given the increased danger of fraud, tax evasion and corruption. Art thus became a natural channel for the laundering of illegal money.

Authorities have become aware of problems surrounding the world of art, such as its vulnerability on a whole series of issues and threats (for there are terrorist organizations stealing cultural assets to finance their activities). The large amounts of money involved and the lack of transparency in their negotiations require greater control by the authorities, whose inaction provides unprecedented opportunities for organized crime to launder dirty money. All of this leaves out the hunger for profits of private investors, who view art as just another business in which the first principle would be that business is not built on the beatitudes.

Actual economic impacts are felt whenever a large volume of illegal money is channeled. In the case of art, in the name of the transmission of cultural values, its actors appear to have paid little attention to a number of unlawful practices, most notably tax evasion, money laundering, and even corruption.

In an important observation, Misha Glenny explains that “the shadow economy has become such an important economic force in our world, and yet it is surprising that we devote so little effort to a systematic understanding of how it works, and how it connects with the licit economy. This shadow world is by no means distinct from its partner in the light which is itself often far less transparent than one might suspect or desire.”

Questionable practices on the part of its participants have been permitted in the name of the independence of the industry and its necessary secrecy. All the while, court cases, reports in the international press and several studies have suggested there might be international, organized, illegal conduct behind it.

Nor could the emergence of visible links between organized crime and art be viewed with equanimity, for it could soon spell the end of its market—known as it is for forgeries rather than good practices—and add to this the risk of fostering and perpetuating serious criminal behavior (terrorism) against a backdrop of institutionalized inertia.

Hence the need to reflect on the role of each participant in the industry, so that necessary measures may be adopted to obtain the desired results in a reasonable time, all of this, of course, without prejudice to fundamental rights.

Despite the appearance of regulatory control, the use of art in the laundering of money has attracted organized crime, inasmuch as the authorities lack the training required to spot a potential suspect. Drug cartels—mindful of the inattention or even lack of knowledge on the part of many authorities as to the considerable growth in the use of art as a means of laundering money—have made considerable use of this industry.

There is a need to fill loopholes which ordinary criminal law (protecting property from theft and robbery, public faith, forgery, counterfeiting, copyrights, public health, and drug trafficking) has largely been insufficient to properly suppress given the increase in financial crime arising out of the exponential increase in international crime.

Hence, a clear and systematic ordering of existing rules on money laundering, especially laundering made possible through art, so as to block off any possibility of criminal behavior, must be defended. Here then it would make sense to put every effort into effective crime fighting not restricted to setting up regulations for the sector, but also aiming at the improvement of payment methods and a clearer notion of the kind of work done by NGOs.

Closer attention to banking or non-banking transactions in order to prevent money laundering is not following to business in galleries or international auction houses which have become centers for cultural diffusion and eminently social institutions.

A review of codes of conduct, with proper supervision, to see to it that the practice is taken up to not involve conflict of interest, or, failing that at least a check on whether illegal behavior is being detected and proper sanctions applied. It must be required Customer Due Diligence (CDD), and suspicious activities reports. All sensitive information ought to be analyzed and duly reported. In other words, they ought to be more closely monitored. This brings us to the establishment of a compliance job description or department, for the occasional work done by peers (especially when located outside of the country of negotiation or donation of artwork), because even information on its existence may be faulty and not prevent the artificial inflation of art appraisals, as occurs in real estate, and frustrate sales or open the door to fraudulent acquisitions, forged documents, unconvincing or nonexistent identification, negotiations made in the name of outside parties or trustees, or the involvement of offshore accounts to conceal the true identity of buyer or seller. It is important the refusal of payments in cash, in prepaid access cards, through electronic transfers or other methods that are untraceable and usually are the result of some sort of tax evasion or illegal act. Also, it is mandatory the refusal of payments on behalf of outside parties or trustees, or which involve offshore accounts that mask the true identity of the buyer.
Thus, a rethinking the role of museums, galleries, auction houses, insurance companies and nongovernmental organizations, to get them to adapt to the situation we face is in order, and to do likewise with regard to the way suspicious payments are made, the hazards of which have hardly been assessed.

Self-regulation by art private sector, like art world, can be an obstacle for an efficient combat and prevention of money laundering.

What is called for is an immediate rereading of all mechanisms of enforcement and prevention of money laundering as a general proposition, and all of its myriad forms of expression, but notably in this very important area where enforcement is the reaffirmation of cultural and social traits.

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See original here:

NYTimes: “Valuable as Art, but Priceless as a Tool to Launder Money
Criminals are increasingly using expensive artworks — bought and sold in secret and with little regulation — to hide ill-gotten profits, the authorities say.https://www.nytimes.com/2013/05/13/arts/design/art-proves-attractive-refuge-for-money-launderers.html