Art & Money Laundering: More Than Meets the Eye
With the advent of the European Union’s 5th Anti-Money Laundering Directive (5AMLD), art dealers are now required to conduct customer due diligence (CDD) – in a similar vein to financial institutions. Perhaps understandably, this has caused some confusion and resentment for those in the industry. What does this mean for financial institutions with art clients and are they themselves any better equipped to identify risky customers in this space?
Although not necessarily thought of in pure investment terms, it might surprise you to know that art has outperformed Standard & Poor’s 500 Index by approximately 180% between 2000 and 2018, according to Artprice. It has survived numerous market ‘corrections’ and shows no signs of devaluing any time soon.
Not Always the Picture You See
What is becoming increasingly apparent is that there are multiple uses of art and not all of them are legitimate; clearly the need to include art within 5AMLD is testament to that. Take the interesting case of Raffaele Imperiale. In what has been described by a respected art critic as ‘the most shocking art crime of the 21st century’, a number of paintings were stolen from the Van Gogh Museum in central Amsterdam on 7th December, 2002.
The art had been stolen to order and were sold to a murky, underworld character who went by the name of ‘Pinocchio’. It turned out this was the ‘nom de guerre’ of a high-ranking Camorra gangster who was an associate of the notorious Amato-Pagano clan, namely Raffaele Imperiale. His connection to Amsterdam went back to 1996 when he purchased a ‘coffeeshop’ there. This eventually developed into a massive cocaine trafficking organisation and, concerned about the possible loss of his liberty for a lengthy period of time, the art was intended to be used as a bargaining tool.
There exists in Italian law the ability to reduce the term of a custodial sentence if new evidence is presented to the police that they were not previously aware of. The works of art were eventually tracked down to a Neapolitan country house that was connected to Imperiale; information that was given up after Italian Police arrested 11 members of his crew. Even though he was still ‘on the run’, Imperiale was sentenced by a court to 18 years in absentia for drug offences. Thankfully, the paintings have been returned to their rightful owners.
Furthermore, there are numerous articles that suggest organisations such as Islamic State are selling ancient artefacts, looted from historical sites of interest, on eBay or via Facebook groups. When we are buying art, or anything for that matter, how confident are we that we know who will ultimately benefit from the transaction? We would, I am sure, be hopeful that we aren’t lining the pockets of an already-wealthy drug baron or indirectly funding a terrorist organisation.
What Is a Financial Institution to Do?
To those of us involved either directly or indirectly in the financial services industry, it is expected that we identify and verify the address of a prospect, as well as carry out appropriate screening upon them. Thankfully, the advice to the art industry is to do the same and specific reference is made in 5AMLD to screening for sanctions and politically exposed persons (PEPs) although there is no mention of adverse media, which seems a little odd.
Surely, as a trader in art, you would want to know if a potential new customer has ‘previous’ in terms of laundering money through art deals? This won’t necessarily involve a PEP or someone who is sanctioned. Similarly, if you are a bank who has these types of clients on your books, or you are looking to onboard them, you need to have sufficient confidence that they are aware of the letter, but also the spirit, of the directive and are complying with it. Having a compliance regime that enables better decisions is at the heart of the EU Directives and this is supported by the recently issued guidance from The Wolfsberg Group which talks about effectiveness.
How Best to Identify the Art Fraudster
Despite banks having been subject to AML laws for a lot longer, there are still many that don’t fully implement adverse media screening or aren’t carrying it out effectively. Therefore banks might also want to consider whether they can identify offences like money laundering, fraud, and smuggling from adverse media sources, which, as well as other areas could well be connected to art. It is important to note that dealing in art that involves a financial crime is a predicate to money laundering.
To conclude, don’t leave yourself exposed to bad actors – you or your organisation definitely do not want to be the first to be found culpable in this regard – and consider what value you would place upon your organisation’s reputation. Technology now exists to significantly reduce the investment of resource previously required to effectively carry out appropriate customer due diligence, of which customer screening against sanctions, PEPs and adverse media should be a cornerstone.