The US government has become increasingly concerned in recent years over the potential use of so-called high-value works of art (those valued over $100,000) to launder money and avoid US sanctions regulations. A series of advisories (and enforcement actions) have deduced that aspects of the art trade that have traditionally been prized and guarded by participants—anonymity and confidentiality—also make the market appealing for bad actors seeking to conceal both their identity and the source of their funds.
As reported, US government enforcement agencies are now expecting art market participants, including galleries and brokers, to develop compliance and due diligence programmes that will identify these bad actors and stop transactions involving sanctioned persons or entities.
This is an unwelcome regulatory burden for many, but businesses should ignore it at their peril.
Recent advisories from the US government
In October 2020, the US Office of Foreign Assets Control (OFAC, the body that monitors the US economic sanctions regime) issued a non-legally binding advisory to art market participants which identified the art market as particularly vulnerable to bad actors. It sent a message that it may investigate high-value art transactions, initiate enforcement actions in transactions with blocked persons, and scrutinise more closely the sanctions compliance efforts of art market participants. The advisory also clarified that an existing exemption from OFAC—involving the import or export of certain works of art—does not apply to transactions with blocked parties using art as an investment asset or exchange medium.
The OFAC’s Advisory followed its 2019 enforcement action against Nazem Ahmad, an art collector and gallery owner accused of evading US counterterrorism sanctions by using his multi-million dollar collection and Beirut art gallery to finance Hezbollah, and a 2020 report by the Permanent Subcommittee on Investigation of the US Senate Committee on Homeland Security and Governmental Affairs detailing how several Russian oligarchs used shell companies to buy high value art to avoid the sanctions imposed against them. Notably, that report described the art market as the “largest legal, unregulated market in the United States”.
Most recently, in January the US Congress enacted the Anti-Money Laundering (AML) Act of 2020, requiring antiquities dealers to implement measures that will bring them into compliance with the anti-money laundering requirements of the US Bank Secrecy Act.
What does OFAC’s sanction programmes cover?
US sanctions programmes vary in scope: some are country-specific (i.e. Cuba, Iran, North Korea), while others focus on specific activities (i.e. counterterrorism, drug trafficking), specially designated individuals (SDNs) or entities. They may also combine broad prohibitions at the country level with targeted sanctions against specific entities and individuals (i.e. Venezuela, Russia, Nicaragua, and Syria).
The list of blocked countries, activities and SDNs can be found on OFAC’s website. The SDN list contains more than 6,000 names of individuals, groups and entities, designated under sanctions programmes that are not country-specific, and certain individuals and companies owned or controlled by, or acting for or on behalf of, sanctions-targeted countries.
Who is subject to OFAC?
OFAC prohibits US persons from engaging in transactions with parties located in blocked countries or on the SDN list. US persons includes citizens and green card holders, regardless of where they are located, anyone within the US, and all US- incorporated entities and their foreign branches. Sanctions laws can also apply to non-US parties, if they have assets or other contacts with the US, or provide material support and assistance to parties that have been sanctioned.
Moreover, OFAC has a 50% rule prohibiting covered parties from engaging in transactions with parties 50%-owned by one or more blocked persons. Significantly, OFAC imposes strict liability—meaning that a covered person may be subject to fines even if they did not know or have reason to know they were engaging in a transaction with a blocked party. Punishments are tough—art market participants knowingly engaging in a prohibited transaction may find themselves on the SDN list and their US assets frozen.
Who needs to worry about the OFAC advisory?
All art galleries, museums, dealers, auction houses and other art market participants located in the US, as well as all US persons conducting art business anywhere in the world are subject to OFAC. Furthermore, any art market participant, regardless of their geographic location, may also be subject to OFAC if they conduct any business or have assets in the US, or if they facilitate a violation of OFAC by engaging in transactions with blocked persons. In a nutshell, non-US galleries and dealers attending US art fairs, selling art to US clients, employing US persons, owning US assets or using the US banking system need to pay attention to these regulations.
What should art market participants do now?
The advisory encourages art market participants to implement a risk-based sanctions compliance programme and to conduct due diligence to mitigate the risk of transacting with blocked persons. Some participants have established voluntary AML procedures including working only with vetted counterparties, conducting due diligence, prohibiting cash transactions and only transacting through reputable banks. However, these procedures may not be enough for purposes of OFAC.
Parties engaged in a high-value art transaction also need to check all counterparties against the SDN list. OFAC’s 50% rule creates challenges because there are no commercially available screening platforms that offer complete information as to who the ultimate owner of an entity may be. Additionally, understanding how the country specific sanctions work is difficult and may require external legal advice. The OFAC sanctions program is fluid and changes regularly.
To assist, OFAC has provided guidance on how to put together an adequate risk-based sanctions compliance programme. The framework specifies five essential components: (i) senior management’s commitment; (ii) entity specific risk assessments; (iii) implementation of internal controls; (iv) comprehensive and objective testing and auditing; and (v) training programs. OFAC will consider an entities compliance programme when assessing the gravity of a violation and level of fines to impose.
In determining the kind of compliance programme to put in place, each art market participant should assess its specific circumstances. But above all, the advisory and new AML act are clear signals that the US government considers the art market a regulatory vacuum that needs to be filled, and as such, should not be ignored.
- Marie Elena Angulo and Nicole Chipi are attorneys at the Miami office of Jones Day. Marie Elena sits on the Board of Oolite Arts. Nicole is a board member at Locust Projects. The views and opinions set forth herein are the personal views or opinions of the authors; they do not necessarily reflect views or opinions of the law firm with which they are associated.