Give art market regulation a chance

A. Money laundering through art

Money laundering through art is accomplished through investment of ‘dirty money’ in art. ¹² In this scenario, art itself is not tainted, but is merely used as a means by which money or other goods obtained through criminal activities – e.g. through drug dealing, tax evasion or corruption – are ‘cleansed’. ¹³ Money laundering through art occurs as an alternative to other forms of money laundering, such as laundering through the financial, real estate or diamond sector.

The reason for the increasing discovery of art as a suitable means for money laundering purposes may be found in certain characteristics of this kind of good. Being small in size, mobile, easily storable, high in value and subjected to inconsistent and speculative pricing mechanisms, art is regarded as an ideal vessel for funnelling or hiding illegal funds. ¹⁴ Moreover, the confidentiality characterizing transactions in the art market, its opacity and (at least, perceived) insufficient regulation and oversight are considered factors making the art market an attractive arena for laundering activities. ¹⁵

Art may be misused for money laundering purposes in all three stages of a typical money laundering cycle. Such a cycle is commonly divided into a placement, a layering and an integration phase. These steps respectively aim at cutting the link between crime and proceeds, at further transferring and confusing the latter with other assets to achieve the best possible dissimulation of their illegal origin and, finally, at introducing them into the legal economy as seemingly legal goods. ¹⁶

Examples for placement in the art market are the exchange of illegal drug proceeds for art ¹⁷ or its acquisition with misappropriated funds by politically exposed persons (PEPs). ¹⁸ The possibility, at least until recently, to do business discreetly in the art market eases the use of illicit proceeds to purchase art, thereby kicking off the laundering cycle. ¹⁹

The art market has proven to be an ideal environment also for layering operations. These usually consist of multiple, often cross-border, transactions. As this phase is meant to cover up the traces of illegal commodities, it is also known as the step of ‘heavy soaping’. ²⁰ An artwork could be acquired through a shell company and then be sold off again, to make tracing of illicit funds back to their origin more arduous.

Also, since art lends itself well to operations of artificial price setting, it seems particularly suitable also to more complex schemes of trade-based money laundering (TBML), such as customs misrepresentation in the layering phase. ²¹ The particular difficulties in assessing the highly ‘speculative’ value of art, the lack of adequate training of customs agents in order to determine such value and the unavailability of data and resources allowing to establish the ‘fair market price’, usually allow over- or under-invoicing operations to go through without raising suspicion. ²² Like the over- and under-invoicing of goods, the false description of goods is particularly valuable to those who use art to launder their money, as quality and type of the art object are often not easily assessed without the necessary expertise. ²³ The fact that TBML often takes place in Free Trade Zones (FTZs) makes detection even more difficult, as efforts to regulate such areas do not seem to be accompanied by effective enforcement. ²⁴

An example of such a practice is represented by the case involving the import into the United States of Jean-Michel Basquiat painting. The artwork, known as ‘Hannibal’, was presented to United States customs authorities as an unnamed painting with a declared worth of US$100 that was directed to a warehouse situated in Manhattan's Upper East Side. In reality, its actual worth amounts to US$8 million. The painting was part of an immense art collection held by a former Brazilian banker and embezzler which he had assembled, and so used to convert part of his ill-gotten gains. The camouflaged import into the United States served the purpose of further ‘layering’ the proceeds of crime previously ‘placed’ by purchasing the artwork. ²⁵

Finally, the art market is also a suitable platform for the third and last step of the laundering cycle: the integration of cleansed funds into a legitimate economy. ²⁶ Representing a luxury object and status symbol, art attracts illicit proceeds also in the form of freshly cleansed money. ²⁷

B. Antiquities trafficking – not just about terrorism financing

Antiquities trafficking has been recognized as a potential source of revenue for terrorist groups. The operations considered in that regard are those of antiquities being looted in territories controlled by terrorist groups and channelled towards the official art market. The profits made from selling these goods on the art market are diverted back to terrorist groups and used to support them and their activities. ²⁸

Yet the phenomenon of antiquities trafficking goes beyond the issue of terrorism financing. It is a crime against art that deeply affects peoples’ cultural heritage. As a phenomenon it is not limited to antiquities but can have also fine art as its object. ‘Art trafficking’ appears therefore as a more appropriate, all-encompassing expression. Although the lack of consistent data and of reliable measurements makes an estimate of the volume of art trafficking very difficult, ²⁹ it is believed to be considerable and often referred to as the third largest illegal trade, after those in drugs and weapons. ³⁰

Art trafficking consists of the transnational movement of stolen or looted art. ³¹ While art in unstable regions, war zones or occupied countries is particularly endangered, ³² art looting and theft are global phenomena that occur also in times of peace wherever art is located. The destruction of archaeological sites and, with them, of unrecoverable archaeological context in Italy, Greece, Turkey or Mexico, just to name a few, has been followed for decades with concern and indignation by scholars and local communities. In more recent times, the phenomenon has reached an alarming scale due to the constantly growing demand of a globalized art market. ³³ To meet that demand, stolen or looted art enters a transnational supply network and is funnelled towards the official art market. ³⁴ Cross-border displacement of art is necessary because source and market location of unlawfully obtained art, be it antiquities or fine art, rarely coincide.

Countries can be divided into source or market nations depending on whether supply exceeds demand or demand exceeds supply. ³⁵ Most western countries can be classified as market states. The most important art market can be found in the United States, while in Europe the United Kingdom, France, Germany as well as Belgium are among the most relevant marketplaces. ³⁶ Source countries are located across all regions of the world. Prominent examples include Southeast Asia and the Middle East. In Europe the most important art-rich countries are represented by Greece and Italy. ³⁷

The route from source to market is not always straightforward. Before reaching their destination, illegal art objects often pass through transit countries. ³⁸ One can distinguish between states that are transit states because of a geographical advantage and market-transit states. ³⁹ Geographically advantaged transit countries include countries physically close to sources countries so that traders and smugglers almost inevitably pass by them. This seems to be the case for Israel and the Gulf states, which act as a conduit for art leaving the Middle East. Further, the category comprises countries that have a role as a regional hub, as is the case for Hong Kong. ⁴⁰

Market-transit states are states in which services such as auctions, valuation and restoration are concentrated. They play an important role in the movement of art as they ease its entry into final market centres. The United Kingdom, Switzerland or Luxembourg could be cited as examples for such market-transit states. ⁴¹

Art trafficking has several features in common with other forms of illegal trade, especially drug trafficking. Like drug trafficking, it is transnational in nature and involves different forms of crime along the way: looting, theft, selling and receiving stolen goods, corruption, violent crime and white-collar crime. Furthermore, it is often connected to organized crime and to other forms of illegal trade. ⁴² Like drug trafficking, art trafficking also includes an essential link to money laundering. ⁴³

Art trafficking differs, however, from drug trafficking and most other forms of trafficking in its relation to laundering processes. Money laundering is traditionally linked to transnational trafficking phenomena as a subsequent process, employed to maximize the illegal profits of the trafficking by introducing dirty cash derived from such activities into the legal economy. ⁴⁴ In the case of art trafficking, the interplay between trafficking and laundering changes. Trafficked art is rarely intended for an illegal market, as happens with drugs. Art needs to be sold in the legal market to realize its full market value. ⁴⁵

For stolen or looted objects to find their way into antique stores, galleries, auction houses and various e-commerce platforms, their illicit origin must be concealed to create an appearance of legality. This means that, with art trafficking, not the proceeds of the illegal trafficking, but the object itself needs to be laundered. ⁴⁶ More precisely, where art trafficking targets the official art market it takes on a laundering dynamic. This type of laundering can be defined as ‘art laundering’.

In such cases art trafficking operations have an autonomous relevance for art market actors’ obligations that derive from the Fifth AML Directive. The fact that in certain cases art trafficking results in terrorism financing should be regarded not as the only but as an additional justification of the extension of a prevention regime to the market in question.

C. Art laundering – a crime against art

Art laundering pursues the cleansing of illegally sourced art. What distinguishes art laundering from money laundering through art and other ‘traditional’ forms of money laundering are its predicate offences, which are offences against art, like art theft or looting, and its object: art itself. ⁴⁷

Art laundering can be defined as a crime against art for two reasons. First, the criminal activity in question has art as its direct object. As will be seen, art laundering operations often include the damaging of the art in question, as this makes transport easier and recognition of the item and identification of its origin more difficult. ⁴⁸ Second, by facilitating the entry into the official art market, art laundering makes predicate art crimes such as art theft and looting profitable. Not only does art laundering further the effects of its predicate crimes; it can be considered as an incentivizing factor for these offences. ⁴⁹

Art laundering activities consist, like other money laundering acts, in the cover-up of the illegal origin of the proceeds of (art) crime, be it theft, looting, illicit excavation or illicit export, ⁵⁰ that eases the entry into legal economy of the good in question. ⁵¹ Hence, the three-step mechanism of placement, layering and integration constituting a typical money-laundering cycle can be considered to apply also to this phenomenon. ⁵²

The placement stage starts in the aftermath of the predicate offence, any form of looting or theft, and consists in the removal of the art object, be it fine art or antiquities, from its original location, for example by selling stolen or looted objects or passing them on to smugglers. ⁵³

Once it has been ‘placed’, art enters the trafficking stream, a circuit which usually takes it out of its country of origin. This marks the beginning of the layering phase, which includes at times multiple transfers across national borders, towards transit countries, which makes the investigation of the original crimes even more difficult. ⁵⁴

This difficulty increases in cases in which artefacts are obtained through clandestine excavation. As such, they have never been seen (at least in modern times), let alone catalogued and inserted into a database. ⁵⁵ Once removed from the excavation site and shipped abroad, it is extremely arduous to determine the exact origin of an object. ⁵⁶

Additional confusion is usually obtained by shipping stolen artworks and looted antiquities to free ports in market-transit states. ⁵⁷ The privacy granted by only limited oversight over goods entering free ports and transactions carried out there allows for uncomplicated entry even for artworks and looted antiquities of dubious provenance ⁵⁸ and for further ownership transfers and commixture with items of legal collections, ⁵⁹ as in the case of the Etruscan antiquities trafficked by Giacomo Medici out of Italy to a Geneva warehouse. ⁶⁰

In the same warehouse a Modigliani painting, Seated Man with a Cane, which had been taken from a Jewish Parisian art dealer during the German occupation, ⁶¹ resurfaced after being lost for decades. ⁶² As it formally belonged to an offshore corporation registered in Panama, whose beneficial owner could not be identified, the family of the art dealer was unable to obtain the restitution of the painting. It was only when the Panama Papers uncovered the identity of the sole shareholder of the offshore company that the ownership dispute could move forward. ⁶³

Free ports are also ideal environments to kick off the integration phase. For art laundering, this stage is usually divided into two sub-parts: justification and investment. ⁶⁴ Justification consists in the active simulation of a mask of legitimacy, through the restoration of items that were previously dismantled or damaged to allow for easier smuggling and through fabricated invoices, reports, contracts, agreements or deeds. ⁶⁵ Such documents contribute to the establishment of a fake ownership history that aims to corroborate the dissimulation of the illicit origin achieved in the layering phase. ⁶⁶ Subsequently, the now seemingly legal goods, originally stolen or looted artworks and antiquities, are relatively easily provided with the necessary export documentation to leave transit states for further circulation towards market states where the integration phase will be completed with investment. ⁶⁷

Investment consists of the injection of cleansed property into the official economy: illegal antiquities and fine art are sold onward and shipped to dealers in the final market country. The sale of these items in the official art market concludes both the trafficking and the laundering processes. ⁶⁸

Since art laundering activities are usually characterized by a transnational dimension, predicate offences and laundering activities are often not committed within the same jurisdiction. While the art laundering activities described here generally fit the description of a money laundering offence, for such operations to be criminally relevant under national money laundering statutes in the jurisdictions where the trade takes place, it is crucial that predicate offences against art, which are committed abroad, are recognized as predicate offences in these jurisdictions. ⁶⁹

This is not generally problematic regarding offences of unlawful taking, be it theft or looting. In contrast, offences of unauthorized export of cultural property may not always find a counterpart in jurisdictions with a less thorough cultural heritage protection framework and hence not be considered as predicate offences for the purposes of money laundering. This highlights how an international agreement on a common denominator for core offences against art, as proposed by the 2017 Council of Europe Nicosia Convention on Offences relating to Cultural Property, ⁷⁰ would be an important step not only to close a protection gap, but also to ensure that a broader range of offences against art, be it fine art or antiquities, trigger nationally applicable money laundering statutes every time tainted works of art are introduced as seemingly legal goods into the art market.

A. Varying scope of application due to different notions of ‘works of art’

The Fifth AML Directive extends AML and CTF obligations to persons trading or acting as intermediaries in the trade of works of art, including when transactions are carried out by art galleries and auction houses. ⁸⁰ The same obligations apply to persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports. ⁸¹

The Directive seems to envisage a broad spectrum of art market participants including galleries, auction houses and free ports as well as intermediaries in the trade of works of art. A combined reading of different provisions of the Fifth AML Directive suggests an understanding of ‘trade in works of art’ as an umbrella term that covers not only the trade in fine art but also in antiquities, as the EU lawmaker has attributed to the trade in cultural artefacts and other items of archaeological, historical, cultural and religious importance, or of rare value a particularly elevated risk of money laundering or terrorist financing that requires enhanced costumer due diligence. ⁸²

However, as the EU lawmaker has not provided an explicit definition confirming this broad understanding of ‘trade of works of art’, it is up to national definitions of this concept and, more specifically, of the notion of ‘works of art’ to determine more precisely which traders are covered by the new rules. ⁸³ This leeway in defining the scope of application of the new AML and CTF rules has, indeed, resulted in discrepancies among national implementations. These arguably reflect a different sensitivity towards the necessity to introduce stricter regulation not only for the market in fine art but also for the antiquities trade.

While legislation in countries that could be defined as market (or market-transit) countries, like the United Kingdom or Germany, tends to follow a more liberal approach, laws in states with considerable wealth of antiquities, source countries such as Italy or Greece, seem to have implemented the Directive as including a wider range of market participants.

The applicable legal frameworks in Germany, and in the United Kingdom, which implemented the Directive before Brexit, have aligned the national definitions of ‘works of art’ with the one provided in the laws on value added tax in force in the two jurisdictions. ⁸⁴ This concept covers paintings, drawings, engravings, sculptures and other objects that can be entirely executed by hand. ⁸⁵ Antiquities, which are not explicitly mentioned, are included insofar as they qualify as paintings, drawings, engravings, sculptures etc. Antique furniture, coins and stamps collections, on the other hand, remain excluded from this definition. ⁸⁶

Conversely and to dispel any doubts in this regard, the Italian lawmaker has explicitly mentioned the ‘trade in antique objects’ in the national provision implementing this part of the Directive. ⁸⁷ Similarly, the Greek law implementing the Fifth AML Directive specifically covers also ‘antique objects of value’. ⁸⁸ By making an explicit reference to the antiquities trade as a sector to which AML and CTF obligations are extended, the Italian and the Greek law also cover the trade in antique furniture, coins and stamps collections excluded under German and British legislation.

The lowest common denominator for national implementations of the Fifth AML Directive seems to include participants in the trade of fine art and of antiquities that can be defined as ‘works of art’ as in the case of antique paintings, sculptures, reliefs, engravings. An all-encompassing coverage of antiquities market participants in general, on the other hand, appears to be provided mainly in those Member States whose legislation reflects a protective approach towards the national cultural heritage and, hence, a more restrictive attitude towards the antiquities trade altogether.

B. A risk-based approach to new obligations

Whenever transactions have a value of €10,000 or more, obliged art market actors must assess the risk of money laundering their activity is facing. ⁸⁹ Compliance duties do not, however, follow a one-size-fits-all approach. Rather, needed compliance measures are identified according to a risk-based approach. ⁹⁰

This implies a certain flexibility for obliged entities in identifying a form of compliance that responds to the risk assessed for their specific business. The entity of the efforts depends on the size of the art business, but also on the types of customers, on the type of goods traded, on the country they operate in and on the type of distribution channels they use: for example, face-to-face transactions bear a different risk coefficient than online or telephone sales. ⁹¹

In response to the money-laundering risks identified, galleries, auction houses and free ports must establish internal policies, controls and procedures. ⁹² These must be approved by senior management, monitored and, if necessary, enhanced. ⁹³ To ensure internal organization is adequate to face money laundering and terrorism financing risks, staff must be made aware of them and be regularly trained to recognize operations that could be related to money laundering or terrorism financing and to deal with them correctly. ⁹⁴ As the extent of the required organizational effort depends on the individual capacity of the undertakings, larger businesses in the art industry will be held to higher standards than smaller establishments. ⁹⁵ While larger businesses might be in the position to consecrate a whole internal division of their company to manage and monitor compliance, in a smaller gallery one person may have to perform multiple roles. ⁹⁶

Finally, compliance duties do not represent an obligation to achieve a specific result, but a best-effort obligation. ⁹⁷ What obliged entities must be able to demonstrate to competent authorities is that the measures enacted are appropriate vis-à-vis the risks of money laundering and terrorist financing that have been identified. ⁹⁸

C. Customer due diligence

The above-mentioned internal policies, controls and procedures comprise customer due diligence. Customer due diligence measures must be applied to both sellers and buyers, in other words, the vendor and the purchaser of a work of art. Art market actors must attribute them a risk score, which will determine the nature of the due diligence checks. ⁹⁹

The obligation to conduct customer due diligence allows art market actors to make a (more) informed decision on whether to engage in certain transactions. This obligation is designed to prevent situations in which art market participants become part of laundering activities without being aware of it, be it out of a genuine ignorance or because of wilful blindness.

Galleries, auction houses and free ports must apply customer due diligence measures every time they enter a business relationship and, in the case of occasional transactions in cash, when the value of said transaction amounts to €10,000 or more, regardless of whether the transaction is carried out in a single operation or in several linked operations. In addition, customer due diligence is necessary whenever there is suspicion of money laundering or when there are doubts as to the veracity or adequacy of previously obtained customer identification data. ¹⁰⁰

Customer due diligence includes know-your-client procedures (KYC) according to which obliged art market actors must identify their customers and verify their identity based on documents, data or information obtained from a reliable and independent source. In addition, any person purporting to act on behalf of the customer must be identified, and their identity and the authorization to act on behalf of the client must be verified. ¹⁰¹

Similarly, reasonable measures must be undertaken to identify beneficial owners. Where the customer is a legal person, a trust, a company or a foundation, obliged entities must be satisfied that that they understand the ownership and control structure. ¹⁰² Corporations and other legal persons must provide information on the legal owner as well as on the beneficial owner. ¹⁰³

The Fifth AML Directive now requires that if it is not possible to identify a natural person as the beneficial owner of a legal entity and the senior managing official is hence regarded as the real owner, galleries, auction houses and free ports must verify the identity of the natural person who holds that position and shall keep records of the actions taken and of the difficulties encountered during the verification process. ¹⁰⁴ This rule should from now on prevent transactions, such as the ones regarding the Seated Man with a Cane, in which beneficial owners can hide behind intermediaries and shell companies and avoid facing restitution claims by rightful owners or their heirs.

Customer due diligence requirements comprise an assessment of the business relationship by obtaining information on its purpose and intended nature. Since a customer's circumstances, such as his residence or occupation, may change over time, ongoing monitoring is required to ensure that the transactions are consistent with the obliged entity's knowledge of the customer and the risk assessment performed at the outset of the business relationship. ¹⁰⁵ These obligations apply not only to new clients, but also to existing ones. Monitoring and, where necessary, updates of the initial assessment must occur throughout the business relationship at appropriate times on a risk-sensitive basis or whenever relevant circumstances of these clients change. ¹⁰⁶

Art professionals must refuse to carry out the transaction or terminate the business relationship if it is impossible to fulfil all the required compliance measures. ¹⁰⁷ In addition, if the professional knows, suspects or has reasonable grounds to infer that money laundering or terrorism financing has been committed or is being committed, even if just in the form of an attempt, a suspicious transaction report must be submitted to the national Financial Intelligence Unit (FIU). ¹⁰⁸

Documents acquired in compliance with customer due diligence requirements as well as supporting evidence and transaction records must be kept for five years after the end of the business relationship or after the date of an occasional transaction. ¹⁰⁹ This obligatory record keeping should ensure, in future, more transparency and traceability of art transactions, which will facilitate inquiries into an artwork's ownership history.

D. Enhanced due diligence

To manage and mitigate appropriately cases of higher money laundering and terrorist financing risks, obliged entities must examine as far as reasonably possible the background and purpose of transactions that are complex, unusually large, conducted in an unusual pattern or do not have an apparent economic or lawful purpose. They must obtain additional information on the customer and the beneficial owner and increase the frequency of the risk assessments contributing to the ongoing monitoring of the business relationship, to determine whether these transactions are suspicious. ¹¹⁰

To this end, obliged entities must consider risk factors linked to the type of customer, to the geographical area involved in the transactions or business relationship and to the product, service, transaction or delivery channel. The Fifth AML Directive includes transactions related to cultural artefacts and other items of archaeological, historical, cultural and religious importance among the factors indicating such increased risk. ¹¹¹ The need for enhanced due diligence is understandable also considering the speculative nature of prices achieved in the art market ¹¹² and the risk that unusual transactions might entail money laundering (through art) operations.

The inclusion of transactions related to cultural objects among the factors indicating a higher risk also suggests a consideration of a potential art trafficking scenario by the EU lawmaker. The sensitivity towards the risk of these goods being linked to criminal activity is also reflected in the import restrictions and prohibitions included in the Regulation 2019/880 on the introduction and the import of cultural goods. The Regulation prohibits the entry into the customs territory of the EU of items that are important for archaeology, prehistory, history, literature, art or science, ¹¹³ and that were removed from the territory of the country where they were created or discovered in breach of the local law. ¹¹⁴

Considering that whenever art trafficking targets the official art market, an art laundering operation is involved, enhanced due diligence measures for transactions involving cultural artefacts are crucial to prevent exposure to risks not only of money laundering through art, but also of art laundering. Indeed, at least as far as offences of art theft and looting committed abroad are concerned, dealing with the proceeds of such offences as if it were legal art, and hence engaging in art laundering, is likely to fall under the scope of application of a national money laundering statute.

A. Too heavy a burden?

The new measures imply costs in terms of organizational effort, especially regarding data management and data protection, in terms of time, personnel, training, as well as in terms of reduction in privacy. ¹¹⁹ Stakeholders argue that the changes introduced by the Fifth AML Directive will be felt particularly by smaller businesses since larger ones often already have compliance systems in place. ¹²⁰

It is, however, debateable whether that burden is excessive for smaller dealers and whether it impacts relations between dealers and customers in a way to result in the overall loss of business by obliged actors. ¹²¹ A first argument in that regard refers to the above-described risk-based approach chosen by the Directive, according to which efforts and compliance standards expected from art market participants will differ depending, among others, on the size of the business and its specific risk level. ¹²²

Furthermore, a look at other non-financial businesses to which AML and CTF regulations have been extended in the past reveals that initial scepticism by market participants is usually not followed by an overall damage to the business and that as market actors familiarize with the new obligations, these reveal themselves as manageable and, finally, useful to ensure the preservation of a solid reputation of the sector which, in the end, has positive effects on the development of the business itself.

The experience of the Belgian diamond industry, to which AML and CTF obligations have been extended over 15 years ago, shows that the introduction of new rules to a previously ‘unregulated’ sector almost naturally encounters resistance from stakeholders. It also suggests that in the short term the adjustment might require some work and may even result in the loss of some business. ¹²³

However, this experience has also demonstrated how, especially with the support of sector bodies, initial difficulties can be overcome and the fulfilment of due diligence requirements facilitated: as a sector body, the Antwerp World Diamond Centre (AWDC) has lowered the threshold for compliance in practice by drafting KYC templates, developing guidelines for client acceptance and drafting letters for clients explaining the Belgian AML regime, which defeated the impression that the due diligence checks originated from a climate of distrust and thereby made it easier for Belgian diamond traders to keep their customers and to obtain the necessary documents. ¹²⁴

Developments in the diamond industry indicate how, in the longer term, sceptical attitudes tend to shift due to such practical support and in view of the positive effects of compliance that manifest themselves over time. Compliance efforts have, indeed, contributed to the reestablishment of the reputation of this market, which has led to commercial benefits: as a ‘clean’ sector the diamond industry attracts business that previously hesitated to engage with this market as it was considered a ‘money laundering hub’. ¹²⁵

A look at the concerns and issues currently faced by art market participants and at practical solutions already being discussed shows how there are considerable parallels with the diamond industry. Key concerns regard the relationship between art businesses and their clients. In that respect, it appears that new AML and CTF obligations may indeed have an adverse impact. Identity checks, the meticulous verification of clients’ source of funds and wealth, and the duty to report suspicious transactions could create friction with clients used to a culture of privacy and discretion. ¹²⁶

Customer due diligence could affect also the ‘flow’ of deals since these measures tend to slow down the speed of transactions. This could prove to be an issue particularly during art fairs. Especially when organized in other countries, as for instance in Asia, art fairs are an opportunity for art dealers to reach a different client base. The need to request from new clients a series of documents at the outset to ensure KYC procedures are respected could hold up proceedings for several days or encounter a lack of understanding on the part of clients that are not familiar with such requirements. There is a risk that this could jeopardize both new business relationships and individual transactions. ¹²⁷

However, there is already feedback from art professionals suggesting that while AML and CTF rules entail costs and are likely to affect business relationships and transactions, overcoming many of those inconveniences has been less challenging than expected. For example, by giving existing clients key information on customer due diligence as well as reassurance on how information collected will be managed and protected ahead of time, resistance by clients could be avoided. In fact, it is likely that most art collectors are used to these kind of procedures as they must provide similar information also in other lines of business. ¹²⁸

Similarly, a solution to the loss of precious time when entering new business relationships at art fairs could be found in practice, by getting art fairs to pre-register potential clients. ¹²⁹ And while this option has not been explored yet, it shows how practical adjustments have the potential of alleviating at least part of the additional burden new AML and CTF obligations have brought along.

As the art market embarks on a journey similar to the one of the diamond industry and it seems to encounter comparable challenges, it appears reasonable to expect an analogous development: that with the intervention of sector bodies art businesses, even smaller ones, over time will adjust more easily to their new obligations and that sceptical positions will change to a conviction of the importance of more transparency for the good reputation of the art market and, thereby, for its sound growing.

B. Between displacement and effectiveness

The question regarding the effectiveness of AML and CTF measures goes hand in hand with the question about the quantity of money, the proceeds of crime, being laundered. ¹³⁰ Critics maintain that claims on the volume of money laundering – in general, not just in the art market – are not supported by known facts. ¹³¹ Moreover, regulation of the art market is considered to even have the counter-productive or, at least, unintended outcome of displacing non-compliant behaviour beyond the scope of application of the rules in question. ¹³² The migration of illicit behaviour to a different jurisdiction or a different market would neither effectively reduce the number of laundering phenomena in general nor impact the perpetration of predicate offences.

However, crime displacement is not a necessary consequence of regulation. The phenomenon depends on the extent of the applied prevention measure as well as on the nature of the offender's motivation and his decision-making process as well as on his actual ability to relocate his criminal activity. ¹³³ While recognizing that art market regulation might result in a partial displacement of criminal activity, this paper stresses that greater transparency resulting from the application of AML and CTF rules to the art market will significantly impact especially those laundering operations in the art market that are intimately linked to art trafficking: art laundering. Art laundering operations lack the flexibility needed to relocate to another arena. In other words, laundering of drug money may take place in the financial market, but may also be transferred to the art market and from there to yet another, less regulated, sector if need be. In contrast, illegally sourced fine art and antiquities can only be laundered in the art market.

As AML and CTF rules make art laundering riskier and more difficult, these are likely to reduce not only art laundering operations but art trafficking, theft and looting as well. Unlike illegal drugs which are sold and generate profit on the illegal market, while subsequent money laundering operations are aimed at maximizing that profit, the target of most stolen artworks or looted antiquities is the official art market. In those cases, laundering is essential to make underlying offences profitable at all.

Art laundering dynamics make sure that market demand acts as a steady driving force behind theft and looting of art. ¹³⁴ Since art dealers, auction houses and free ports stand at the gateway between the legal and the illegal sphere, like a Janus figure, they are in the most favourable position to disrupt art laundering dynamics. ¹³⁵ Extending compliance obligations to this sector will impose more selectivity in the demand for cultural artefacts, which is likely to reduce chances and opportunities to launder illicitly sourced art into the official art market. This, in turn, should disincentivize art trafficking, including those antiquities trafficking operations that aim at financing terrorist groups. ¹³⁶

Geographical displacement of art laundering activities, on the other hand, remains a likely consequence, as criminal operations tend to move towards jurisdictions with a less regulated art market. There is, moreover, the risk that not only illicit behaviour, but also legitimate trade may migrate towards more liberal environments. ¹³⁷

Differences between art market regulation in the EU and in the United States may lead to a geographical displacement in favour of the American market. The United States lawmaker has recently introduced a law bringing the antiquities market within the scope of application of the federal money laundering statute. While Section 6110(a) of the United States Anti-Money Laundering Act (AML Act) of 2020 includes persons ‘engaged in the trade of antiquities’ in the notion of ‘financial institutions’ and, hence, among the entities subjected to compliance obligations as set out in the Bank Secrecy Act (BSA), ¹³⁸ the same does not apply to the ‘fine art’ sector. Given that the American art market is the largest art market in the world, this asymmetry compared to rules applied to the EU market for fine art opens the gate to displacement of illicit and of legitimate art business towards the United States.

However, the risk that stricter regulation may result also in the loss of legal business to the advantage of more liberal arenas cannot be an argument against including the art sector under the EU AML and CTF regime. Rather, it advocates for a global response to the global issue of art theft, looting, trafficking and laundering. ¹³⁹ In this perspective, the fact that the United States lawmaker has already ordered a study on the facilitation of money laundering and the financing of terrorism through the trade in works of art in view of a possible extension of AML and CTF rules also to that sector ¹⁴⁰ must be welcomed as it suggests that the asymmetry between EU and the United States art market regulation will be limited in time. ¹⁴¹

C. What about proportionality? The values at stake

The question about proportionality assesses whether the introduction of AML and CTF rules to the art market is like taking a sledgehammer to crack a nut. A reflection on this topic requires considering, first, the values at stake and, second, whether these values could be protected through less invasive means.

To examine the values stricter art market regulation intends to protect, it is crucial to remember that money laundering – and art laundering as a specific declination of that offence – is not a victimless crime. ¹⁴² It alters, first of all, the normal functioning of the economic system. ¹⁴³ The prejudice to the economic order or even more specific values such as fair competition seems to be the main concern of EU AML legislation, ¹⁴⁴ as reflected in the preamble of Council Directive 91/308/EEC on prevention of the use of the financial system for the purpose of money laundering (First AML Directive), ¹⁴⁵ Directive 2005/60/EC of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing (Third AML Directive), ¹⁴⁶ Directive (EU) 2015/849 of the European Parliament and of the Council on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing (Fourth AML Directive) ¹⁴⁷ and Directive (EU) 2018/1673 of the European Parliament and of the Council on combating money laundering by criminal law (Sixth AML Directive). ¹⁴⁸

Second, considering that the very essence of every laundering activity consists of the concealment of the illicit nature or origin of proceeds of crime, the hindrance of the identification of the proceeds of crime is an inherent part of each laundering operation. ¹⁴⁹ As laundering impedes or, at least, slows down the emergence of the predicate crime, every act of laundering negatively affects the administration of justice. ¹⁵⁰

Third, and with specific regard to art laundering and its incentivizing effect regarding other crimes against art, the values at stake also include art as the cultural heritage of a society. The art of a society can be considered a manifestation and a mirror of its culture, while the existence and awareness of a common culture is intimately tied to the existence and awareness of a sense of community. ¹⁵¹

The interest in the preservation of cultural heritage is strongly connected to human rights. ¹⁵² According to the Fribourg Declaration on Cultural Rights, cultural rights are to be considered as human rights and, as much as other human rights, they are an expression of and a prerequisite for human dignity. ¹⁵³ The Universal Declaration of Human Rights and the International Covenant on Economic, Social and Cultural Rights similarly establish a fundamental link between cultural heritage and human rights, as they recognize one's right to realization of their cultural rights that are essential to their dignity ¹⁵⁴ and to take part in the cultural life of their community. ¹⁵⁵ Even more explicitly, the UN Committee on Economic, Social and Cultural Rights affirmed in its General Comment No 21 that cultural rights are an integral part of human rights. ¹⁵⁶ The increasing importance of the human rights dimension inherent in cultural heritage protection has also been recognized in the report of the independent expert in the field of cultural rights, Farida Shaheed, who observed the shift towards cultural heritage protection as a ‘crucial value for individuals and communities in relation to their cultural identity’. ¹⁵⁷

On the European level, the Council of Europe Framework Convention on the Value of Cultural Heritage for Society (2005 Faro Convention) similarly recognizes every person's right to engage with cultural heritage as an aspect of the right freely to participate in cultural life. ¹⁵⁸ This right is defined as including, among others, the right to benefit from cultural heritage both individually or collectively, ¹⁵⁹ to participate in the process of study, protection and conservation, ¹⁶⁰ and to have access to cultural heritage. ¹⁶¹ The European Commission underlined the essential role of cultural heritage as a defining factor of people’s identity and acknowledged that it ‘is a powerful instrument that provides a sense of belonging amongst and between European citizens’. ¹⁶²

Stricter art market regulation, as introduced by the Fifth AML Directive, is intended to prevent criminal activities affecting, in the case of money laundering through art, the normal functioning of the economic system and the administration of justice, and in the case of art trafficking, the integrity of cultural heritage and all such values when it comes to art laundering. At the same time, where these offences are nonetheless committed, an obligation for art professionals to make the necessary background checks allows the disqualification of the attitudes of turning a blind eye and allegations of ignorance as to the illicit origin of the art or, as far as money laundering through art is concerned, the ill-gotten gains in question. Tighter art market regulation facilitates the assessment of the mental element with regard to the laundering offences in which art market actors may be involved. It thereby ensures a more effective application of national money laundering statues for money laundering through art activities and those art trafficking dynamics that result in art laundering operations.

A reflection on values must include all involved interests. Accordingly, next to the general interest in preventing and punishing offences affecting the functioning of the economic system, the administration of justice and the cultural heritage of humankind, there is a need for art professionals (and especially smaller businesses) to avoid organizational costs that may have a negative impact on the relation to clients and on the business in general.

Weighing supra-individual, universal interests such as the protection of the functioning of the economic system and of the administration of justice or of cultural heritage against the economic interest of a group of individuals, on an abstract level, would impose favouring the protection of the former at the expense of the latter. Such an evaluation could change in concrete cases in which sacrificing the interest in avoiding administrative burden and economic disadvantage would be ‘unnecessary’ due to an only remote possibility of activities damaging the above-mentioned universal interest being carried out.

This paper argues that the administrative burden imposed by stricter art market regulation cannot be considered unnecessary. First, whenever individual transactions in a market reach a volume of several million dollars – as is the case with the art market, there seems to be an inherent laundering risk, and introducing increased control obligations is required regardless of the availability of empirical data on the frequency of money laundering through art offences. ¹⁶³ Second, as far as art trafficking and art laundering offences are concerned, their widespread occurrence is epitomized by stolen or looted fine art and antiques found time and again in galleries, antique shops, auction houses and free ports – the case of the Modigliani painting being a suitable example. ¹⁶⁴

As the in concreto analysis also suggests that the above-mentioned general interests should prevail over the individual interests, the examination of the proportionality of the rules introduced by the Fifth AML Directive must evaluate whether stakeholder interests are interfered with more than is necessary to protect the functioning of the economic system, the administration of justice and the integrity of cultural heritage. Could such protection have been achieved through less invasive measures?

As has already been discussed above, soft-law measures such as the guidelines published by the Basel Institute in Governance or the so-called ‘Responsible Art Market Initiative’ (‘RAM’) have proven to be ineffective due to uneven and frequently too lenient application. ¹⁶⁵ In light of this, and given the urgency to protect the first set of values, it seems difficult to argue that the imposition of hard-law due diligence obligations implies a disproportionate burden for art market actors – even more so as compliance efforts and costs can be tailored to the dimension of their business and to the concrete risk they are facing.