Art Law Report

FinCEN Signals Suspicion of Art Market Even Before AML Study Begins

Posted by Nicholas O'Donnell on March 23, 2021 at 9:52 AM

In connection with the late-2020 amendment to the Bank Secrecy Act (BSA) to include “dealers in antiquities” as a result of its inclusion in the National Defense Authorization Act (NDAA), the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has issued a notice of “Efforts Related to Trade in Antiquities and Art.” The notice is a combination of guidance to entities now covered by the BSA, but it is also a potential backdoor around the entities that Congress chose not to regulate with respect to potential or perceived money laundering risks: art dealers. It also raises concerns about the objectivity of the forthcoming study of the art market that Congress instructed FinCEN to conduct. In either event, it is further evidence that momentum continues to gather for stricter oversight and regulation of the U.S. art market, and the importance of the art trade demonstrating more transparency and diligence if it hopes to modify or mitigate that regulation.

As I've explained here and in a January article in The Art Newspaper, the NDAA brought “dealers in antiquities” within the Bank Secrecy Act’s requirement to file Suspicious Activity Reports (SARs). Banks, of course, are the primary object of the Bank Secrecy Act, and they are already obliged to file and do file SARs. What this new notice does is an interesting bridge from what the legislation does to where FinCEN clearly believes legislation is going. It states, “Financial institutions with existing BSA obligations, including the reporting of suspicious activity, should be aware that illicit activity associated with the trade in antiquities and art may involve their institutions.”

Recall, however, that the NDAA was a narrower version of an earlier 2018 (the Illicit Art and Antiquities Trafficking Protection Act) bill that would also have added “dealers in art and antiquities,” a bill that never became law. It asks current filers to provide detailed information about the objects and transaction parties (including their physical or virtual location). It also asks for information about beneficial ownership—also part of the NDAA’s focus, but beyond it insofar as the Corporate Transparency Act in the NDAA is addressed only to domestic corporations. The recent notice also confirms that FinCEN is in the process of drafting proposed regulations, but gives no timetable yet for their promulgation.

Can FinCEN ignore this Congressional expression and expand what appeared to be a narrow antiquities-focused mandate? The short answer is yes, but it has to do some work to get there. FinCEN has every authority to remind those “with existing BSA obligations” of potential reasons that they might need to file SARs. To use a different example, “laundry services that use only cash” is not a category of entity obliged to file SARs, but FinCEN could absolutely issue a notice like this one encouraging those already subject to the BSA to be on the alert to suspicious activity in that sector.

But that is not really what FinCEN is doing. What FinCEN is really doing is a clandestine first step in the study of the art market it was ordered to undertake. It is using existing reporting obligations to compile examples of suspicions of money laundering in the art market. That is within the law and there is nothing at all wrong with it in isolation.

The biggest issue with this approach, however, is that it clearly assumes the existence of the problem before the study has begun. A study of potential money laundering and terrorist financing in the art market must begin critically and objectively. Otherwise, every individual act of wrongdoing will be seen as proof of a larger pattern because that larger pattern was assumed before it was demonstrated to be true.

This all exposes as well a constant tension largely often from the breathless and largely anecdotal news coverage of supposed crime in the art market. To repeat: the art market lacks transparency associated with other sophisticated commodities markets. It is inefficient as a result. But criminals seeking to exploit those inefficiencies do not make the professionals that they deal with into criminals in their own right. Just because someone could launder money by buying art does not prove or even tend to prove that there is a notable level of that activity happening. And it ignores that in most of these scenarios, the art dealer is the victim, not the perpetrator.

There is one aspect of the new regulation on which I think both proponents and opponents agree: it is far more show than substance if the goal is to reach those with the specific criminal intent of making ill-gotten proceeds appear legitimate. Opponents often scoff at the idea of self-regulation like the Responsible Art Market Initiative, but that brings to mind another area of the art trade with which I have particular experience: Nazi-looted art. Thirty years ago, provenance that included a sale during the Nazi period was no obstacle at all to the purchase or sale of a work of art. No one is more impatient than I about how much progress we have or have not made since then, but as I’ve written in A Tragic Fate, there is no denying that provenance gaps and obvious fictions are commercially unacceptable in a way that they were not a generation ago. There are many, many reasons for that evolution but one reason is that market standards evolved in response to self-regulation. The major auction houses made it their policy to inquire and demand resolution of potential Nazi-looted claims, but they didn’t do so because Congress required it. I believe the same is true here.

Topics: The Art Newspaper, Nazi-looted art, Antiquities, Terrorist financing, Responsible Art Market initiative, Money laundering, FinCEN, A Tragic Fate, Financial Crimes Enforcement Network, Illicit Art and Antiquities Trafficking Protection, suspicious activity reports, Corporate Transparency Act of 2019, Bank Secrecy Act, National Defense Authorization Act

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About the Blog

The Art Law Report provides timely updates and commentary on legal issues in the museum and visual arts communities. It is authored by Nicholas M. O'Donnell, partner in our Art & Museum Law Practice.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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