Art Law Report Header-1

U.S. Senate Report Takes a Swing at Money Laundering in the Art Market But Strikes Out on Substance

Posted by Nicholas O'Donnell on August 12, 2020 at 2:41 PM

A recent report by the U.S. Senate Permanent Subcommittee on Investigations (headlined by Chairman Senator Rob Portman, Republican of Ohio, and Ranking Member Tom Carper, Democrat of Delaware) has drawn widespread attention for its damning statements about the international art market. Focusing on purchases of art from major auction houses by Arkady and Boris Rotenberg, two Russian nationals described as “oligarchs” by the report, the Subcommittee makes a series of pronouncements about the supposed prevalence of money laundering in the art market, and the need for regulation to address this perceived problem. Yet upon closer read, the report is a recycling of clichés about the art market, a detailed description about the considerable diligence by the auction houses far beyond what any even theoretical regulation would require (thus begging the question of what lesser regulation would accomplish), and no discussion or empathy at all for the vast majority of small art businesses that could not possibly comply with such regulation and stay in business, let alone actually combat money laundering. In other words, in concluding that two men laundered money, the Senate committee deduces that the practice is rampant. This hardly follows as a matter of logic. Far from supporting the case for sweeping financial regulation of the art market, the report unintentionally makes the opposite point.

The report is 150 pages long and not easily summarized. But in critical respect, it looks at the art buying practices of the Rotenbergs, who have been placed on the U.S. sanctions list related in particular to Russia’s invasion of Ukraine in 2014 (style points at least: the report includes a color photograph of one of the Rotenbergs participating in judo with Vladimir Putin). That sanction includes a prohibition on any related entities doing business in the U.S., yet apparently a number did so to purchase art at auction in New York. As is often the case, they allegedly made these purchases with the assistance of an art advisor, based in London. That advisor, Gregory Baltser, in a statement to the New York Times, denied any wrongdoing but would not confirm or deny a relationship with the Rotenbergs.

The report repeatedly decries the Rotenbergs’ use of what it calls “shell companies.” This is deeply lazy. The capital structure of corporations exists for myriad legitimate reasons, as the Subcommittee knows perfectly well. The purchase of assets in a limited liability company or corporation no more implies wrongdoing than the creation of a trust for estate planning purposes. Yet the report uses the phrase, again and again, to imply that the mere existence of these single purpose entities is a red flag that should have stopped the auction houses in their tracks. This is disappointing, all the more so because doubtless many of the investigators and Senators use such single purpose entities to buy and sell real estate. Why? Because that way investors are shielded from the liability of the corporations. Think that’s just for rich folks? It’s the same reason you don’t get sued for the debts of a company whose share of stock you own, and thus one of the bedrock drivers of economic activity and investment. Another pet peeve: the report amplifies the tired claim that the “art industry is considered the largest, legal unregulated industry in the United States.” Auctioneers are absolutely regulated. The Uniform Commercial Code, as adopted by the various states, governs the vast majority of transactions involving merchants. There is no specific agency devoted to the art market, but suggesting that it is pure laissez-faire is simply wrong.

What, then, does the report propose? It suggests that the Treasury Department “maximize its use of suspicious activity reports (‘SARs’) filed by financial institutions,” and that the Office of Foreign Assets Control (OFAC) should “issue comprehensive guidance on the steps auction houses and art dealers should take to ensure they are not doing business with sanctioned individuals or entities.”

How would this be done? It would take legislation, some of which is already on the table. There is pending currently a bill that would revise the Bank Secrecy Act to include antiquities dealers, and impose that law’s requirement to file SARs and report any cash transactions over $10,000. It would not apply to auction houses or art galleries—a similar bill that would have was proposed two years ago but went nowhere. It also fails to define “antiquities dealer” with any specificity. Yet the major auction houses named in the report as sellers to the Rotenbergs performed customer diligence substantially in excess of what would be required by any regulation under discussion, and through no fault of their own, nonetheless did not perceive the Rotenbergs as the ultimate buyer. And these are businesses with substantial and sophisticated compliance departments. Imagine requiring a gallery with a median selling price of $5,000 to make such reports. It would require a full time department where many such businesses don’t even have a staff. The bill passed the House of Representatives last fall and was reported to the Senate, but there has been no legislative action on it since.

The pending regulation would address one of the major complaints of the report, namely the ultimate beneficial owner (UBO) of an entity. It is, after all, called the Corporate Transparency Act of 2019, and would compel the filing of beneficial ownership information with the Financial Crimes Enforcement Network (FinCEN). That might, in theory, have uncovered who the UBO of the Rotenbergs’ LLCs were, but only if they were incorporated in the United States (which a sophisticated money launderer would obviously then duly avoid). Put another way, a Jersey or Cayman LLC who is the winning bidder at a New York auction wouldn’t be covered, and would be left to the auction houses’ KYC.

The point is that none of the measures proposed would have the effect desired by the report. The better course continues to be gaining buy-in from the market itself. Full disclosure: I am proud to be on the Advisory Committee of the Responsible Art Market Initiative, about whose work I have written many times here, and to co-chair its New York chapter. RAM has compiled country guides for money laundering rules (I submitted the U.S. version), and also created a Transaction Toolkit. These in turn include red flag checklists with respect to the art, the counterparty, and very much include the risks attendant to Politically Exposed Persons (PEPs) and sanctions lists, for which the Rotenbergs would clearly qualify based on their presence on the U.S. sanctions list. Will this expose every criminal trying to buy art? Of course not. But neither will a U.S.-based entity database, nor disclosure of financial tools like cash that are barely a factor in practice.

Is transparency an issue in the art market? 100% yes. No art business wants to be used for money laundering, however, that makes the business a victim of a crime. Even assuming for the sake of argument the villainy of the subjects of the Senate report, its broad strokes about the art market and use of two easy bogeymen are uninformed and ultimately of little use. One of the report’s most stinging accusations is that the auction houses failed to ask Baltser for whom he was buying art. There is no question that anonymity increase the possibility of mischief, but that anonymity is also enshrined in law, particularly in New York.

Political grandstanding in an election year is nothing new and expensive art is an easy straw man to hoist up, but if you want to learn about the art market, Washington, DC is not the place to do it. And if anyone thinks OFAC is positioned to compile a useful report on the market, then I have (a painting of) a bridge to sell you.

Topics: OFAC, Vladimir Putin, Uniform Commercial Code, House of Representatives, New York Times, Responsible Art Market initiative, Money laundering, FinCEN, Financial Crimes Enforcement Network, Permanent Subcommittee on Investigations, Boris Rotenberg, oligarch, shell companies, suspicious activity reports, Banking Secrecy Act, Politically Exposed Persons, Arkady Rotenberg, Treasury, ultimate beneficial owner, UBO, Corporate Transparency Act of 2019, Tom Carper, Office of Foreign Assets Control, Rob Portman

Sullivan logo

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.

Meet the Editor

Subscribe to Blog

Recent Posts

Posts by Topic

see all