Exploring How India Addresses Transparency, Provenance, And Anti-money Laundering Compliance In The Art Market Today

Introduction

The Indian art market functions through two overlapping but distinct spaces – the primary market, where emerging and established artists sell their works (often through private galleries), and the secondary market, where collectors, auction houses, and intermediaries trade in resale value. In the primary segment, pricing reflects artistic reputation, gallery affiliation, and curatorial positioning; in the secondary, it is speculative and driven by scarcity, provenance, and market sentiment. Between these circuits flows a steady volume of high-value private sales, many of which are conducted off-record through informal agents or closed auctions. What makes this structure distinct is that art operates simultaneously as a cultural good and a financial asset, yet its regulation in India recognizes only the former.

The Antiquities and Art Treasures Act, 1972 (hereinafter referred to as the "AAT Act") treats artworks as heritage objects, focusing on export restrictions and registration, while the Prevention of Money Laundering Act, 2002 (hereinafter referred to as the "PML Act") views financial transactions purely through the lens of banking and securities. This bifurcation leaves contemporary art, often exchanged through private galleries, offshore storage facilities, and transnational auctions, largely beyond the scope of either regime.

The absence of provenance-linked disclosure duties, beneficial ownership reporting, or storage transparency has resulted in a "lemons market", where unverifiable authenticity and opaque transfers erode trust and inflate transaction costs. Auction houses and dealers operate under fragmented tax and customs reporting requirements that capture turnover but not capital origin. At the same time, freeports and bonded warehouses, legally insulated from customs visibility, allow artworks to circulate as shadow assets.

This article argues that India's regulatory design unintentionally subsidises opacity. First, we show how the state's failure to treat art-market actors as financial intermediaries keeps laundering through art both low-risk and high-reward. Second, we use a law-and-economics lens to explain how information asymmetry, fragmented compliance obligations, and regulatory enclaves distort market efficiency and weaken accountability. Third, we examine how the absence of provenance-linked disclosure, beneficial ownership reporting, and storage transparency entrenches a lemons market in which unverifiable authenticity and opaque transfers inflate transaction costs. Lastly, we argue that integrating art-market participants into the preventive framework of the PMLA would bring India closer to global AML standards and help stabilize what has effectively become an unpriced economy of opacity.

Information Asymmetry and the 'Lemons' Market in Indian Art

The near-total absence of verifiable provenance and valuation standards lies at the core of this informational distortion. The resulting uncertainty closely parallels Akerlof's "lemons" problem, when purchasers cannot reliably distinguish authentic works from fraudulent or dubious ones, they rationally discount prices across the board, producing a systematic undervaluation of high-quality assets and setting the conditions for broader market failure. The same dynamic operates in art transactions, when provenance records, ownership chains, and authenticity certificates are either forged or unverifiable, rational buyers discount the value of artworks ex ante, pricing them below their potential worth to hedge against the risk of fraud. The result is adverse selection wherein authentic artworks exit the market because sellers are unwilling to accept undervalued prices, leaving behind a disproportionate number of fakes and high-risk assets.

Regulatory Assumptions and the Framework of Disclosure

A central difficulty arises from the statutory assumptions underlying India's anti–money laundering and cultural-heritage framework. Neither the PML Act nor the AAT Act imposes any disclosure obligations on art dealers, auction houses, or galleries. Under the PML Act, preventive duties attach only to "reporting entities," and art-market participants have never been notified under Section 2(wa). The AAT Act, for its part, regulates export, registration, and the protection of antiquities, but remains silent on beneficial ownership, provenance verification, or the financial history of artwork transactions.

In this context, the statutory framework rests on a simple premise that art is a static cultural object whose legal importance lies in preservation and heritage protection rather than financial movement. This assumption is built into the PMLA's narrow idea of who qualifies as a reporting entity and into the AAT Act's focus on the physical object. If the law starts from the view that art does not operate as a channel for capital, the absence of disclosure duties follows naturally. Art is treated as outside the realm of financial assets, so the transparency requirements that apply to movable capital are not triggered.

Contemporary art markets operate on assumptions entirely different from those imagined in the 1972 or even 2002 legislative frameworks. Art today is routinely used for wealth storage, collateralisation, international transfers, estate planning, and, crucially, for the layering and integration phases of money laundering. Once these financial characteristics are recognised, the absence of disclosure mechanisms becomes not just an oversight but a structural vulnerability.

To understand the problem, it is necessary to distinguish between object-centric regulation and transaction-centric regulation. The AAT Act concerns itself with the physical characteristics, age, and protection of an object. The PMLA's preventive arm, in contrast, is built on tracking financial flows, identifying parties involved, and generating an audit trail of economic activity through mandatory reporting. Since art-market actors are excluded from the PMLA's preventive structure, the regulatory architecture sees the artwork but not the transaction; it records physical movement across borders but not the financial movement underlying each sale.

This conceptual misalignment between the legal categorisation of art and its economic function, creates a n asymmetry. The state's ability to trace illicit capital depends on the existence of pre-transaction documentation. Yet in the absence of any statutory duty to record beneficial ownership, maintain provenance histories, or verify client identity, such documentation simply does not exist. Enforcement agencies are therefore forced to reconstruct financial trails post hoc, usually from bank records, which sharply increases investigative cost and reduces the probability of detection.

As will be explained in the next section, this asymmetric design has significant consequences for deterrence, enforcement efficiency, and market integrity. When art is legally treated as a heritage object but economically functions as a financial instrument, the gap between statutory intent and market reality becomes the structural condition that enables opacity to flourish.

In 2025, the Enforcement Directorate exposed two large-scale frauds involving forged artworks attributed to F. N. Souza, M. F. Husain, and S. H. Raza, together worth over ₹30 crore. In both cases, counterfeit provenance documents were used to justify inflated prices, and payments were layered through intermediaries before the artworks' falsity was discovered. These incidents are not mere criminal aberrations, they are predictable market outcomes in a system where information creation costs (verifying authenticity and provenance) are borne by buyers, while information manipulation benefits accrue to sellers. From a Coasean efficiency standpoint, the allocation of verification costs to the least informed party (the buyer) represents a misallocation of transactional responsibility, resulting in chronic inefficiency. The lack of standardized valuation methodology, acknowledged even by market participants, turns the Indian art market into a price-making rather than price-discovering system. Prices are often set through opaque negotiation or private contracts, detached from objective criteria such as provenance, exhibition history, or restoration records.

This opacity allows illicit funds to be integrated into the legitimate economy through "value fluidity," an artwork purchased for ₹10 lakh may later be resold for ₹1 crore, with no objective benchmark to question the inflation. The FATF typology on art laundering (2023) specifically identifies such "valuation elasticity" as a common laundering mechanism, yet India's framework lacks any requirement for independent valuation or record of resale price differentials.

The broader market effect is the erosion of trust, an intangible yet economically central form of capital. Once buyers suspect that authenticity cannot be credibly verified, they exit or demand deep discounts, reducing liquidity. Deloitte's Art & Finance Report 2019 quantifies this loss – jurisdictions with weak AML and provenance regimes face 8–12% higher average transaction costs due to risk premiums and compliance burdens. This "trust tax" is disproportionately borne by smaller galleries and emerging artists, who cannot afford to institutionalize verification systems. Large collectors and corporate buyers, in turn, shift to foreign jurisdictions, London, New York, Singapore, where due diligence standards create a lower-risk environment. The result is a capital flight from Indian art markets, weakening both domestic creative industries and the state's ability to monitor high-value financial flows. The law's failure to generate credible information has, in economic effect, priced honesty out of the market.

Fragmented Compliance and the Hidden Cost of Opacity

India's regulatory approach to art transactions reads less like a coherent market framework and more like a set of tax-driven rules assembled without regard to how the art market actually operates. The result is a system that manages revenue concerns but leaves the transactional landscape largely opaque. Rules such as Rule 114B of the Income Tax Rules, 1962, which mandates disclosure of PAN details for purchases above ₹2 lakh, and the Goods and Services Tax framework aim primarily at revenue collection. They record the occurrence of a transaction but not its economic substance. What these mechanisms miss is the element of beneficial ownership, that is, who ultimately pays for and controls the asset. The system is therefore transactional but not relational, it knows that something has been sold, but not who the ultimate buyer or controller is.

This vacuum produces a predictable pattern of regulatory arbitrage. Art dealers and collectors can legally fragment large purchases into multiple invoices below the ₹2 lakh threshold, "bunching" transactions to stay invisible to reporting systems. Others route payments through offshore entities, family members, or layered trusts, maintaining formal compliance while evading substantive scrutiny. The law's design invites this behaviour because the marginal cost of evasion (splitting or layering payments) is nominal compared to the marginal cost of disclosure (loss of anonymity). The market thus evolves towards an equilibrium where opacity is the rational choice. From a law-and-economics standpoint, this reflects a negative externality in the Pigouvian sense wherein the private benefit of concealment – tax minimisation, money-laundering, or simple privacy, generates a social cost in the form of weakened market transparency and inflated enforcement expenditure. Since the state must later expend investigative resources tracing the beneficial owner, the absence of ex ante disclosure effectively subsidises opacity. The social cost of this externality is non-linear as transactions proliferate and fragment, enforcement costs rise exponentially because each sub-threshold sale demands separate verification.

This phenomenon is visible in recent Enforcement Directorate cases involving forged artworks, where tracing the flow of funds required reconstructing dozens of micro-transactions across accounts, intermediaries, and shell entities. The investigative difficulty stemmed not from the art's value but from the structural invisibility of small, legally compliant payments. In this sense, fragmented regulation becomes a form of regulatory arbitrage by design, each statute captures a narrow economic objective (tax collection, export control, customs reporting), but none target transparency as an independent public good.

Contrast this with the United Kingdom's implementation of the Fifth Money Laundering Directive, which lowered the reporting threshold to £10,000 and mandated beneficial ownership disclosure even for transactions below that level when they form part of a linked series. This structure internalises the aforementioned externality; it treats opacity as a cost borne by the discloser, not the regulator. The obligation to maintain client identification records effectively prices anonymity into the cost of doing business. By contrast, India's current framework makes anonymity free and transparency expensive, pushing legitimate actors towards under-reporting to remain competitive against opaque rivals.

When market actors price anonymity into transaction strategy, art ceases to function as a transparent asset class. Institutional investors, insurers, and financial institutions, entities that rely on verified provenance and beneficial ownership, either avoid the sector or demand higher returns to compensate for opacity risk. The result is a dual market structure – a small, compliant formal sector overburdened by regulatory friction, and a large, informal art economy thriving on cheap anonymity. In equilibrium, enforcement costs rise, transaction costs increase, and total welfare declines, a textbook case of market failure induced not by absence of law, but by the misalignment of statutory purpose with economic reality.

The Freeport Loophole and Regulatory Arbitrage

Art storage and circulation in India is nominally governed by two AAT Act and PML Act. In practice, neither statute engages with the regulatory vacuum created by freeports and bonded warehouses, even though these facilities now operate as effective safe havens for high-value art. Built under the Customs Act, 1962 to streamline cross-border trade, they permit indefinite storage without triggering customs duties until the goods formally enter the domestic market. The law treats assets inside these warehouses as not yet imported, a legal fiction that produces significant downstream effects. Once art is placed in such a zone, it slips out of the AAT Act's registration and export-control requirements and also avoids the PMLA's disclosure obligations. What emerges is a a space where economically significant art transactions occur but remain largely invisible to the statutory regimes that are meant to govern them.

Under Section 12 of the AAT Act, any antiquity intended for export must be registered and cleared by the Archaeological Survey of India. But the Act is silent on the status of artworks that are imported and then stored in customs-bonded areas without being released into the Indian market. Since no import technically occurs until clearance for home consumption, the ASI's jurisdiction, and by extension, the requirement of provenance verification, never triggers. The artwork can remain in perpetual limbo – legally offshore, physically onshore. The PML Act, in turn, applies only when there is a "transaction" involving proceeds of crime. Intra-freeport transfers, structured as paper movements of ownership or custodial rights, rarely amount to a "transaction" in the statutory sense. The result is a regulatory vacuum in which beneficial ownership can change hands without creating a single reportable event.

By design, the absence of disclosure obligations converts opacity into a subsidised economic good. The cost of concealing ownership is near zero, while the cost of transparency – through registration, valuation, and tax compliance – is disproportionately high. Rational actors respond by using freeports not as logistical hubs but as storage vehicles for undeclared wealth. Art, in this framework, ceases to be a commodity of exchange and becomes a parking asset, a form of static capital that generates utility through concealment rather than circulation.

The Geneva Freeport in Switzerland, governed by lenient customs legislation until the 2010s, became infamous as a warehouse for undisclosed art and antiquities, many later found to be looted or linked to laundering networks. In response, Swiss authorities amended the Federal Act on the International Transfer of Cultural Property to extend due diligence and inventory requirements even within freeports, mandating that owners and intermediaries maintain full provenance records accessible to customs and law enforcement. India, by contrast, continues to rely on customs notifications and departmental circulars to regulate bonded warehouses, with no cross-reference to the PMLA or the AAT Act.

This disjunction between customs regulation and anti-money laundering law enables regulatory arbitrage. An importer can store a painting worth ₹20 crore in a bonded warehouse, transfer custodial title to another entity, and later re-export it, all without triggering either PMLA Section 12 record-keeping or AAT Section 14 licensing obligations. This undermines both fiscal policy and AML objectives as taxable events are deferred indefinitely, provenance chains remain unverifiable, and enforcement agencies are left with no statutory anchor to investigate ownership transitions.

Such freeports generate allocative inefficiency by incentivising storage over exchange. Instead of contributing to cultural circulation or economic productivity, art becomes collateral for off-book wealth. The resulting "storage economy" mirrors the distortions observed in Switzerland and Luxembourg before reform, high-value assets immobilised for secrecy, not aesthetics or commerce. The social cost manifests as lost tax revenue, reduced liquidity in the legitimate art market, and diminished investor confidence.

If India were to address this lacuna, two statutory interventions are necessary. First, an amendment to Section 24 of the AAT Act (power to make rules) could authorise the government to prescribe record-keeping and disclosure norms for artworks stored in bonded warehouses. Second, a targeted notification under Section 2(1)(sa) of the PMLA, expanding the definition of "person carrying on designated business or profession" to include operators of bonded warehouses and freeports handling cultural property, would bring these zones under the reporting regime. Together, these would close the current regulatory gap that treats storage as a neutral act rather than an economically meaningful transaction.

Conclusion

India's treatment of art as a heritage-bound object rather than a financial asset has produced a regulatory blind spot that is no longer tenable. The AAT Act freezes art within an antiquarian frame and the PMLA limits scrutiny to traditional financial actors. This dual structure creates a space where high-value art can circulate without leaving a regulatory trace. Bonded warehouses and freeports exploit this gap by offering storage that is economically meaningful but legally unacknowledged. The result is a system that preserves the symbolism of cultural protection while ignoring the realities of a globalised art market where provenance, valuation, and capital movement are deeply intertwined.

Once art is understood as both a cultural object and financial asset, the logic for transparency will follow. Extending disclosure duties to intermediaries, bringing bonded storage within the scope of oversight, and aligning with emerging international norms are not radical shifts; they are baseline requirements for a market that seeks legitimacy. Until the law recognises art's dual character, India will continue to regulate a world that no longer exists and leave the one that is entirely ungoverned. Integrating art-market participants into the PML Act's preventive architecture would recalibrate incentives and redistribute compliance responsibility. Under this model, intermediaries, auction houses, galleries, and art investment platforms, would perform due diligence analogous to "Designated Non-Financial Businesses and Professions" under the Financial Action Task Force (FATF) Recommendations. The marginal compliance cost imposed on these entities is outweighed by the systemic informational gain to the state, producing a net-positive welfare outcome.

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