United States: Expanded Measures Impose AML Overhaul On Art And Antiquities Market

On July 28, 2020, the U.S. Senate Permanent Subcommittee on Investigations released its findings on the role of the unregulated art market in undermining U.S. sanctions policies and facilitating criminal activity.¹ The Subcommittee identified specific vulnerabilities in the art market, such as anonymous purchasing through the use of art dealers and offshore shell companies to conduct transactions, and it made recommendations to address the gaps in the anti-money laundering ("AML") regime.² On January 1, 2021, Congress passed the Anti-Money Laundering Act of 2020 ("AMLA") within the broader National Defense Authorization Act, imposing significant AML reforms, some of which target the art and antiquities market.³

Under the new measures, persons "engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities" are now required to meet certain record-keeping, reporting and other compliance requirements as "financial institutions" under the "BSA."⁴ The new regulations now require art and antiquities traders to have the five pillars of the Bank Secrecy Act (BSA): (1) a system of internal controls to ensure compliance, (2) independent AMLA compliance testing, (3) a designated BSA Compliance Officer, (4) ongoing employee training and (5) risk-based customer due diligence procedures.⁵

While further guidance is forthcoming, the Financial Crimes Enforcement Network ("FinCEN") has already provided specific guidance for antique and art traders to identify and report suspicious activity using Suspicious Activity Reports ("SARs") that may be captured in the AML infrastructure.⁶ Businesses are required to explain how the suspicious activity relates to "antiquities" or "art" and to provide details that may assist in the identification of (1) the objects connected to the transactions; (2) other transactions or proposed transactions that may involve antiquities or art; and (3) any other relevant information, which may include IP and email addresses, volume and dollar amounts and beneficial owners. SARs should also include specific reference to FinCEN's update and indicate the connection between the suspicious activity and the activity highlighted in the notice.⁷

Failure to comply with the new regulations can result in increased criminal penalties in an amount equal to the profit gained by reason of the violation and up to 10 years' imprisonment.⁸ Additionally, those who commit a BSA offense while at that time being a partner, director, officer or employee of an antiquities or art trader may be ordered to repay any bonus paid to the individual during the year in which the violation occurred. The AMLA also increases civil penalties for repeat BSA offenders, who may now be required to pay an additional civil penalty of three times the profit made (or loss avoided, whichever is greater) as a result of such conduct, or two times the otherwise-applicable maximum penalty.⁹

It is likely that strengthened regulation will be imposed on the entire art market in the near future, as the AMLA also calls for coordinated efforts by the FBI, the Attorney General, and Homeland Security Investigations to launch a study to identify the possible "facilitation of money laundering and the financing of terrorism" throughout the entire art market.¹⁰ The study will evaluate which markets should be subject to regulations and recommend the degree to which the art market, with an emphasis on high-value trade in works of art, needs to identify actual purchasers of those works.

The increased demand for disclosures and the heightened risks for antiquities and art traders require the design and implementation of robust, risk-based AML programs that take into account the business's geographic locations, products and services, and customer base. Art and antiquities traders should review current AML and due diligence procedures and create written risk controls that clearly define the roles and responsibilities of each part of the business. Traders should appoint a BSA Compliance Officer who is responsible for managing and maintaining only the AML program. Art and antiquities traders should also implement ongoing AML training for employees, with training components tailored to the roles of each employee, and should keep accurate records of the training procedures required to substantiate compliance. Periodic independent testing and monitoring of AML compliance can be performed by third parties or employees with no responsibility for the program but with sufficient knowledge of AML compliance to effectively review the program and test internal controls. Effective AML information collection and disclosure regimes should also include customer identification and due diligence programs with risk-based components to reasonably identify the true identity of buyers, develop a customer risk profile, and continuously monitor and report suspicious transactions in accordance with FinCEN regulations.

Footnotes

1 U.S. Senate Permanent Subcommittee on Investigations, "The Art Industry and U.S. Policies That Undermine Sanctions" (Jul. 28, 2020), https://www.hsgac.senate.gov/download/majority-and-minority-staff-report_-the-art-industry-and-us-policies-that-undermine-sanctions.
2 Id.
3 H.R. Rep. No. 6395, Public Law 116-283 (2020).
4 AMLA, § 6110(a)(1).
5 31 CFR § 1020.210.
6 U.S. Department of the Treasury, Financial Crimes Enforcement Network, Release, FinCEN Informs Financial Institutions of Efforts Related to Trade in Antiquities and Art (Mar. 9, 2021).
7 Id.
8 AMLA, § 6312.
9 Id. at § 6309.
10 Id. at § 6110(c).