On February 4, the Department of the Treasury (Treasury) released the “Study of the Facilitation of Money Laundering and Terror Finance through the Trade in Works of Art” (Study). The Study assesses the various risks of the high-value art market based on its propensities for money laundering and illicit financing.
Specifically, the Study addresses three main ways art is used to launder money.
- Accepting art as payment to integrate illegally obtained funds into the financial system.
- Purchasing art with illicit funds, holding it for several years, and then selling it for a profit.
- Using art purchased with unlawfully obtained monies and offering it as collateral for a loan.
The Study notes that auction houses, galleries, art fairs, online marketplaces, museums, and other art market participants are vulnerable to money laundering in different ways, with some having greater risks than others. The Treasury’s underlying concern with all market participants is the incentive to conduct due diligence on potential buyers.
The Study goes on to discuss money laundering challenges with the emerging nonfungible token (NFT) market. NFTs are digital tokens on a blockchain that represent ownership of images, videos, audio files, and other forms of media. The Study states that “in the first three months of 2021, the market for NFTs generated a record $1.5 billion in trading and grew 2,627 percent over the previous quarter.”
The Treasury is concerned that NFTs may be used for self-laundering, where an individual purchases an NFT with illicit funds and then transacts with himself or herself to show sales on the blockchain. Thereafter, a person may purchase the NFT from the criminal with clean funds not tied to a crime. Additionally, the Study notes that smart contracts allow artists to be paid every time an NFT is sold, which incentivizes selling the piece several times with the possibility that no due diligence is completed on the purchaser.
In closing the Study, the Treasury notes regulatory and nonregulatory options to monitor the high-value art market. Nonregulatory options include (1) encouraging the creation of private sector information-sharing programs to garner transparency among art market participants and (2) updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies. The regulatory options include (1) using FinCEN to support information collection and enhanced due diligence and (2) bringing certain art market participants under the anti-money laundering legal framework and obligating them to create and maintain anti-money laundering programs.
Our Take. The Treasury is closely monitoring the high-value art market and possibly pointing to the Financial Crimes Enforcement Network (FinCEN) to regulate the NFT and digital art market. In September 2021, FinCEN published an advance notice of proposed rulemaking (ANPR) regarding implementation of AML Act Section 6110, which amended the definition of financial institutions under the Bank Secrecy Act (BSA) to include any “person engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or sale of antiquities.” The ANPR seeks comment on, among other topics, how to define “antiquity,” including whether the term encompasses all fine art, a particular subset of it, or exclusively high-value exchanges. If FinCEN deems an NFT or other digital art an “antiquity,” the art market will need to comply with AML and BSA requirements.