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OFAC issues new art world guide (warning)


At the end of October, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC), its sanctions administration, issued a new advisory on the potential abuse of the high-value art market by Specially Designated Nationals and Blocked Persons (SDNs).

According to OFAC, high-value artwork is any piece valued at more than $100,000.

The advisory highlights that the art market is exceptionally vulnerable to a range of illicit activities, including sanctions evasion, because of “the mobility, concealability, and subjective value of artwork.” Historically the trade has also been notoriously opaque, with anonymity and secrecy for buyers and sellers the commonly accepted norms, and shell companies and intermediaries used to facilitate the trade and provide ‘cut outs’ for those involved.

To make the point, the advisory notes several cases in recent years where high-value art has played such a role. In December 2019, for example, the US designated Nazem Said Ahmad, a Lebanon-based art collector, for providing alleged support to to the Islamist extremist group, Hizballah.

According to the US government, Ahmad was one of the group’s major financial backers, and he and his business organisation were used by the group to undertake terrorist financing and money laundering activities.

Ahmad is alleged to have invested funds in high-value artwork in an attempt to avoid the impact of US sanctions, opening an art gallery in Beirut as a front. At the point of designation, Ahmad’s collection included works by Pablo Picasso and Andy Warhol, and was worth tens of millions of US dollars.

The advisory also highlights how the North Korean regime has earned tens of millions of US dollars by selling pieces from the Mansudae Art Studio, an art studio in Pyongyang, to galleries in the People’s Republic of China and Hong Kong. It further notes the examples of brothers Arkady and Boris Rotenberg, Russian oligarchs designated by OFAC in 2014, who the US Senate Homeland Security Committee recently alleged to have used a complex shell company structure to purchase art after they were designated.

To tackle these kinds of risks, OFAC stresses the need for all relevant players on the high-value art market – galleries, museums, private collectors, auction companies, agents and brokers – to undertake a risk-based sanctions and AML/CFT compliance programme.

It also states that any potential involvement with a designated individual or entity should prompt immediate engagement with OFAC for guidance, and an application for a potential license to undertake a transaction. This might be allowed depending on the specific circumstances.

Nonetheless, the advisory still takes a strong enforcement line, stating that OFAC will enforce sanctions on transactions involving high-value art in which an SDN has any interest, if there are reasons to believe that they are using it as “an investment asset or medium of exchange” for future conversion into cash, gold or VAs. The advisory further clarifies that the department sees no exemptions under the so-called ‘Berman Amendment’ to the International Emergency Economic Powers Act (IEEPA), which allows any import or export of information-based materials.

Although it is not clear whether any specific case or strategic trend has prompted the issue of this new advisory, it comes as one more example of an increasing emphasis by a wide range of law-makers and regulators on the potential abuse of the art market by financial criminals. The EU’s 5th Anti-Money Laundering Directive (5AMLD), for example, brought high-value art market players within the scope of AML/CFT obligations, and all member states were expected to have transposed the requirement into law by January of this year. The UK – one of the world’s leading locations for the art trade – has also introduced the same requirements.

Despite the industry’s past reputation – and almost accepted status – as a murky place to do business, levels of regulatory expectation from authorities are now rising. It seems clear that all those involved in the high-value market will need to take a more forward-leaning approach towards fighting financial crime in the future, and as the OFAC advisory notes, a key element in doing so will be thorough effective client due diligence.