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Senate investigation finds that oligarchs use art industry to avoid sanctions

Financial Crimes U.S. Senate Investigations Sanctions OFAC Anti-Money Laundering Bank Secrecy Act Federal Legislation Of Interest to Non-US Persons

Financial Crimes

Last month, the U.S. Senate Permanent Subcommittee on Investigations issued a bipartisan report titled “The Art Industry and U.S. Policies that Undermine Sanctions,” which details findings from a two-year investigation related to how Russian oligarchs appear to have used the art industry to evade U.S. sanctions. According to the Subcommittee, the investigation—which focused on major auction houses, private New York art dealers, and seven financial institutions—revealed that the “secretive nature” of the art industry “allowed art intermediaries to purchase more than $18 million in high-value art in the United States through shell companies linked to Russian oligarchs after they were sanctioned by the United States in March 2014,” and that, moreover, “the shell companies linked to the Russian oligarchs were not limited to just art and engaged in a total of $91 million in post-sanctions transactions.” The report claims that the art industry is largely unregulated, and, unlike financial institutions, is not subject to the Bank Secrecy Act (BSA) and is not required to maintain anti-money laundering (AML) and anti-terrorism financing controls. However, the report notes that sanctions imposed by the U.S. Treasury’s Office of Foreign Assets Control (OFAC) do apply to the industry, emphasizing that U.S. persons are not allowed to conduct business with sanctioned individuals or entities.

The Subcommittee’s key findings include that while four of the major auction houses have established voluntary AML controls, they treat an art agent or advisor as the principal purchaser of the art, which allows the auction house to perform due diligence on the art agent or advisor instead of identifying and evaluating a potentially undisclosed client. The auction houses also reportedly rely on financial institutions to identify the source of funds used to purchase the art. Because of these practices, the report concludes that these shell companies continue to have access to the U.S. financial system despite the imposition of sanctions.

The report makes several recommendations including: (i) the BSA should be amended to include businesses that handle transactions involving high-value art; (ii) Treasury should be required to collect beneficial ownership information for companies formed or registered to do business in the U.S., making the information available to law enforcement; (iii) Treasury should consider imposing sanctions on a sanctioned individual’s immediate family members; (iv) Treasury should announce and implement sanctions concurrently “to avoid creating a window of opportunity for individuals to avoid sanctions”; (v) the ownership threshold for blocking companies owned by sanctioned individuals should be lowered or removed; (vi) Treasury should maximize its use of suspicious activity reports filed by financial institutions to, among other things, alert other financial institutions of the risks of transacting with sanctioned entities; (vii) OFAC should issue comprehensive guidance for auction houses and art dealers on steps for determining “whether a person is the principal seller or purchaser of art or is acting on behalf of an undisclosed client, and which person should be subject to a due diligence review”; and (viii) OFAC should issue guidance on “the informational exception to the International Emergency Economic Powers Act related to ‘artworks.’”

Additionally, in June, a bipartisan group of senators introduced the Anti-Money Laundering Act of 2020 (AMLA) as an amendment (S.Amdt 2198 to S.4049) to the National Defense Authorization Act (NDAA), which would, among many other things, require federal agencies to study “the facilitation of money laundering and the financing of terrorism through the trade of works of art or antiquities” and, if appropriate, propose rulemaking to implement the study’s findings within 180 days of the AMLA’s enactment.

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