Estimated at $67.4 billion worldwide in 2018, the legitimate art market is enormous, highly liquid and largely deregulated. As a consequence, it has become a primary target for money laundering and forgeries due to its loose regulations, exclusive nature and the lack of art market expertise in most law enforcement agencies around the world.
Ranked by the US Department of Justice and UNESCO as the third highest-grossing criminal trade in the world over the last 40 years, art crime has flourished as many art dealers and collectors around the world are often duped into buying forgeries or in some cases, complicit in theft, money laundering and tax evasion schemes via art. Forgeries have become so rampant in the globalized trade that Thomas Hoving, former director of the Metropolitan Museum of Art once estimated that 40% of all ‘name’ artworks currently on sale, are fake. Moreover, forgeries are far more likely when the art is moving between credible and trusted dealers. The result has led to the downfall of prestigious art galleries and landed various dealers and forgers in prison. Adding to the duplicity, former FBI agent Robert Wittman estimated that 75% of the illegal art market, ie. art that is connected to crime, is fake.
Unlike traditional avenues for money laundering such as banks, life insurance companies, casinos, currency exchangers, and even precious-metals dealers, auction houses and art sellers have no obligation to report large cash transactions to the authorities. In fact, dealers can often keep the names of buyers and sellers anonymous. Unlike other businesses in the US that deal in large sums of money, they do not have to file suspicious activity reports with the US Treasury Department if they have doubts about the origins of the money they are being paid. Moreover, transactions are often private and prices can be subjective and manipulated while the art work can disappear from view for years or decades once purchased.
To put this into perspective, this article will look at the following key issues: market size and regulation, Europe’s lack of an anti-money laundering strategy, difference between the laws and capabilities of EU member states, difference between EU and US strategies, freeports and law enforcement.
Market Size and Regulation
Typically, money launderers focus on 4 types of assets:
- Property/real estate;
- Small Medium Enterprises that deal mostly in cash (restaurants, bars etc.);
- Easily liquidated assets such as cars, boats etc.;
- Jewelry (the easiest way to move millions in the palm of your hand).
In any four of these asset classes, paperwork and proof of identity are required. It is simply not possible to buy a business, property or car without proving who you are and where your money comes from. Currently, this is not the case with art.
Europe’s Anti-Money Laundering (AML) Directives but No Strategy
Europe’s art market was valued at approximately €19 billion in 2018, roughly one third of the global market share.
As of January 2020, the latest AML Directive came into force, the fifth of its kind. With much of its focus being on addressing crypto-currencies, this is also the first AML Directive to bring art traders under its purview. This AML Directive obliges art traders and intermediaries with reporting and due-diligence procedures on customers. It specifically singles out high value works of art, applying AML checks to any art transaction over €10 000. Despite this step, only a few EU Member States are yet considered to be in compliance and the European Commission lacks a specific strategy dedicated to this issue.
Difference of Laws and Capabilities in the EU Member States
Most countries in Europe are simply not set up to deal with art crime cases. In the event that a stash house of stolen, forged or smuggled art works are discovered, most countries lack a judicial system where prosecutors are trained to prosecute such cases or judges have the qualifications to preside over them. As a result, criminals understand that by stashing art in weaker countries, their cost benefit analysis becomes more favourable.
Moreover, most countries have laws which mandate that the case be tried wherever the art works are found, not where they were stolen from, as a result, smugglers adjust their routes to take them through low risk territory.
US vs. Europe, Who Does it Better and Why Does It Matter?
Between the FBI, DHS and ingenious district attorneys in states like New York, the US currently has better law enforcement in this area. Despite the fact that multiple cases are currently ongoing, no official number of cases yet exists since art crime can be prosecuted under charges of fraud, forgery, theft or money laundering. Even though art crime does not fit neatly into any single criminal definition, American courts have a strategic advantage due to their stricter legal interpretation that forbids thieves from acquiring ‘good title’. In America, once something is stolen, it is always considered stolen, even if you bought it legally many years later.
However, the EU’s 5th AML Directive gives Europe room to maneuver in addressing this crime since the money laundering legislation covers auction houses, galleries, dealerships, sole traders and intermediaries. Thus far, the US is exploring ways to replicate this by extending the bank secrecy act.
Both the US and Europe share the key challenge in the traceability of art and the capacity to enforce the laws in this space. Moreover, the EU laws apply to its 27 countries but must also take into account the conditions in the US since it is often the desired market smugglers hope to exploit. So far, nearly 100% of the illicit antiquities appearing on the US market have transited through EU territory to get there.
This refers to trading zones which are either tax free or have massively reduced taxes. With over 80 of these across the EU, these ‘semi-permanent’ storages are ideal for stashing high value goods for extended periods of time as they are technically considered to be ‘in transit’. Since freeports are not considered financial institutions, they are also exempt from the ‘automatic exchange of information’ between tax authorities under US Foreign Account Tax Compliance Act (FATCA), the OECD’s Reporting Standards (CRS) or the EU’s reporting agreements between tax authorities.
These long-term storage units can be specialized for hosting sensitive high value goods like art, wine or luxury cars which must be stored properly to avoid damages while they appreciate in value over time. In 2010, there were approx. 46 722 square meters of dedicated art storage in Luxury Freeports. Today there is approx. 178 800 square meters, almost four times as much in only 10 years.
Recent European Commission reports on money laundering listed freeports alongside the football industry, crypto-currencies and golden passport schemes as key areas ripe for exploitation. This is particularly concerning as freeports also allow ‘counterfeiters to land consignments, adapt or otherwise tamper with loads of associated paperwork, and then re-export products without customs intervention.’
Law Enforcement Playing Catch-up
Fortunately, law enforcement is improving rapidly as there are multiple organizations engaged in fighting cultural smuggling, art forgery and money laundering across the national, international and non-governmental sectors. These include: Interpol, Europol, World Customs Organization (WCO), the EU Counter-Terrorism Coordinator, International Council of Museums (ICOM), UNESCO and the Antiquities Coalition.
National specialized forces dedicated to this issue are currently operating in: Belgium, Bulgaria, Cyprus, Germany, Greece, Hungary, Ireland, Italy, Lithuania, Netherlands, Poland, Spain, UK and USA. Special reverence is held for the Italian Carabinieri Department for Protection of Cultural Heritage, deemed a leading force in Europe for countering cultural smuggling.
Moreover, joint operations carried out by national and international law enforcement agencies have become more frequent. This has included:
- OPERATION SARDICA (October 2018): Over 30 000 artefacts were seized. 17 properties were searched, 13 arrested, €180 000 in cash seized.
- OPERATION DEMETRA (July 2018): More than 250 police officers simultaneously searched 40 houses in Italy, Germany, London, and Barcelona. There were 23 arrested, 25,000 items seized worth over €40 million.
- OPERATION ATHENA, PANDORA II (October-December 2017): Over 41 000 cultural goods seized globally. More than 200 investigations opened and 53 persons were arrested.
What This All Means
All this demonstrates the fact that cultural smuggling, money laundering, forgery and other art crimes are on the rise which has not gone unnoticed by authorities. As long as this issue remains a legally flexible grey zone, or simply a playground for the rich, it will continue to be exploited and reforms will be evaded.
As law enforcement continues to trail behind and the global landscape of art crime grows, there remains a strong need to ensure that the proper political, financial, operational and logistical support are in place. This would include legal reforms and harmonization across Europe, training courses for customs officials and law enforcement, formal strategies and doctrines from the European Commission and other international organizations along with an easily accessible and forensically supported databases are just some of the steps that need to be taken.
As the value of art and the lucrative nature of this world continues to rise, the lack of reforms will only continue to attract various schemers along the way.