Self-Regulation Against Money Laundering in Art

PUBLISHED BY BILAN IN FRENCH IN JUNE 2017. Read here.

Original English Version Below:

SWISS ART MARKET FIGHTS MONEY LAUNDERING TAINT WITH A PUSH FOR SELF REGULATION

Priti Patnaik, February 2017

One can easily overlook a discreet corner of Geneva Palexpo, a convention centre in the outskirts of this small city, especially on a chilly winter evening in January this year, when temperatures plummeted below zero. The atmosphere inside was just as discreet, but warm with anticipation. Art dealers and underwriters mingled with prosecutors, lawyers, and forensic specialists to find out how self-regulation in the art market address money laundering.

Authorities and art connoisseurs had gathered for the launch of the Responsible Art Market guidelines for countering money laundering and terrorist financing threats.

The global art market is characterised by easily moveable goods of high value, its international nature, a culture of confidentiality, and lack of an art-specific regulation. This makes it vulnerable to potential criminal activity such as money laundering and terrorist financing.

In 2015, globally, the art market was pegged at more than $63 billion with more than half accounted for by dealers and private sales, the rest by auction houses, according to Arts Economics. To be sure, Switzerland accounts for only 2% of the total trade, but is also home to 10 freeports (tax-free storage sites) that reportedly house 1.2 million artworks and has more than 200 customs-free zones.

Geneva, the nerve centre of the Swiss art market, home to one of the world’s largest freeports, was dragged into a few money laundering cases in 2016 ranging from expressionist art allegedly bought with the tainted Malaysian 1MDB scandal money,  trafficked ‘cultural assets’ from Syria, and the trail of ‘Panama Papers’ that led to a raid in the Freeport which revealed the “Seated Man with a Cane” – a Amedeo Modigliani painting.

Of course, it was the Yves Bouvier affair in 2015 that firmly put Geneva on the map in the fight against money laundering in art.

The art community, in this city of private bankers and commodity traders, is now trying to take this business seriously to protect art and its reputation.

WHY SELF-REGULATION OF THE ART MARKET?

The Responsible Art Market (RAM) is a non-profit initiative, which has been built on the efforts by the Art Law Foundation and the Centre for Art-Law in Geneva since 2015. The initiative is backed by a range of actors in the Swiss art market, including galleries, dealers, auction houses, art advisors and service providers, lawyers, academics and authorities specialising in art related and compliance matters.

The RAM guidelines, as the founding group refers to this framework, include understanding risks, making risk assessments, knowing the customer, being alert to red flags, doing research on the artwork itself, understanding the nature of the transaction, keeping records, monitoring processes, being alert to suspicions and complying with the law, among others. An inter-disciplinary team behind this initiative devised these guidelines. The goal is to combine due diligence practices of the art world with the compliance procedures of the finance industry, the founding members told the art fraternity.

Sandrine Giroud, a partner at Lalive, a Geneva-based law firm, and Anne Laure Bandle,  director of the Art Law Foundation in Geneva, who worked on the initiative among others, told Bilan, “The vast majority of the arts business is done properly and there is not more money laundering than in other markets. Unfortunately, a few bad examples can taint the reputation of the entire industry which relies fundamentally on reputation. There are legal, reputational and financial risks for not only art dealers but also for all art businesses, advisors, ancillary services associated with the industry.”

THE ANTI-MONEY LAUNDERING FRAMEWORK IN SWITZERALAND

Ursula Cassani, Professor, University of Geneva, one of the speakers at the session said that self-regulation is complimentary to existing legal frameworks.

She explained that there are two types of legislations to address money laundering in Switzerland, one that addresses criminal offences and another that seeks to prevent money laundering through prudential rules. Both underwent changes in 2016.

Money laundering is an offence under Article 305bis in the Swiss Criminal Code. This offence can be committed by anyone, and in the context of the art industry – even by players in the art business and their clients.

“The criminal offence of money laundering is only punishable if the perpetrator acts with intent. If, for example, art dealers ignore red flags, then they become liable,” Cassani said.

In 2014, following international (Financial Action Task Force, FATF) recommendations, the Swiss law expanded the scope of the definition of money laundering to include proceeds from ‘tax fraud’ under certain circumstances. This amendment has been in force since 2016.

Predicate offences to money laundering were extended to include qualified tax crimes. Predicate offences include misleading the tax authorities by using false documents, in order to evade taxes for more than 300,000 Swiss francs per tax period. If assets resulting from such qualified offences are used as an investment in a work of art, such work could be seized in the context of money laundering proceedings.

The preventive rules are defined in the Anti-Money Laundering Act (AMLA 1997). This act applies primarily to financial intermediaries including banks, assets managers, money transmitters among others. Some players of the art business such as major auction houses and high-end dealers may be involved in transactions which qualify them as financial intermediaries. They also have also been subject to the provisions of the AMLA for many years. However, this is the exception, not the rule, Cassani said.

In addition to this, an amendment of the AMLA which entered into force in 2016 applies to merchants selling goods (art works, cars, jewels, real estate, etc.), if they accept cash in excess of CHF 100,000 for any particular transaction. However, the preventive requirements only apply to this cash payment. They do not apply if the payment is made in another form, e.g. through a bank. Furthermore, if CHF 100,000 are paid in cash and the rest through a bank, the AMLA does not apply, Cassani explained.

(This threshold has been problematic from a regulatory point of view, as we will see later.)

Dealers in cash deals over CHF 100’000 have due diligence obligations, unless they entrust a financial intermediary with transactions over CHF 100,000. The due diligence obligations include, identifying the contractual party, identifying the final beneficiary of the transaction and establishing the necessary documentation. In general, if an art dealer acts as a financial intermediary, the diligence requirements apply to all assets.

Bilan got in touch with the Money Laundering Reporting Office Switzerland (MROS) at the Federal Office of Police in Switzerland to find out if there has been an increase in the detection of money laundering activity related to art as a result of these new changes. “A year is a short period of time for effects of new guidelines to be seen,” Lulzana Musliu, Spokesperson, Federal Office of Police said.

STEPS TAKEN BY THE SWISS GOVERNMENT

Riccardo Sansonetti, Head of the Financial Crime section, State Secretariat for International Finance, Bern, who was a panellist at the session said, “Prevention of money laundering in art is important, as in every sector. The Guidelines issued in the context of the Responsible Art Market initiative show that private sector wants good practices, that it is a rather mature industry and there are efforts to raise awareness.”

On Switzerland’s role in combatting money laundering, the government is pleased with the recent endorsement of the Financial Action Task Force (FATF). The Paris-based FATF, seated in the OECD, sets the international standard in the fight against money laundering and financing of terrorism. As per FATF requirements, Switzerland conducted a national assessment of risks in 2015 that acknowledged the vulnerabilities of the art trade.

The FATF mutual evaluation report for Swizterland on anti-money laundering and counter-terrorist financing measures released in December 2016, indicates that the legislation and regulatory measures that are in place relating to freeports are sound and in line with the international standards, the SIF official said.

However, in the said report, FATF wants Switzerland to improve transparency. It says, “… these risk-reduction measures apply only to cash purchases of goods. They cannot establish any overall transparency in the art market, which appears necessary given the risks mentioned in the assessment report. Measures should therefore be taken to ensure greater transparency by all of the stakeholders concerned.”

To be sure, Swiss regulators have noted that despite recent amendments, regulations  will have little effect when, for instance, “transactions in art  are broken into fractional ownership pieces each having a declared value below enhanced reporting thresholds”, according to a testimony on ‘Terrorism Financing in the Global Art Industry’ to the Committee on Financial Services Task Force to Investigate Terrorism Financing at the United States House of Representatives in April 2016.

HOW TRANSPARENCY IN THE ART MARKET HELPS TRACKING MONEY LAUNDERING

Experts at the session, in essence wanted the art industry to work with authorities in the fight against money laundering. By following Know Your Customers (KYC) guidelines, art dealers can prove to be really helpful to authorities they said.

“Sometimes, art dealers know more about their customers than reputed banks. So dealers must be alert,” Jean-Bernard Schmid, Public Prosecutor, Ministère Public, Geneva, who was on the panel at the session said.

If art dealers ignore red flags, they become liable because they are helping ‘wash the money’ from illegitimate income, to enable it to enter the legitimate economy. If, for example, invoices disappear, then it is a problem, he explained.

“As a prosecutor, transparency is essential for me to investigate,” he emphasized.

The tightening of the rules for the financial sector globally has other impacts. Ralph Wyss, Partner in Deloitte Switzerland’s Forensic team said, “The risk for the art market being abused by money launderers is increasing because it can at least partly provide an alternative to the financial services industry which is under significant scrutiny.”

Insurers who form a critical part in the supply chain were also present at the event.

“As a title insurer serving this industry, the more we can see the entire market supply and distribution chain the better we can manage our business needs as well as the risks to the industry,” Lawrence M.  Shindell, Chairman of New York–headquartered, ARIS Title Insurance Corporation, told Bilan. The challenge is to achieve transactional transparency while protecting legitimate privacy interests, he added.

ARIS has been working on these issues with trade and financial regulators in the U.S., UK, Switzerland and the EU including Luxembourg, and Belgium. It has also met with regulators tasked with oversight of freeports and free trade zones. (See testimony cited above)

IMPORTANCE OF WORKING ACROSS INDUSTRIES

Major law firms as well as financial institutions and others can and do get caught up in these kinds of transactions. “The use of the international art industry for money laundering purposes is real and is likely a larger problem than some observers make it out to be,” Shindell said. And the reputational and legal risks of any implicated transaction are disproportionately high.

Until the problem of money laundering is attacked on a cross-industry basis, the market will not be able to make a significant dent in the problem.  The reason is the information is too fractured, he added. There is a need to link and cross-correlate information on source of funds and beneficial ownership between the art trade and its different stakeholders, the financial sector, property insurers, logistics firms and customs authorities, he suggested.

Sansonetti of SIF, also highlighted the difficulties in getting data on national and international levels to address money laundering in art, during his interventions at the session.

ARIS’s focus has included Switzerland because of the country’s transition to transparency in the financial industry, its reputational needs around freeports (not unlike similar needs elsewhere such as in Luxembourg ), its role in the art industry and the fact that Switzerland is able to act a single country jurisdiction independent of the EU.

“Switzerland in theory should be nimble and motivated to be part of creating and implementing pilot solutions to attack the problem correctly.  A small number of leading jurisdictions will have to take the important first steps on a pilot basis to move the industry to systemic change,” Shindell urged.

But there are practical and real challenges for this kind of cross-border regulation including the difficulties in piercing real beneficial ownership in different jurisdictions.

“Our jurisdiction stops at political borders. Even operating within the country, across cantons needs cooperation in various jurisdictions”, Schmid, Geneva prosecutor told the gathering.

However, what is very much within the borders of authorities are freeports.

The Swiss Federal Audit Office pointed out laxity in freeports in its report in 2014. Laurent Crémieux, of the Performance Audit and Evaluation Unit at the Swiss Federal Audit Office, said, “The customs offices had too much autonomy concerning the art and quality of the control activities inside freeports and warehouses.  We also found good practices and the customs administration must make these practices as norms.” The SFAO is expected to come up with a new report in 2018 to follow up on its recommendations.

To be fair, some freeports have started opening up. Marie Flegbo-Berney, Attorney-at-law and member of the board of directors of the Geneva Freeports told Bilan, that in 2016, the storage site adopted measures including, commissioning an independent audit to systematically control all archaeological objects entering its site, taking steps to restrict and monitor the site access and working to introduce biometrics. In 2017, it will install a biometric identification system.

Further, in accordance with the amended Swiss Customs Act, which came into force in January 2016, depositors at the Geneva Freeports are required to register the name of the owners of so-called “sensitive goods” in an inventory record, which is provided to the customs administration; works of art and antiquities fall under this category of “sensitive goods”, she explained.

The Geneva Freeports say that it requires identification of the beneficial owners of all its clients. Steps have been taken to improve the vetting procedures of its potential clients including by checking information on clients and their beneficial owners on existing national and international databases before offering them facilities, she added.

Self-regulation if followed judiciously could help the art market. There are lessons to draw from banks, experts said.

In the financial services industry the cost for investigations were often higher than the fines themselves, Wyss of Deloitte cautioned his audience.

Simon Studer, who runs his own dealership  and seeks a fair portrayal of the art market, implored to his fellow panellists “Don’t put the art industry on trial.” But that’s not the intention, irrespective of how much art is loved, authorities will need to keep asking questions.

ENDS

Read the previous story on the subject filed by this author. (In English)

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