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No Secrets about Money Laundering

July 17, 2016

Cartoon of a man hanging money to dry with AML letters

By David Honig, Esq.

Aside from drugs, art is the largest unregulated market in the world.

~ The Mona Lisa Curse

Why does it seem like most notorious drug dealers and dictators have vast collections of art? Part of the reason is that most people love art and it happens to be easy to hide. Even though people’s interests and tastes may differ, the desire to collect or at the very least view art is consistent among large segments of the population. Read our recent review of “Possession: The Curious History of Private Collectors from Antiquity to the Present.”

There is however, a more sinister incentive to “collect” valuable art. Art, especially paintings on canvas by a select group of artists, is easier to move and store than other assets of similar value, such as precious metals or cash. Patricia Cohen, Valuable as Art but Priceless as Tool to Launder Money, N.Y. Times, (May 12, 2013), at A.1. As a moveable commodity, for example, if rebel forces are raiding a dictator’s palatial compound it would be very easy to pull a painting off the wall, remove it from its frame and escape with an asset worth millions of dollars.

In 2007 a Basquiat work titled Hannibal was brought into the United States by Edemar Cid Ferreira, a Brazilian banker who purchased numerous works of art in a money laundering scheme. Id. Around the same time Ferreira smuggled art worth around $30 million out of Brazil to avoid paying debts owed. Id. At the time the painting was valued at $8 million USD – in order to match the value he would have needed to move 574.88 lbs of gold (using 2008 prices) or 176 lbs of $100 bills. A painting, then, is a more attractive commodity for holding value from illicit gains since both gold and paper money are heavier and harder to transport, and paper money can be traced. A painting on the other hand can be easily packed in one’s suitcase hidden between shirts, or rolled up into a yoga bag. In fact, it seems Ferreira did just that. According to the New York Times article, in order to enter the United States without documentation or taxation Ferreira had Hannibal declared as an unnamed painting worth $100. Id.

More recently a gallery owner in Philadelphia pled guilty to money laundering. In 2011 federal agents raided the house of drug trafficker Ronald Belciano where they discovered $2.6 million dollars in a fish tank and art, worth $619,000, that was used to launder drug money. Jeremy Roebuck, Philly.com (Jan. 25. 2015). After the raid, Belciano agreed to cooperate with the government to build a case against Nathan Isen, the owner of the gallery who sold him the art in order to launder money. Id. Roebuck introduced Isen to an undercover agent posing as a drug dealer. The agent, who was introduced as being a marijuana grower, made numerous references to growing marijuana and even apologized to Isen for the cash “smell[ing] like marijuana, [because] she stored it next to the drugs.” Id.

Art’s monetary value is not the only reason why it is often found in the homes of those with less than savory occupations. The secrecy and lack of regulation in the art market lends itself to a certain flexibility in the range of crimes such as money laundering. Money laundering is the process by which money obtained through ill means is “cleansed” and made to appear legitimately obtained. Often times in popular culture, businesses depicted as ‘fronts,’ such as restaurants, dry cleaners or other businesses are used for this purpose.

There is also the benefit of liquidity. When assets are liquid they can be traded more freely and turned into or used to purchase other assets. If someone has a net worth of $10 million but her net worth is solely derived from a painting that can never be sold is she really worth $10 million? If she can’t sell the painting she can’t obtain cash which means she can’t buy anything with the $10 million.

Just as beneficial as the relative liquidity of art is the notoriously secretive art market. There are various reason for this, such as avoidance of getting caught, embarrassment and safety. Some people are forced to sell their art collections because they need access to immediate cash or other types of transactions. Some do not want people to know they have enough money to purchase the works or that they own a particular work. According to an article cited by Fausto Martin De Sanctis’ Money Laundering Through Art: A Criminal Justice Perspective, “Christie’s only asks the sellers where the proceeds from the sale ought to be deposited…” Fausto Martin De Sanctis, Money Laundering Through Art: A Criminal Justice Perspective 115 (Springer 2013). Whatever the reason for this secrecy, it allows for the market to be abused.

One reason for this secrecy is the lack of legal requirements for artworks to be registered. De Sanctis points out that this feature makes art a better vehicle than real estate for money laundering. Real estate is often used for money laundering for the same reason as art, high value, market speculation and cash purchases. Id. at 58. Additionally, art and real estate “are classified as non-financial, and therefore lack the regulation and rigid, standardized controls in pace for the financial sector.” Id. at 58. A key difference is the incentive to record ownership in real estate with local government, to create security in ownership. In fact, De Sanctis notes that “regulatory agencies pay little attention to the art world.” Id. at 59

In reference to the art market, economist Nouriel Roubini points out, “there is no tracking of it through the financial system and you can park it into a freeport” Interview by Cristina Alesci with Nouriel Roubini, Professor, NYU Stern School of Business (May 11, 2015). A freeport is a warehouse where valuables are stored. By storing art in a freeport the owner of the work, or valuables, avoids paying taxes for as long as the work is stored there. David Segal, Swiss Freeports Are Home for a Growing Treasury of Art, N.Y. Times (July 21, 2012). Freeports are also notoriously secret. In fact, people who work there do not know what is being stored in the adjacent vaults. Id.

The secretiveness of both freeports and the art market makes money laundering through this avenue is so lucrative. Once a person purchases a piece of art, she can ship it to Geneva, Delaware or whatever freeport she chooses, store it there indefinitely and avoid paying taxes for as long as the art resides in that freeport. Since that work was purchased in secret, does not need to be registered, and is stored anonymously in a warehouse its existence as an investment is shielded until the owner finds an opportune time to sell.

Although the regulations on the art market are minimal, it is not completely devoid of regulation or safeguards against money laundering. First, 26 U.S.C. 6050I and 31 U.S.C. 533 requires any party who receives cash in excess of $10,000 in the same, or two related, transactions to file a report with the IRS and Financial Crimes Enforcement Network respectively. Both of these laws require the recipient to state the amount of cash, the name of the paying party, the nature of the transaction and date of the transaction. Further, both have a catch-all provision that would allow either the IRS or the Financial Crimes Enforcement Network to ask for more information. The European Commission requires a similar filing for cash purchases over €7,500 and Switzerland’s Federal Assembly, its parliament, places restrictions on cash transactions that exceed CHF 100,000. Hili Perlson, Switzerland Cracks Down on Art Market with Tighter Anti Money Laundering Laws, artnet news (June 2, 2015).

The Federal Assembly also passed a law, which went into effect on January 1, 2016, that creates more regulation for freeports. Henri Neuendof, Switzerland’s Tough New Stance on Freeports Will Shake the Art World, artnet news (November 19, 2015). Among new regulations are a six month time limit for storage of goods to be exported and a requirement that freeport’s keep an inventory of goods stored and their owners. Id. Since the money laundering necessitates secrecy there is no real way to tell if preemption methods will be enough. According to the NYU Stern School of Business Professor, Nouriel Roubini, self-regulation is probably the best way to move forward. There may not be an easy solution but it is worth exploring new avenues that will prevent the use of art for the facilitation of illegal transactions and from those works being hidden away from the sight of the world.

Sources:

Interview by Cristina Alesci with Nouriel Roubini, Professor, NYU Stern School of Business (May 11, 2015).
Patricia Cohen, Valuable as Art but Priceless as Tool to Launder Money, N.Y. Times, May 12, 2013, at A1
Fausto Martin De Sanctis, Money Laundering Through Art: A Criminal Justice Perspective (Springer 2013).
Henri Neuendof, Switzerland’s Tough New Stance on Freeports Will Shake the Art World, artnet news (November 19, 2015) https://news.artnet.com/market/switzerland-freeport-regulations-367361.
Hili Perlson, Switzerland Cracks Down on Art Market with Tighter Anti Money Laundering Laws, artnet news (June 2, 2015) https://news.artnet.com/art-world/swiss-money-laundering-art-market-303976.
Jeremy Roebuck, Philly.com (Jan. 25. 2015) http://articles.philly.com/2015-01-25/news/58412036_1_art-dealer-money-laundering-marijuana.
David Segal, Swiss Freeports Are Home for a Growing Treasury of Art, N.Y. Times, July 21, 2012, http://www.nytimes.com/2012/07/22/business/swiss-freeports-are-home-for-a-growing-treasury-of-art.html?_r=0.
The Mona Lisa Curse (Channel 4 television broadcast Sept. 21, 2008).

About the Author:

David Honig is a post graduate law fellow at the Center for Art Law. He is a member of the Brooklyn Law School class of 2015. While attending law school he focused his studies on intellectual property and was a member of the Brooklyn Law Incubator & Policy (BLIP) Clinic. He is admitted to New York and New Jersey state bars. In the Fall of 2016 he will be pursuing an LL.M. in taxation from NYU Law.

Disclaimer: This article is for educational purposes only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Instead, readers should seek an attorney.