How is Art Used to Hide Money Laundering?

How is Art Used to Hide Money Laundering?

Money laundering is a serious crime that threatens society and has financial and economic implications on the world. Preventing money laundering is a complex process, and agencies try to detect any suspicious financial activity and deter criminals. But, criminals are constantly creating innovative ways to circumvent the government and succeed in their malicious intentions. One such method is using art to hide money laundering, and agencies have become familiar with this technique and are keeping a close eye on it. The sale and purchase of high-end art and antique pieces are used as vehicles for money laundering. It is because the prices can be subjective, which are manipulated, and the transactions are private.
Well, it would not be right to say all art dealers are criminals, but the art sector is prone to money laundering because of the enormous transition sizes, subjective prices, and preference for cash payments. Art dealers need privacy for security reasons, but the government needs to be proactive in tackling the severe issue of money laundering using art. Dubai is a famous city and one of the seven emirates and is a renowned business hub open to individuals and businesses from across the globe. On the flip side, it has become notorious for money laundering.

The art market is prone to misuse by criminals. The UAE market has implemented the AML law made by FATF- Financial Action Taskforce to strengthen the UAE government to combat the challenges of financial terrorism and prevent money laundering. The anti-money laundering laws in the UAE help businesses to identify suspicious customers and detect financial fraud early in the customer screening process.

Financial institutions can prevent money laundering by following the best risk practices in their business relationships and deter fraudsters from using art to hide money laundering. They can keep a vigilant eye on individual buyers, art dealers, galleries, and auction houses. It helps prevent any form of financial misuse and protects innocent people from being used unknowingly for money laundering. With the risk-based approach, authorities can detect suspicious financial transactions. It will focus on three risk-prone categories- verifying the client, the source of the procurement of the art piece, and the source of the buyer’s financial resources involved in the transaction. Some rules that need to be followed are-
• The KYC process should be stringent to detect any suspicious activity in the early stages of customer screening. The process should provide complete information about the customers’ purchasing and selling high-value art. It should also consider the individuals’ duration as a customer and the business time. 

• Screening should be done on risk scoring method considering different factors such as -if the sale details are in the public domain and the type of artwork the business deals in.

• Identification of Politically exposed persons (PEP) through an AML Screening Process.

• Businesses can identify the UBO- Ultimate Beneficial Owner using transaction monitoring software. Financial institutions can determine suspicious nature and inform them about the risk of business relationships with such individuals and entities.

• Institutions need to focus Special attention on the Source Of Wealth (SOW) and Source Of Funds (SOF).

• Institutions should also concentrate on dealers, galleries, and auction houses to ensure that they are screened per the KYC program. The program will help bring more transparency to the transaction and mitigate risks. The transactions, therefore, are more transparent, and there’s less probability of any suspicious transaction.

• Verifying SOW and SOF: SOW includes activities that include the total net worth, while the SOF involves the money used for facilitating transactions between the FI and the client. Money laundering has become a massive issue in the UAE, and the government is taking strict actions to prevent the problem from spiralling. It is essential to record the SOF details when the customers open an account. If the SOF includes sales of an artwork, then receipts for relevant pieces of art should be gathered.

• The AML team will analyse if the artwork’s price is reasonable and not exaggerated or inflated to facilitate money laundering. They also need to verify the invoice provided – if it’s real or not and detect any suspicious activity. They can take the help of the Art Loss Registry, and the art databases can shed light on the same.

UAE Laws to Prevent Money Laundering

The UAE government takes some decisive actions with strict AML- Anti-money laundering laws. The government has passed two laws – AML- Anti Money Laundering (law no- 4/2002) and CFT- Counterterrorist financing (Law No- 1/2004). The law states the penalties for the crimes, including life imprisonment the death penalty. As per the law, assets can be forfeited and seized.

The administrative regulation no- 24/2000 has provided guidelines for the conduct of financial institutions to prevent money laundering. As per the regulations, all banks, financial institutions, exchange houses need to follow the KYC guidelines with caution. They have to follow the process to verify natural persons, legal entities, the types of documents furnished, and record-keeping rules. As per the KYC, banks and other financial institutions in the UAE have to verify the customer identity and maintain the transaction details for all the exchange house transactions above $ 545 and transactions over $ 10,900 for non-account holder bank transactions.
In 2013, the Dubai Financial Services Authority AML module amendments were made and revised into Anti-Money Laundering, Counter-Terrorist Financing, and Sanctions Module (AML Rules). As per the rules, customer records have to be maintained for a minimum of five years, and they need to be regularly updated until the duration of the account is opened.
The AML professionals evaluate the buyers’ profile, focusing on a few vital points such as countries where transactions occur, jurisdiction from where the art dealer procures the inventory, types of transactions, client Verification, funds sources, financing methods, and Value of the art traded, etc.

Training

Training is required for AML professionals to make them acquainted with the art market and the different techniques and methods used by criminals to hide money laundering behind the art. This will help them to equip themselves with updated knowledge, better skills, and proactiveness to identify and deal with suspicious activities.

AML Training helps them be acquainted with the mode of operations of the art market, the type of artwork traded, and the source of the procurement of artwork. They also need to gather information about the dealers and how the purchase and sale process is carried out. In UAE, the regulation Conferencing procedures for AML requires financial institutions to create and execute the AML/ CFT training programs to prevent criminal activities.

Central Bank of UAE is the regulator for AML controls in the UAE- it regulates all the authorised companies, including banks, financial firms, insurance companies, etc., in the DIFC. The DFSA controls the Dubai International Financial Centre free-zone and regulates all the authorised companies, including banks, financial institutions, insurance companies, investment banks, etc. All these agencies ask the financial institutions to have strict Customer Due Diligence policies and adhere to the rules and regulations of the AML/ CFT policies.

Conclusion

The authorities are making every effort to combat money laundering and financial terrorism and regulate the art market. It will deter criminals from using art as a vehicle for money laundering. AML UAE is one of the highly acclaimed professional firms in the UAE rendering Anti-Money laundering services such as AML/ CFT Policy Controls, and procedures documentation, AML Training, AML software selection,In-house AML Compliance Department setup, Annual AML/ CFT Risk Assessment report, and AML/ CFT health check-up. Individuals/ businesses can take professional assistance to help prevent the now frequent money laundering cases. Feel free to visit AMLUAE for more information.

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FAQs

Yes, art can be used for money laundering. It is easy to smuggle or hide art. Also, the prices of art pieces are subjective and can be manipulated. So, it is easier to launder money by buying and selling art. Money launderers buy art with illegal funds and then sell it in private transactions to get legal money.  

About the Author

Pathik Shah

CISA, FCA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a multi-disciplinary professional with more than 22 years of experience in compliance, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of Anti-Money Laundering rules and regulations, and he helps companies comply with legal requirements. Pathik also helps companies generate value from their IT investments.