Identity Verification in the Art Market: Complete Checklist to Prevent Money Laundering

While some use art to awaken their imagination or express themselves, others see it as a great way to invest. You can argue about the taste in art or what piece to put in your living room, but one thing’s for sure: art has always been a part of luxury and an entry into the elite. It also comes with a huge price tag and a possible risk factor. In this article, we discuss how identity verification helps combat fraud in the art market.

Authorities fear that the more valuable the art piece is, the bigger chance of money laundering it brings. To make the art market more transparent, back in 2020, Anti-money laundering (AML) legislation was introduced, helping reduce the risks of high-value transactions. The law set upgraded boundaries for art market participants, requiring them to conduct identity verification.

Keep reading to discover how art marketplaces can protect themselves from fraud and money laundering and learn about the best ways to utilize identity verification.

Compliance Requirements in the Art Market

Even though some tend to believe that identity verification is mostly implemented in the Financial sector, it’s now becoming a mainstream procedure in various industries, including the Transport industry, Healthcare, and the Education sector.

Some industries require identity verification due to age restrictions. This procedure is generally vital, as it helps reduce many risks, including money laundering or terrorist financing. The art market isn’t an exception. Here, security is ensured by verifying that buyers and intermediaries involved in the sale of artwork are who they say they are.

The main compliance requirements in the art market vary across different jurisdictions, but some common requirements include:

  1. Anti-Money Laundering (AML): Many countries have implemented AML regulations that require art market participants, such as dealers, auction houses, and galleries, to establish robust AML programs. These programs involve customer due diligence, monitoring of transactions, reporting suspicious activities, and maintaining records.
  2. Know Your Customer (KYC): Art market participants must often conduct thorough due diligence on their clients and beneficial owners. This includes verifying their identities, assessing their reputation and background, and understanding the source of their funds.
  3. Enhanced Due Diligence (EDD): In certain situations, such as high-value transactions or dealings involving politically exposed persons (PEPs), art market participants may be required to apply enhanced due diligence measures. This involves conducting more extensive background checks and risk assessments.
  4. Sanctions Screening: Compliance with international sanctions is crucial in the art market. Art market participants must ensure they are not engaging in transactions with individuals, entities, or countries subject to sanctions or embargoes.

What Makes the Art Market an Attractive Target to Criminals

In February of 2023, the Financial Action Task Force (FATF) released a report focusing on Money Laundering and Terrorist Financing in the Art and Antiquities Market. The report highlights various factors that make this market attractive to criminals, including:

  • The extensive secrecy surrounding beneficial owners and transactions
  • The subjective and diverse values assigned to artworks
  • The large and global nature of the art market

Others argue that anonymity, for example, ensures fairness in the bidding process by preventing bias. Despite that, the subjective nature of art allows pieces to be valued appropriately by those who can recognize their worth, even if others only see them as random paint splatters.

Other factors that play a huge part in determining the high level of money laundering in the art market:

  1. Ease of transportation: Artworks possess a unique characteristic that makes them highly susceptible to illicit movement. Their transportability allows them to be discreetly sent to different countries, even via private planes, without drawing much attention.
  2. Subjective value determination: Inherent subjectivity in art pricing creates opportunities for criminals to manipulate prices to their advantage. For instance, it is possible to acquire a painting for a mere $100 today and sell it for an astonishing $1 million in a short time. That’s why the pricing of contemporary artwork is frequently influenced by extraneous factors rather than purely objective value.
  3. Allowing too much privacy: Imagine a well-off family facing financial difficulties. To overcome their financial struggles, they choose to sell their valuable art collection discreetly without letting others become aware of their misfortune. To maintain secrecy, the art dealer ensures their identities remain hidden. At first glance, this may seem like an innocent illustration. However, it is important to recognize that criminals can similarly exploit this veil of anonymity for money laundering purposes.
The Art Market and Compliance

What is the Fifth Anti-Money Laundering Directive?

The art trade was redefined when the European Union’s Fifth Anti-Money Laundering Directive (5AMLD) was brought into force in January 2020. It regulates art dealers, galleries, and auction houses in the EU as well as the United Kingdom.

This law-defined battle with financial crimes requires record keeping and taking action toward fraud prevention. The most significant change was made for transactions meeting or exceeding €10,000 – the obligatory additional security check – identity verification – was added to the list forcing companies to adapt and take a risk-based approach

That means art market participants are required to perform customer due diligence procedures, which involve identifying and verifying the identity of their customers. This includes obtaining information such as the customer’s name, address, and date of birth, as well as the nature and purpose of the business relationship.

Non-compliance with AMLD5 can result in significant penalties, including fines and reputational damage. It is crucial for art market participants to familiarize themselves with the specific AML requirements in their jurisdiction and ensure compliance.

AML Regulations of the Art Industry in the UK and EU

Wanting to strengthen existing AML provisions, the European Union developed the 6th Anti-Money Laundering Directive (6AMLD), which was legally enabled on the 3rd of June, 2021. With the aim to empower organizations to fight harder, the newest directive toughened the penalties for non-compliance.

For instance, 6AMLD introduced a minimum four-year prison sentence, whereas the previous minimum was a year. In addition, businesses, including players from the art market, can now be banned from accessing public funding opportunities.

AML Regulations of the Art Industry in the US

Back in 2020, the Anti-Money Laundering Act (AMLA 2020) expanded its regulatory reach to include antiquities dealers. Previously, AMLA 2020 only applied to US financial institutions governed by the Bank Secrecy Act (BSA). 

The AMLA 2020 now mandates that antiquities dealers must:

  • Establish an AML program
  • Identify beneficial owners
  • Maintain transaction records
  • Provide AML training to employees
  • Report suspicious transactions to regulators
  • Conduct audits of record-keeping and compliance measures

It’s worth noting that, despite these changes, art dealers in the US generally remain unregulated, which leaves a lot of space for illicit activities.

Don’t waste your time on manual ID verification and compliance services. Let us do the job for you. Schedule a free demo.

What is the Responsible Art Market?

A group of art enthusiasts and businesses formed the Responsible Art Market Initiative (RAM) in 2016. The organization reviews the regulations and shares the best practices by increasing public trust in the art market. To this day, the goal is to help spot the risks in the market as well as provide guidance on how to deal with operations and reputational threats.

In other words, RAM provides practical and ethical directions to simplify confusing and constantly changing regulations. The Responsible Art Market doesn’t follow a certification scheme, which means that companies can subscribe or pay attention to its guidelines voluntarily.

The initiative encourages companies to adopt legal obligations and ensure AML measures for protection against terrorist financing and money laundering.

RAM shares two key points to achieve this goal:

  • Companies should use an appropriate risk-based approach when it comes to anti-money laundering and terrorist financing.
  • Businesses need to identify the red flags, or the indicators of suspicious activity and, in response, take clear action.

RAM explains the most common red flags in the market by dividing them into three categories: Client red flags, Artwork red flags, and Transaction red flags. For example, if the art piece is presented with very little documentation, that’s a signal there’s a possibility of fraud.

For security reasons and as a way to find out more about the seller, the initiative suggests conducting in-depth technical analyses. Also, if possible, it’s important to check the databases of stolen artwork. For instance, businesses can screen Interpol’s  “Works of Art” database or the International Council of Museums’ “Red Lists” database.

What is the Responsible Art Market?

Money Laundering In The Art World

With lots of secrecy and less regulation, the art market has always been on the verge of being beautiful and ugly. For example, trying to avoid paying taxes isn’t at the top of the criminal behavior list. Not sticking to Anti Money Laundering and Know Your Customer regulations raises even more concerns, especially when we’re talking about the continuing issue of money laundering through art.

Many concerns arise due to extremely large transaction numbers. According to Artsy, 2021 wasn’t an exception. Here are the Top 3 notoriously expensive art pieces

  1. With the most expensive art piece that was auctioned off for $103.41 million and a nearly 20-minute battle between two bidders, Pablo Picasso took the first place for Femme assise près d’une fenêtre (Marie-Thérèse) (1932).
  2. In the 1980s, art critic Robert Hughes names Basquiat’s Expressionist work absurd. Fast-forwarding to 2021, Jean-Michel Basquiat’s last piece of the trinity “Skull” collection took the silver medal with In This Case (1983), landing a $93.105.000 deal in Christie’s marquee spring sales.
  3. An Italian Early Renaissance icon, Sandro Botticelli, hit the auction with a bang last year, taking third place for Portrait of a young man holding a roundel (ca. 1470–80). It was sold for $92.1 million at a January Sotheby’s sale, while the painter’s previous record of $10.4 million was achieved back in 2013.

With such enormous numbers, identity verification is vital, as it brings security benefits to the art market. Not to mention the fact that up to this day, the buyers’ identities can be shielded, either by middlemen or shell companies.

Buyers are also not obliged to carry out anti-money laundering checks on their sellers. As more companies value security and are becoming aware of its importance, in 2022, there’s a larger expectation that art will be sold legally as well as ethically.

Money Laundering Using NFTs

Non-Fungible Tokens (NFTs) have gained popularity in the digital art world, but they can also present risks in terms of money laundering and pose dangers to the industry. NFTs can be used as a tool to launder illicit funds due to their unique characteristics and the decentralized nature of blockchain technology. That’s why criminals can use NFTs to convert illegally obtained funds into seemingly legitimate digital assets, obscuring the origins of the money.

Criminals can create an NFT and set up two different accounts — one for selling and another for buying. They can essentially launder money through the transaction by purchasing the NFT from themselves using these separate accounts. This method has become a prevalent technique within the NFT world and poses a significant risk regarding illicit financial activities.

Illicit funds injected into the market through the purchase of NFTs can distort prices and artificially inflate the value of certain artworks, disrupting the natural market dynamics. This can harm genuine artists, investors, and collectors by distorting perceptions of artistic value and potentially leading to speculative bubbles.

Money Laundering In The Art World

What Happens in the Case of Non-Compliance?

A recent survey shows that 85% of Americans are likely to stick with a business even during a brand crisis if its history is based on transparency. According to the Kearney Consumer Institute, honesty and consistency are the main ethical components that build trust between a company and its consumers.

In the cyber security sphere of the art market, the logic principle is the same. AML and KYC compliance is the core base that can’t be ignored; otherwise, failing to comply with regulations might lead to inconsistency and loss of reputation.

The art business is affected by regulations that aren’t optional anymore. The AML regulations set strict boundaries and legal requirements. According to an AML compliance expert, Rena Neville, maintaining a regulatory routine is a must in the art market, as failing to comply can even lead up to an imprisonment penalty.

To avoid the unwanted aftermath, art galleries, advisors, or auction houses need to follow the advice to stick to the rules. Consequently, it’s crucial to bridge the gap in risk perceptions among art players, law enforcement, and regulators and establish a unified “culture of compliance” similar to what has been achieved, to some extent, in the financial sector.

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The Demand for Automated Solutions in the Art Sector

Despite the AML regulations and the efforts to stop fraud, there hasn’t been a significant reduction in the amount of money that’s being laundered. For instance, the UK government reports that £219 million was recovered in the total proceeds of crime from Confiscation Orders, Forfeiture Orders, and Civil Recovery Orders receipts in 2021. That’s why there’s a high demand for digital solutions, and the art market isn’t an exception. Many events are now online, including auctions or virtual gallery openings.

Due to the change of scenery, the market has been forced to seek innovative opportunities which have already increased its reach over the past decade. Of course, this leads us to identity verification and the need to ensure that the person buying art isn’t attempting to buy an art piece through a false identity.

The same principle goes for art sellers. Online transactions give the opportunity for criminals to use fake documents to sell valuables and launder money. Recent predictions show that by 2026, the number of identity checks globally will reach 92 billion versus the 45 billion made in 2021.

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The Benefits of Identity Verification for Art Marketplaces

Monitoring shifty behavior and implementing face-matching software are ways to reduce risks and protect the art business from those attempting to buy valuable pieces under a false identity.

With the Fifth Anti-Money Laundering Directive mentioned, one of the steps to prevent money laundering in the art market is Customer Due Diligence (CDD). It requires the art market participants to verify their identity, bringing many benefits to the table:

  • Trust. It’s the key value in most modern businesses that strive to maintain a steady relationship with their clients. With identity verification in the art market, art lovers are protected from money laundering. This factor also helps the company maintain a high reputation.
  • Positive experience. With a safe and quick identity verification process, many customers bring value to the company by recommending the service or wanting to buy more. Many businesses, including the art market, overcome this difficulty by choosing online identity verification services.
  • Maximized security. The laws were created for a reason. Since there are some weaknesses in human control measures, online identity verification helps automate the process and improve accuracy rates. Only skilled specialists have the experience to actually see if the document is real or stolen. That’s why, in the art world, it’s easier to identify the buyers and let the software check the authenticity of the document.
What Are the Pros of Online Identity Verification?

Final Thoughts

Art dealers bump into security-threatening challenges. For example, they need to familiarize themselves with the security features of common identity documents. Art lovers should be aware of the possibility of suspicious activity when conducting in-person identity checks. Usually, art dealers lookout for imposters, as many passports can be genuine but belong to another person.

Outsourcing and choosing an online identity verification solution is the most reliable choice in the art market. Purchasing and selling valuable art isn’t easy on its own.

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This blog post was updated on the 22nd of June, 2023, to reflect the latest insights.

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