The UK’s National Economic Crime Centre (“NECC”) recently issued an amber alert concerning the sanctions evasion, money laundering, and trafficking in cultural property risks presented to UK industries linked to artwork storage facilities and the art storage sector (the “Amber Alert”).  The Amber Alert highlights that criminals are finding ways to utilize the art market to conduct illicit activity and includes case studies and key indicators that those operating within the art storage sector can use to detect such activity.  This development underscores the UK government’s continued commitment to cracking down on the evasion of sanctions (particularly under the Russia sanctions regime), as well as an increased focus on identifying and targeting more avenues for sanctions evasion so that counter measures can be implemented to thwart those efforts.  It also highlights the increasingly interconnected approach the UK government and law enforcement are adopting to address activity with potential touchpoints to a range of financial and other crimes. 

Art Storage Sector Concerns

The primary objective of the Amber Alert issued by the NECC, a multi-agency unit within the National Crime Agency (“NCA”), is to provide UK businesses operating in the art storage sector with crucial insights into techniques suspected of being used in the illicit transfer of high value artworks and other cultural objects.  While the primary audience for the Amber Alert is artwork storage facilities, including warehouses, auction houses, art dealerships, galleries, museums, and freeports, its relevance also extends to those offering “specialist services” such as shipping and transportation, insurance, legal, accountancy, and banking.

High-net-worth individuals (“HNWIs”) are known to store artworks in specialist storage facilities, some of which offer tax advantages.  As the price of art has increased, there has been a heightened interest in contemporary art collecting, driven by the desire of owners to see their art investment portfolios appreciate in value.  While this trend extends beyond HNWI buyers, it raises concerns about the potential misuse of these storage facilities for illicit activities.  Criminals are drawn to these facilities as a secure repository for capital assets that appreciate over time and can be liquidated when needed.

Clients of UK artwork storage facilities, and their associated specialist service providers, include both UK residents and those located overseas, including in high-risk jurisdictions like Russia.  HNWIs often hold substantial art assets either within their properties or in these specialized storage facilities.  In addition, non-HNWI clients may exploit these storage facilities to bypass financial and other restrictions.  Clients may also enlist third-party representatives such as law firms, brokerage firms, or Trust and Company Service Providers (“TCSPs”), to further obscure the true source of funds and provenance of artworks.

Mitigating Risk Indicators

The Amber Alert highlights that criminals are finding ways to use the art market to conduct illicit activity.  Specifically, criminals are exploiting assumptions made by many art market participants in the art storage sector that someone else has taken responsibility for conducting due diligence and for maintaining accurate and current customer profiles.  The NECC states that criminals are known to test organizations’ due diligence processes by conducting legitimate business activity and then placing illicit items or requesting sudden service changes to conceal and move assets that may be subject to restrictions. 

The NECC urges art market participants, including those working in the art storage sector or linked specialist services, to build the capability to identify within their businesses changes in client status and suspicious activity relating to a range of financial crimes, including sanctions evasion, money laundering, and cultural property trafficking.  The NECC encourages art market participants to protect their businesses by conducting thorough due diligence at regular intervals to identify changes in clients’ circumstances impacting their risk profile.  The Amber Alert also notes that failure to conduct regular and appropriate due diligence is “considered to be a red flag for complicity and may indicate an attempt to circumvent regulations.” 

The Amber Alert urges art market participants to adopt a proactive approach to analyzing transaction activity and customer attributes that may indicate red flags suggestive of potential illicit activity as part of a holistic assessment of the risks associated with individual transactions and customer relationships. 

The Amber Alert provides a non-exhaustive list of measures designed to identify and mitigate risk indicators, which art market participants should consider incorporating into their existing compliance systems and controls, as follows:

  1. checking international sanctions listings and other due diligence systems on a daily basis against clients’ details and their assets;
  2. understanding the reasons for, and context in which, attempts are made by clients to transfer artwork or cultural property ownership to a family member, close contact, business associate, or other intermediary (e.g., the transferor has, or may be about to, become a sanctions target or the new owner has links to persons recently targeted by sanctions or under scrutiny from law enforcement);
  3. understanding the reasons for, and context in which, attempts are made to sell artwork or cultural property quickly or move it to another jurisdiction (e.g., identifying whether it represents an effort to obscure the financial trail, the sale price is artificially low/high, or the seller is, or is at risk of becoming, a sanctions target);
  4. understanding the source of, and rationale for, regular payments (e.g., establishing the ownership and control structure of counterparty, assessing whether and why any lack of clarity seeks to conceal the artwork’s ultimate beneficial owner (“UBO”), understanding the reasons for use of offshore accounts or changes in payment arrangements);
  5. understanding the reasons for use of front or shell companies, as well as complex corporate or trust structures (e.g., is there a legitimate reason for the structure, is the structure intended to obscure the involvement of the UBO, and does the vehicle have a suspicious business model or lack of track record);
  6. checking objects under an organization’s control on a daily basis against stolen art registers and other due diligence systems; and
  7. understanding the role of intermediaries in transactions involving the purchase and sale of artworks or cultural property in an out of specialist storage facilities (e.g., are the ultimate buyer and seller unknown to each other because of the use of intermediaries, does the client’s business engage in unusual activity or make use of exclusive trading relationships).

Criminal Liability Risk for Art Market Participants

The Amber Alert reminds art market participants that there are a number of UK criminal offences that may be engaged by transactions in the art storage sector, as follows:

  • Sanctions Evasion
    • The commonplace movement of artworks between jurisdictions offers a potential route for transactions intended to circumvent sanctions.
    • The movement of artworks by a person following their becoming a UK designated person would constitute a breach of financial sanctions.  Any associates or enablers of such a transaction that are UK persons or engage in activities within the UK also may commit a circumvention offence.
  • Money Laundering
    • Investments in artwork, antiques, antiquities, and other collectibles can be used to transfer illicit finance from criminal activity and pose a high money laundering risk.
    • Art market participants that deal in the sale or purchase of works of art with a value in excess of €10,000 (or the equivalent in other currencies) for a single transaction, or series of linked transactions, must comply with the transparency and due diligence requirements set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.  This obligation applies to the storage of art within a UK freeport.
    • Both sanctions breaches and sanctions circumvention constitute criminal offences, which means that the onward transfer of funds or assets could become proceeds of crime and recoverable property under UK money laundering legislation.
  • Cultural Property Trafficking
    • It is an offence to acquire, dispose of, import or export “tainted” cultural objects, as well as agreeing or arranging to do so under the Dealing in Cultural Object (Offences) Act 2003.  For the purpose of these offences, it is immaterial where it is agreed or arranged that the relevant act would take place.
    • It is also an offence to deal in cultural property knowing, or having reason to suspect, that it has been unlawfully exported under the Cultural Property (Armed Conflicts) Act 2017.

Reporting

The Amber Alert reminds art market participants that are “relevant firms” of their obligation to make a mandatory report to OFSI if they know or suspect that a breach of financial sanctions has occurred, a customer is a designated person, or they hold frozen assets when that knowledge or suspicion came in the course of their business.  Art market participants also can report knowledge or suspicion that activity is consistent with money laundering by submitting a suspicious activity report via the NCA’s SAR portal.  Reports submitted as a result of the Amber Alert should also include the reference “0735-NECC.”  For more information on these developments, contact the authors of this post, Alexandra Melia or Elliot Letts, in Steptoe’s Economic Sanctions team in London.