The battle against dirty money is far from over. But adopting innovative technologies to follow money trails could be the solution to ending money laundering in Europe.
The battle against dirty money is far from over. Although Europe has improved its anti-money laundering (AML) defences significantly over the past few years, there’s still a long way to go. Criminals are constantly on the search for vulnerabilities, and this pulls compliance professionals into an endless game of cat and mouse. Developments in one area will lead the lawbreakers to search for a new, lesser-known method of laundering money.
It isn’t necessary to look far and wide for evidence of this. Traditionally, under European law, certain companies were noted for their role in the movement of money, and were termed as “obliged entities.” This status meant that they would be required to conduct stringent due diligence and risk assessments on the backgrounds of any transaction that they were involved in, reporting any that were deemed to be “suspicious” to the relevant authorities.
Initially, these laws only applied to financial institutions, but their effectiveness drove criminals towards using professional services, such as law and real estate. This was noted by the authorities, and to further stem the flow of dark capital, the European Fourth Anti-Money Laundering Directive extended these due diligence responsibilities into a number of new sectors, including those mentioned above. But once again, this has caused the criminals to innovate, driving them towards sectors with less supervision.
Why the criminals are so interested in art and antiques
The world of art and antiques is the largest lawful unregulated business on the planet, and art crime is estimated to be second to the illegal narcotics trade in terms of annual revenue generated. With the sector being so lenient on legislation, it has found itself favoured by those seeking to launder their money.
There are several features – some unique to the art and antiques market – which make it an ideal vehicle to launder money. Firstly,
1. Art and antiques are easy to store and transport;
2. Rare art can be worth millions, which means it is a great mechanism to store and transfer wealth;
3. Art can be stored safely in custom-built, highly-secure warehouses (normally in Free Ports or Free Trade Zones) which means that criminals assets are secure;
4. Art and antiques tend to appreciate in value, which means that money is not lost in the laundering process, it's actually gained;
5. There are no asset registers for art so the ownership and exchange of fine art and antiques are very hard to trace.
These characteristics mean that art and antiques are an incredibly useful asset for criminals. They will use art and antiques in both the layering stage (the process of obscuring the connection between the “legitimate” asset and the proceeds of crime used to buy it) and the integration stage (returning the proceeds to the criminal as clean money/assets).
The market for art and antiques is composed of high-value goods being traded by high net worth individuals – with the market worth approximately $67 billion (€61.3 billion) in 2018, and the art wealth held by ultra-high-net-worth individuals forecast to rise to $2.7 trillion (€2.5 trillion) by 2026. This makes it simple for criminals to “place” large quantities of money into the financial system without as much as a question asked and given the volumes, criminals can and do hide in plain sight.
This is magnified by the intricacies of the market. Many transactions, even those with entirely legitimate intentions and outcomes, are conducted with next to no transparency, with middlemen being commonplace, and the ultimate buyer and seller being completely unknown to each other. This practice – which was enacted historically to protect involved parties from becoming targets of crime – makes it incredibly difficult for anybody to judge the provenance of a transaction.
Through the laundering of money via art, terrorists can fund their attacks across the world and criminals are able to become incredibly rich off the back of death, destruction and abuse, exploiting the most vulnerable through crimes like human trafficking and narcotics smuggling. This was acknowledged by the United Nations Security Council Resolution 2347 that terrorist entities were “generating income from engaging directly or indirectly in the illegal excavation and in the looting and smuggling of cultural property from archaeological sites, museums, libraries, archives, and other sites, which is being used to support their recruitment efforts and to strengthen their operational capability to organize and carry out…attacks.”
Notably, Islamic State has been known to make use of such a money laundering scheme, with a number of relics plundered from Iraq and Syria having been discovered in storage across Europe. Similarly, a number of early Van Gogh’s works were also discovered to be in the possession of a Camorra drug trafficker in Naples.
Thankfully, the European Union has moved to improve the level of AML controls in the art and antiques sector. Under the Fifth Anti-Money Laundering Directive, “persons trading or acting as intermediaries in the trade of art, including when this is carried out by art galleries and auction houses” will now be considered as “obliged entities,” just like financial institutions.
Further, any art deal will become subject to all relevant AML regulations, should the value of the transaction equal €10,000 or more. By requiring the sector to ask questions regarding sources of wealth, business activities, identity and the ultimate beneficial owners, far greater levels of transparency will be introduced, making for a far more effective defence against illegally derived money.
However, more must be done. Those involved in the trade of art and antiques must leverage technology to gain a better context around the identity of the those involved in the transaction. Machine learning can be utilised to analyse not only the amount involved, but also the connections of the buyer, seller and intermediaries. A technological approach could also help to fix any inconsistencies of ownership. Creating a digital register of possession – which could be easily be searched by worldwide authorities – would go some way towards preventing high-risk trades and also have the added benefit of allowing governments to assess tax implications of the trade.
The battle against money laundering is far from being won, but innovative technologies and stricter regulations have transformed AML processes. To truly combat the issue, it’s imperative that greater transparency is introduced into the sector. This will go some way towards ensuring a brighter future.
Alexon Bell is the Chief Product Officer at Quantexa, an entreprise intelligence company based in London
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