Editor’s Note: This article is part of a collaboration between the Harvard Art Law Organization and the Harvard International Law Journal.

*Sarah Jane Kim

Introduction

The threat of money laundering remains a major global issue, with up to $2 trillion laundered annually—around 5% of global gross domestic product. The United States has adopted a framework to combat the risk of money laundering, the centerpiece of which is the Bank Secrecy Act (BSA). The BSA requires financial institutions, such as banks, money services businesses, and casinos, to take steps to prevent, detect, and report money laundering activity. While comprehensive, the BSA does not apply to all entities that could facilitate money laundering in the United States, notably excluding the art market.

The global art market’s features make it highly susceptible to money laundering, such as the easy transport of high-value items; use of third-party intermediaries to transact and store art; subjective nature of valuing art; culture of secrecy and lack of transparency embedded in the art industry; and the continuing rise of private sales in the art market. The $65 billion U.S. art market is particularly vulnerable as it is “the largest, legal unregulated industry in the United States.”

Despite its efforts to expand the BSA’s application to additional entities, the United States has opted against regulating the art market, relying instead on voluntary self-policing. The lack of U.S. Anti-Money Laundering (AML) regulation in this industry is especially concerning, considering that the United States is the leading market in art sales worldwide. Given the threat, the United States should immediately take steps to extend AML regulations to core art market participants (AMPs), including dealers, galleries, and auction houses.

This article explores U.S. AML regulatory efforts toward the art market, compares them to the frameworks of the United Kingdom (U.K.) and European Union (E.U.), and highlights the issue with the U.S. art market’s self-regulation. The article then presents a path forward for U.S. AML efforts with a proposal for more effective and practical regulation.

U.S. AML Framework and Recent Proposals

In the United States, the BSA mandates that financial institutions implement AML programs, according to a five-pillar framework: (1) designation of a compliance officer; (2) development of internal AML policies; (3) proper employee training programs; (4) regular, independent, risk-based audits; and (5) implementation of customer due diligence (CDD). The BSA’s definition of “financial institution” has expanded over time to cover non-bank entities such as the real estate industry and pawnbrokers, but excludes participants in the high-value art market despite several attempts. Ultimately, the United States has extended AML regulations only to the antiquities market, while the EU’s AML laws include the art market as a regulated sector.

Attempts to apply the BSA to the art market include the Illicit Art and Antiquities Trafficking Prevention Act (IAATP), introduced in May 2018. It would have amended the BSA to classify “dealers in art or antiquities” as a “financial institution,” thereby obligating art dealers to comply with AML measures, including Know Your Client (KYC) checks and reporting cash transactions over $10,000. However, the law did not pass. It faced opposition from many art professionals due to its burdensome requirements, especially on smaller players such as antique and ancient art dealers, including the low thresholds it had proposed for Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs), as well as its imposition on the privacy of art collectors.

In January 2021, Congress passed the Anti-Money Laundering Act of 2020 (AMLA 2020) as part of the 2021 National Defense Authorization Act (NDAA). Section 6110 of the AMLA 2020 extended BSA provisions to antiquities dealers but not the art market.¹ The AMLA 2020 directed FinCEN to examine the high-value art trade to determine whether the BSA provisions should also cover AMPs. While a 2022 study by the Department of Treasury acknowledged risks of abuse in the high-value art market, it recommended prioritizing other sectors such as real estate and nonfinancial gatekeepers before turning to the art market.

In July 2022, the U.S. House of Representatives passed an amendment to the 2023 NDAA, the Establishing New Authorities for Business Laundering and Enabling Risks to Security Act (ENABLERS Act). It would have imposed AML requirements on art dealers and auction houses and expanded the BSA’s KYC and CDD requirements to include lawyers, investment advisors, and other intermediary entities. However, the Senate rejected the ENABLERS Act following significant pushback from the American Bar Association and other industry representatives. Consequently, U.S. law is still without an effective AML framework for the art industry.

Regulation of the Art Market in the E.U. and U.K.

Unlike the United States, the E.U. and U.K. were much more aggressive and successful in extending AML regulations to AMPs. In 2020, the E.U. enacted its Fifth Anti-Money Laundering Directive (5AMLD), which extended AML regulations to include art auction houses and dealers.

Despite the U.K.’s exit from the E.U. in January 2020, the U.K. proceeded to apply the 5AMLD in its AML efforts. The U.K. offers both a criminal law approach and preventative approach to combat money laundering. For the former, the U.K. enacted its Proceeds of Crime Act in 2002, which made it a crime for any entity, including art market participants, to be involved in arranging or acquiring property through unlawful conduct or money laundering. For the latter, the U.K. enforced the Money Laundering, Terrorist Financing, and Transfer of Funds Regulations in 2017 (MLR 2017), which expanded the country’s AML directives and was updated to specifically cover “art market participants” who transact amounts exceeding €10,000. The MLR 2017 required even accountants, legal professionals, high-value dealers, and the like to establish risk-based protocols. In the U.K., AML compliance obligations include risk assessments, training requirements, CDD checks, enhanced checks for parties involved with politically exposed persons (PEPs) and high-risk third countries, and maintaining records. The U.K.’s AML approach is even more stringent than that of the E.U. and provides a more cohesive regulatory framework.

Analysis

Concerning the art market, U.S. AML laws lag far behind those of the E.U. and the U.K. This is problematic considering that the U.S. is the largest global art market with a share of 42%, surpassing China at 19% and the U.K. at 17%. Instead of taking real action to prevent money laundering in the art market, the United States has opted to allow market participants to follow a voluntary system that is mere window dressing for the problem. As a result, the United States remains an attractive target for global criminals to launder their criminal proceeds.

Senate Subcommittee Investigations: Voluntary AML Compliance Programs

The U.S. Senate’s Permanent Subcommittee of Investigations (the “Subcommittee”) in 2020 investigated the status and effectiveness of the voluntary AML programs at the four major auction houses—Sotheby’s, Christie’s, Phillips, and Bonhams. While the houses do not publish their AML policies, the Subcommittee investigated their voluntary programs and published its findings (2020 Senate Report). The 2020 Senate Report found that the high-value art market presents an attractive vehicle for money laundering and sanctions evasion and recommended imposing regulatory compliance requirements on U.S. art dealers and auction houses. The Subcommittee concluded that the voluntary AML programs maintained by the major auction houses were not effective in identifying the true ultimate beneficial owner (UBO) as they generally performed CDD on the art advisor/dealer and other intermediaries rather than on UBOs—and even then, any CDD may be voluntary.

A Path Forward

The BSA should be extended to art dealers, auction houses, and other art intermediaries with annual gross sales exceeding $5 million, henceforth identified as high-value art market participants (HVAMPs). The following are recommendations for how such AMPs should operate under BSA/AML compliance regulations per the BSA’s five-pillar framework. Drawing from the definitions established in the ENABLERS Act and 5AMLD, AMPs should be defined as “persons or entities engaged in the trade of works of art — specifically including dealers, advisors, consultants, custodians, galleries, auction houses, and museums — or persons or entities acting as an intermediary in the sale or purchase of works of art.”

BSA Compliance Recommendations for the High-Value Art Market

All HVAMPs must have a designated compliance officer.
All HVAMPs must develop internal, written AML policies. Major auction houses with established programs must publish their AML policies. The policies must include clear procedures for filing SARs with FinCEN. An HVAMP receiving an unsatisfactory client response on the source of funds or UBO identity should be required to file a SAR.
Employee training programs must be documented and updated to reflect current market trends. All current and incoming employees must be trained to detect suspicious activity.
Independent, risk-based audits should be conducted periodically to assess weaknesses in a company’s BSA/AML compliance program.
Mandatory CDD should be implemented. This rule requires HVAMPs to identify and verify beneficial ownership identities, allowing HVAMPs to assess whether they are dealing with legitimate or suspicious buyers. HVAMPs should be required to file SARs with FinCEN upon encountering a potentially suspicious UBO customer. As in the E.U. and U.K. and proposed in the ENABLERS Act, CDD should apply to UBO customers who wish to purchase an artwork valued above $10,000.

Considerations

As discussed, previous efforts to apply the BSA to the art market failed due to strong resistance from the art world, especially from smaller market players and peripheral AMPs like lawyers and investment advisors. Therefore, these recommendations attempt to mitigate these shortcomings.

First, mandated AML programs should apply only to core AMPs meeting a realistic and practical monetary threshold. While E.U. and U.K. laws mandate compliance on all those dealing in works of art exceeding €10,000, this requirement will likely cover nearly all small U.S. art dealers and galleries. FinCEN interim rules implementing section 352 of the USA PATRIOT ACT require dealers in precious stones and jewels to establish AML programs if they both purchased and sold at least $50,000 of covered goods in the preceding year. However, this threshold is still too low for the high-value art market.² If these thresholds are imposed, the costs associated with maintaining an AML program could be crushing on small mom-and-pop art dealers and galleries. A more reasonable approach would be to set the monetary threshold at $5 million in annual gross sales, thus preventing undue burdens on smaller dealers while still targeting high-value, money laundering–prone transactions.³ Moreover, the $5 million threshold has precedent in the Corporate Transparency Act of 2024, which requires a reporting entity to have more than $5 million in gross receipts or sales on their prior year’s federal income tax return.

Potential criminals may still attempt to launder their illicit proceeds through dealers under the $5 million benchmark. However, this threshold would create less resistance from smaller AMPs while still addressing the target high-value art market, where players regularly transact above $5 million. If criminals attempt to launder money through a large number of lower-valued artworks with the smaller AMPs, such attempts could become extremely burdensome, and these smaller dealers could eventually achieve sales revenue of $5 million or more—in which case they would become subject to the AML laws. FinCEN could adjust thresholds further if laundering persists but still should avoid imposing undue financial and administrative burdens on smaller AMPs.

Incidentally, backlash may arise over the differing thresholds for the art market versus the antiquities market, whose dealers are subject to AML obligations if trading antiquities valued at $10,000 or more. However, despite physical or categorical similarities between the two, the art market should be treated distinctively as it handles significantly higher volumes and values than the antiquities trade.⁴

Conclusion

The U.S. art industry is vulnerable to money laundering due to the lack of effective AML regulations. Congress has thus far failed to enact effective AML laws applicable to the art industry due to strong opposition from certain lobbying groups and smaller AMPs lacking resources to adopt AML compliance programs. While the E.U. and U.K. enforce stringent AML regulations, the United States, as the leader of the global art market, must catch up. This oversight creates a major loophole in the global enforcement of AML initiatives in this important industry. Implementing a regulatory framework involving large-scale U.S. art market players can strengthen AML efforts without overburdening smaller participants.

* Sarah Jane Kim is a legal research associate and former arts professional. She holds a B.A. in Art History from Georgetown University and M.A. in Art History from Columbia University, where she specialized in 19th-century French art. She has worked at the Metropolitan Museum of Art, Smithsonian, Phillips, and helped teach the Art History survey at Barnard College and Columbia University. She will be entering law school this fall.

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Expanding U.S. Anti-Money Laundering Laws to the Art Market: A Proposal for a New Regulatory Framework