What’s Next for 2020? Art Blockades, Money Laundering Rules, OFAC Sanctions

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At the recent Observer NY conference, Business of Art Observed, CPN editor Kate Fitz Gibbon and Megan E. Noh, a partner in the Art Law Group at New York law firm Pryor Cashman LLP, talked about current and pending legislative measures that could seriously impact the art market as a whole. Fitz Gibbon and Noh also shared generally accepted best practices to avoid legal entanglements in art businesses and useful resources for the art trade.[1]

Graphic showing 2018 Import Restrictions. Algeria, In 2019, Chile and Jordan were added to the list of countries, making 23 nations whose art is blocked from entry to the U.S. Requests for import bans adding Morocco and Yemen were also heard by the CPAC committee in 2019 and are expected to be added in 2020. Requests from Turkey and Tunisia will be heard in January 2020. Graphic by Katherine Brennan.

Fitz Gibbon summarized major changes in laws and enforcement policies since the early 2000s and especially in the last decade. These include U.S. adoption of import blockades on art that cover virtually all of Latin America, China, the Mediterranean region from Italy through Greece, Cyprus, and Bulgaria, most of the Middle East and North Africa, and the recent request from the government of Turkey to halt import of all ancient Turkish and later Ottoman art. She noted that countries such as Mexico and India have made trade in even Modern artworks unlawful and that aggressive local enforcement of these foreign laws discourages foreign dealers from showing in trade fairs in New York City, the world’s art capital.

Frida Kahlo, The Wounded Deer, 1946. Decrees issued by the Mexican government make it illegal to export Modern artworks by Frida Kahlo, José Clemente Orozco, Diego Rivera, Saturnino Herran, David Alfaro Siqueiros, Jose Maria Velasco, Remedios Varo Uranga and Maria Izquierdo and more. The same decrees seek the return of artworks by these artists to Mexico.

She said that while criticism for past wrongs is sometimes deserved, many accusations against the trade are wildly exaggerated or entirely false. Today, the art trade, museums and most collectors have recognized that the paramount issues are preservation, global access, and uncensored scholarly study, not the acquisition of objects at all costs.

She noted that the U.S and European art trade has not only refused to deal in looted materials from the Middle East but has assisted law enforcement to apprehend and seize stolen objects. There has been no evidence of any increase in illegal trade in Europe, even though the Middle East has been in chaos for a decade; and there has not been a single seizure of objects associated with ISIS or other terrorists in the U.S.

Nonetheless, she said, the media seems determined to propound the myth that the illegal trade in cultural goods is a pillar of organized crime, despite law enforcement data contradicting this claim.

Modern and Contemporary art dealers are not immune from legal restrictions most often applied to antiquities. Not only are they equally subject to national ownership laws prohibiting export of the work of major artists; anti-art trade rhetoric, accusations of widespread illegality, and legislation eliminating client privacy will also impact their businesses. Fitz Gibbon noted that the Washington-based Antiquities Coalition, an anti-collecting organization with ties to the Middle East and China, is urging the inclusion of all art dealers within the scope of the anti-money laundering bill, HR 2514, that has passed the House and is pending in the Senate.

The EU’s own research, commissioned from Deloitte, showed that none of the Member States had reported any evidence of financing of terrorist activities linked to cultural property.

Fitz Gibbon also pointed out that the Antiquities Coalition announced a Financial Crimes Task Force in April 2019, an ‘initiative’ based on a partnership with the Association of Certified Anti-Money Laundering Specialists (ACAMS), an organization that certifies and promotes anti-money laundering service providers. The Antiquities Coalition continues to maintain (without citing a single instance of U.S. art trade involvement in terrorism) that its goal is to “end impunity for the illicit trade in cultural patrimony, and sever this key source of funding for violent extremist groups.”[2]

Both Fitz Gibbon and Noh called on all art dealers to voice their concerns to legislators and work together to give journalists clear and accurate information to counter the negative representation of the art trade in the media.

Legislative Developments and Practical Solutions

Attorney Megan E. Noh, a partner in the Art Law Group at New York law firm Pryor Cashman, discussed pending anti-money laundering (AML) legislation, followed with practical solutions for the art trade.

Noh set the stage by briefly reviewing the European Union’s 2018 bringing into force of the 5^th Anti-Money Laundering Directive, noting that an enhanced focus on financial diligence is a global trend.  She then addressed a striking proposal recently gaining traction in the U.S. legislature: HR 2514, the Coordinating Oversight, Upgrading and Innovating Technology, and Examiner Reform Act of 2019, also known as the “COUNTER” Act. This currently-pending anti-money laundering legislation proposes to bring antiquities dealers within the definition of “financial institutions” regulated by the Bank Secrecy Act, thereby making certain members of the art trade subject to reporting requirements that will include providing details of their transactions and client information to the U.S. federal government.

She noted that New York Congresswoman Carolyn Maloney is a co-sponsor of HR 2514 (as a rider on HR 2513, a corporate transparency bill she introduced), and that the bill has bi-partisan sponsorship, unlike a prior incarnation introduced in May 2018 as HR 5886 (which failed to sustain support after the mid-term elections).  If the COUNTER Act becomes law, the implications for the trade may be far-reaching, as the class of persons proposed to be regulated is broadly defined as those “trading or acting as an intermediary in the trade of antiquities, including an advisor, consultant or any other person who engages as a business in the solicitation of the sale of antiquities.”  Moreover, the law does not define what an “antiquity” is, or define the functions of an advisor, consultant or person who solicits the sale of antiquities.

Instead of investigating the need for possible legislation prior to passage, HR 2514 would commission a study on the “facilitation of money laundering and terror finance through the trade of works of art or antiquities” after passage.  Noh pointed out that the art trade will not necessarily be consulted: as described by the text of the bill, the study is to be conducted by the Secretary of the Treasury, in coordination with the FBI, the Attorney General, and Homeland Security Investigations.

HR 2514 does not define the size of the businesses or the threshold values that would require reporting, or which markets, including whether domestic or international, should be subject to regulations.  The bill reserves evaluation of those metrics and mechanics to the aforementioned law enforcement agencies after passage of the bill and during a 180-day period leading up to a report to the U.S. House of Representatives, with the potential impact of such report on rulemaking unclear.  Noh accordingly urged members of the art trade to become involved immediately in order to seek to have their input considered as part of the study, and ultimately to seek to influence these critical regulatory decisions.

Noh also recognized that passage of HR 2514 would have disparate impacts on different art market entities, by virtue of both their business models and economies of scale with respect to available resources; some larger businesses could restrict their businesses to non-regulated areas, but businesses that worked exclusively in antique, ancient, or ethnographic art would likely not have that choice.

Noh then provided useful guidance on performing due diligence.  The first and simplest rule of thumb is the “smell test.”  If a deal seems funny, investigate or just don’t do it.  (Remember, if it is passed, the new legislation may classify a person only tangentially involved in actual antiquities transactions as a regulated “financial institution.”)  Noh referenced the Responsible Art Market guidelines, which have a list of red flags for suspicious transfer and are available at no charge online.

Lesser known resources include the U.S. Office of Foreign Assets Control (OFAC) Resource Center webpage. This searchable database identifies targeted countries and specific individuals with terrorist, narcotics and other criminal associations.

ICIJ website links to databases of individuals and companies associated with money laundering, https://www.icij.org/

She also introduced the fascinating (if complex) free online resource comprising the International Consortium of Investigative Journalists (ICIJ) Offshore Leaks Database.  This website identifies the hundreds of thousands of offshore companies, foundations, and trusts whose ownership and links to other entities were exposed in the leaks of the Panama Papers, Offshore Leaks, Bahamas Leaks, and Paradise Papers investigations.

Noh identified several for-pay global risk-assessment online search tools such as LexisNexis Risk Solutions and Thomson Reuters World-Check that are effective for larger-volume searching (i.e. “batch” searches in advance of auctions), and several investigative compliance risk vendors who can be engaged for “one off” or “a la carte” investigative services. She also noted that even without hiring professional researchers, a basic Google search can often identify red flags – including if the individual or company has no online presence at all.

Noh also suggested that some risks can be allocated contractually through representations and warranties of the transacting parties and indemnification provisions, but cautioned that violations of certain relevant laws correspond to criminal liability, the risks of which (including reputational harm or even imprisonment) cannot be fully indemnified.

Like Fitz Gibbon, Noh closed with a reminder that the law enforcement agencies at the local, state, and federal levels are aggressively pursuing alleged violators of existing laws impacting cultural property, illustrating her point with an image of an application for a search warrant served in recent years on a major encyclopedic museum in relation to an alleged import violation.

OFAC Sanctions Target Diamond Dealer Who Collects Art

On December 13, 2019, the U.S. Treasury issued a press release announcing counter-terrorism sanctions against two “Lebanon and the Democratic Republic of the Congo (DRC)-based money launderers and their affiliated companies.” The businessmen named in the release are accused of providing or facilitating the transfer of tens of millions of dollars “for Hizballah, its financiers, and their malign activities.” The two businessmen are Nazim Said Ahmad and Saleh Assi; they are said to be based in Lebanon and the Democratic Republic of the Congo respectively. An accountant, Toni Saab, who provided services to Assi was also listed. The OFAC press release details various associations and transactions involving individuals said to be high in the hierarchy of Hizballah.

The individuals are now listed in the U.S. Office of Foreign Assets Control (OFAC) sanctions database mentioned by Megan Noh above. By targeting the three individuals as associated with terrorist funding, the U.S. government not only seeks to freeze whatever assets they have in the U.S., it also places anyone doing business with them at risk of being exposed to sanctions or subject to an enforcement action.

Nazem Said Ahmad in his penthouse in Beirut, Lebanon. U.S. Treasury Department.

The first named, Nazim Said Ahmad, was pictured in the Office of Foreign Assets Control (OFAC) press release in his Beirut penthouse, seated in front of a Jean-Michel Basquiat painting and sculpture by Robert Indiana. Ahmad was said in the OFAC release to have a very large art collection worth tens of millions of dollars, including works by Picasso and Warhol. A New York Times article about the OFAC designation also mentioned works by Basquiat, Ai Weiwei, and others. The Ahmad collection is said to be primarily focused on Modern and contemporary artworks, especially American art.

The press release states that Ahmad and Assi generated funds for Hizballah through their diamond trading activities. (The diamond and gemstone trade is traditionally highly secretive, and the similarity of stones and their ready market makes them essentially fungible, readily exchangeable goods, unlike artworks, whose sales require authentication and an ownership history to establish valid title.) Nonetheless, transactions in cash, negotiable instruments, artworks, real property, and other forms of assets are also covered under the OFAC regulations.

By concealing bulk cash transfers and illicit financial transactions in the diamond business, Ahmad is accused of hiding ill-gotten gains from the Lebanese government and depriving the government of tax revenue. According to the press release, Ahmad keeps some of his money in high-value art assets in order to partially avoid U.S. sanctions.

The press release also stated briefly that he used an art gallery in Beirut to launder money. However, the Beirut gallery mentioned, Artual Gallery, appears to be primarily a virtual gallery online. It is operated by Ahmad’s daughter, who is in her early twenties, and features the work of contemporary artists from the U.S. and around the world. The press release did not make it clear if this gallery was a profitable enterprise or a hobby, and the OFAC links to businesses associated with illicit activities did not appear to include the gallery in the list of targeted companies belonging to Mr. Ahmad.

The second named individual, Saleh Assi, is also a diamond dealer. The OFAC press release also accuses him of deliberately fixing bread prices, which sparked protests in Kinshasa. He is accused of destabilizing the Democratic Republic of the Congo government by his corrupt financial dealings. The press release lists a number of gem, real estate and agri-businesses associated with either or both Nazim Said Ahmad and Saleh Assi.

Art businesses need to be aware that engaging in business transactions with these individuals and their companies – or with any individual or business targeted by the Office of Foreign Assets Control – could result in government action against the art business and its principals, who could be subject to criminal and civil penalties. The OFAC press release provides links with new OFAC guidance for the public, under which individuals and businesses are “prevented from engaging in transactions involving information or informational materials, including artwork, that are the property … of persons designated as Specially Designated Global Terrorists (SDGTs).” The linked FAQs also specifically mention art transactions.

Excerpts from FAQs: Counter Terrorism Sanctions

The following FAQs are on the linked website and identified as new instructions as of 12/13/2019. They pertain to transactions with Specially Designated Global Terrorists (SDGTs) and are quoted here to illustrate federal government instructions pertaining to sanctions. Readers are cautioned that these are only excerpts from the FAQs listed; they should go to the OFAC website for complete and/or updated information.

“812. As a U.S. person, am I prohibited from engaging in transactions involving information or informational materials, including artwork, that are the property or subject to an interest in property of persons designated as Specially Designated Global Terrorists (SDGTs) under or otherwise blocked pursuant to Executive Order 13224, as amended, (E.O. 13224)?

“Yes. In general, any transaction or dealing by a U.S. person in any property or interests in property of persons designated as SDGTs under or otherwise blocked pursuant to E.O. 13224 is prohibited. Such property includes artwork and other information and information materials. Certain exemptions available under the International Emergency Economic Powers Act (IEEPA) relating to personal communications, humanitarian donations, information or informational materials, and travel do not apply to transactions with SDGTs or persons otherwise blocked pursuant to E.O. 13224…

“For purposes of these prohibitions, U.S. persons include all U.S. citizens and permanent resident aliens regardless of where they are located, all persons and entities within the United States, and all U.S.-incorporated entities and their foreign branches. U.S. persons who engage in prohibited transactions with SDGTs or with persons otherwise blocked pursuant to E.O. 13224 may be subject to civil or criminal penalties.

“Non-U.S. persons who engage in prohibited transactions or dealings subject to U.S. jurisdiction with SDGTs or with persons otherwise blocked pursuant to E.O. 13224 may be subject to civil or criminal penalties, and may also risk being sanctioned by OFAC. Foreign financial institutions may also be subject to correspondent and payable through account sanctions if they knowingly facilitate significant transactions for or on behalf of an SDGT. [12-13-2019]

“813. As a member of the art community, what are my compliance obligations with respect to Executive Order 13224, as amended?

“U.S. persons (including galleries, museums, private art collectors, auction companies, and others that conduct or facilitate transactions involving artwork) must ensure that they do not engage in transactions with persons listed as Specially Designated Global Terrorists (SDGTs) on OFAC’s SDN List or with persons otherwise blocked pursuant to E.O. 13224, unless authorized by OFAC. U.S. persons should develop a tailored, risk-based compliance program, which may include sanctions list screening or other appropriate measures. An adequate compliance solution will depend on a variety of factors, including the type of business involved, and there is no single compliance program or solution suitable for every circumstance…”

“The names of, and identifying information for, all individuals and entities included on OFAC’s sanctions lists may be located via OFAC’s free, online search engine at the following URL: http://sanctionssearch.ofac.treas.gov. In addition, OFAC offers text and PDF versions of these lists for manual review and a number of data file versions of its lists that are designed to facilitate automated screening. Depending on the scale, sophistication, and risk profile of your business, you may consider one of the numerous commercially available screening software packages. [12-13-2019]”

“814. I am currently in possession of artwork in which a Specially Designated Global Terrorist (SDGT) has an interest. What should I do?

“Once it has been determined that you or your institution is holding or is in possession of artwork that is the property of an SDGT or a person otherwise blocked pursuant to E.O. 13224, or in which such a person has an interest, you or your institution must ensure that access to that artwork is denied to the SDGT or blocked person and that your institution complies with OFAC regulations related to blocked assets, including restrictions on the sale or transfer of the artwork to third parties. Pursuant to 31 CFR section 501.603, blocked property, physical or financial, must be reported to OFAC within 10 business days; U.S. persons must also comply with all other applicable reporting obligations. See FAQs 49 and 50. Questions about whether a transaction should be blocked should be directed to OFAC at 202-622-2490 or [email protected]. [12-13-2019]”

[1] Fitz Gibbon’s program was entitled ‘Zombie Statistics, Draconian Laws, Media Complicity: The End of the Global Antiquities Trade.’ Noh’s program was ‘Transactional Risk Management: Legislative Developments and Practical Solutions.’

[2] See Antiquities Coalition, “Combating Cultural Crimes: Where Are We Now?”, a moderated discussion, April 18, 2019, available at https://theantiquitiescoalition.org/combating-cultural-crimes-where-are-we-now/ (last accessed Dec. 18, 2019).