New FATF report highlights the risk of money laundering in NFT and the art market

Following the Financial Action Task Force’s (FATF’s) second plenary under its two-year presidency in Singapore, the global watchdog has published a new report on money laundering and terrorist financing in the art and antiques market. The report aims to raise awareness and understanding of the risks associated with these markets, and help the public and private sectors identify suspicious activities by listing risk indicators and threats related to cultural objects.

Other discussions in the plenary concerned:

• Changes in the gray list
• Suspension of Russia’s FATF membership
• Improve transparency of beneficial ownership
• Identify and disrupt the financial flows of ransomware
• FATF Vice-Presidency (2023-2025)

Digital art and NFTs

FATF’s report includes a section on digital art and non-fungible tokens (NFT). While 2021 saw a sharp increase in sales of digital art linked to NFTs – the sector’s potential market value reached $44.2 billion compared to $106 million in 2020 – blockchain analytics firm Elliptic found that over $100 million of NFTs were publicly reported as stolen through fraud between July 2021 and July 2022.

While regulation and supervision of NFTs is still nascent or non-existent in many jurisdictions, the FATF has identified market vulnerabilities for NFTs related to money laundering. These include:

• Transferring ownership is easy
• The lack of transparency
• Subjective pricing
• The absence of a need to physically transfer the art
• The possibility of exploiting the flaws in smart contracts used by an NFT platform in thefts or other illegal activities
• High value transactions
• The lack of monitoring of NFT wallets and the concealability of underlying VA transactions
• The inherent exposure to online theft
• Washing trade
• The selection of market participants that facilitate their exchange

However, the FATF also noted that some of these vulnerabilities could be reduced if policies and operational techniques were developed to improve law enforcement’s ability to track the transfer of NFTs between parties.

Money laundering risk indicators for the wider art market

The guidance also includes a non-exhaustive list of risk indicators related to money laundering and terrorist financing in both the public and private sectors of the art and antiques market. These include:

• The use of shell companies, trusts or third-party intermediaries, including art dealers, brokers, consultants or interior designers, to buy, hold or sell cultural objects
• Cash transactions, especially when using large amounts of cash
• Use of banknotes with large denominations
• Sale or purchase of art involving buyers who do not appear to be interested in paying a significantly higher price than the work’s face value
• Sale or purchase of art where a client is not interested in an object’s provenance, history, style, genre or artist
• Customer’s unwillingness to provide identification information to receive an art-secured loan, or early repayment or use of cash to pay such loan
• Transactions involving art market participants (AMPs) without the expertise to conclude high value purchases or sales
• Transactions involving Politically Exposed Persons (PEPs) or their family members or close associates

FATF reminds compliance staff that while a risk indicator may demonstrate or suggest the likelihood of suspicious activity, a single indicator regarding a customer or transaction may not alone warrant suspicion. Companies should instead use the risk indicators to request further monitoring and investigations, where appropriate.

AML requirements for UK art market participants

In February 2023, the British Art Market Federation also released updated guidance on AML requirements for UK AMPs and how they can be implemented. This guidance builds on the initial guidance published in August 2022. The advice has been endorsed by HM Treasury and aims to provide a detailed explanation of the new requirements outlined in the EU’s Fifth Anti-Money Laundering Directive (5AMLD), which came into force in force in all member states on 10 January 2020.

The main changes to the guidance center on legislative updates and a clarification of AMP’s obligations to report inconsistencies in company information that come to their attention. In particular, the updated guidance reflects the following:

• Artists selling their own work are no longer subject to AML requirements, but artists selling work on behalf of other artists must register as an AMP and follow appropriate customer due diligence (CDD) procedures
• In addition to assessing the risk of money laundering and terrorist financing, AMPs must now also assess the risk of proliferation financing when analyzing the risk profile of their business and customers
• From 1 April, an AMP must obtain full details of beneficial owners when the customer is an unlisted company, registered trust or limited liability partnership
• AMPs must report to HM Revenue and Customs (for registered trusts) and Companies House (for companies) any discrepancies in the information they have received regarding the beneficial owners of clients, for example:
  • Different names
  • Incorrect date of birth
  • Inconsistent nationality
  • Other correspondent address

For further guidance on obtaining beneficial ownership information, compliance staff should look for forthcoming FATF guidance to be published in March 2023.