1MDB Scandal and How It Demonstrates the Need for Greater Anti-Money Laundering Protections in the Art Industry

With legislation that would extend
the Bank Secrecy Act (“BSA”) to dealers in art and antiques being contemplated
by Congress, it is important to highlight to dangers money laundering poses to
the art market. The Illicit Art and Antiques Trafficking Prevention Act (HR 5886)
(“Act”), proposed in Congress in May, would apply the BSA to the art market
with the aim of deterring money laundering in the industry. The Act would
require U.S. art dealers to follow similar FinCen reporting rules as banks,
financial institutions, credit card companies, casinos and dealers in precious
metals. Further, it would require art dealers to establish anti-money
laundering programs, do independent testing to monitor compliance and file
suspicious activity reports. Although critics have argued that the legislation
would put too great of a regulatory burden on art dealers, recent scandals have
demonstrated that such legislation is necessary to ensure the integrity of the
institution and deter its use for illicit purposes.

One of the greatest
scandals in modern financial history has surprising ties to the art
world and can have an impact on the future of art financing. The 1Malaysia
Development Berhad (“1MDB”) was initially a government plan to fund
infrastructure projects in Malaysia. However, recent
developments have uncovered that it had transformed into a
multibillion-dollar global corruption scandal. According to the U.S. Department
of Justice (“DOJ”), Jho Low (“Low”) and Roger Ng were indicted
with conspiring to launder billions of dollars from 1MDB. DOJ alleged that between
2009 and 2014, as 1MDB raised money to fund its projects through bond offerings,
billions of dollars were misappropriated and fraudulently diverted, with some
of the funds allegedly being used to
finance “The Wolf of Wall Street” and purchase over $200 million
worth of art. With art world at the center of the investigation, it is a
wake-up call for the industry to be more precautious with regard to sources of
funding and to embrace the proposed legislative changes.

            Although
the alleged money laundering scheme spanned three distinct phases, one phase in
particular involved the siphoning of funds from 1MDB to purchase expensive
artwork at a high-end auctions house. According to the DOJ civil
complaint for forfeiture of property purchased with funds
misappropriated from 1MDB, in 2013, more than $1.26 billion were raised in a
third bond offering and was diverted to a bank account held in the name of
Tanore Finance Corporation (“Tanore Account”). Tan Kim Loong (“Tan”), an
associate of Low, was the recorded beneficial owner of the Tanore Account. The
DOJ complaint further
alleges that 1MDB funds diverted to the Tanore Account were used by
Low and Tan to purchase tens of millions of dollars in artwork for their
personal benefit.

            Both
Low and Tan purchased highly sought-after artworks using the aforementioned
funds. Tan had opened up an account at Christie’s Auction House. The DOJ
complaint alleges that at two auctions in May 2013, Tan’s account purchased
five works of art for a collective total price of $58,348,750. The purchases
included Dustheads, by Jean-Michel
Basquiat for $48,843,750, in addition to Untitled
– Standing Mobile and Tic Tac Toe,
each by Alexander Calder, for $5,387,750 and $3,035,750, respectively. The funds
for these purchases were wired from Tan’s account with a Falcon Bank, a private
swiss bank, to Christie’s account with J.P. Morgan Chase. A Senior Vice
President at Christie’s, who served as a client representative for Tan’s
account and Low, informed
the DOJ that Low attended art auctions in New York and that they
believed that Low was making purchases for his corporate collection. Nothing
was flagged as suspicious by Christie’s.

            In
November 2013, Tan’s account had made more purchases at an Impressionist and
Modern Art Evening Sale at Christie’s, including La maison de Vincent à Arles by Vincent Van Gogh, for $5,485,000. However,
the compliance department Falcon Bank, the Swiss institution with which Tan
held the account that he would use to wire funds for artworks purchased at
previous auctions, raised concern. In an email to Christie’s, Tan explained
“I had been on the phone with Falcon Bank…to resolve this matter as the compliance
department has some questions that required my response about the amount of art
purchases made recently.” Again, nothing was flagged as suspicious by
Christie’s.

The aforementioned
incidents, and the failure of Christie’s to report any irregularities to
authorities, demonstrate the importance of including art auction houses in the
discussions surrounding the extension of the BSA. Critics of the legislation
argue that money laundering is not as pervasive an issue in the art industry as
proponents claim. They
note that money laundering through art is just a small part of a
bigger criminal operation. However, such criticisms ignore the detrimental
effect lax enforcement can have on the art industry. The art market is notoriously
inscrutable as the price of works can be more subjective, and
therefore more volatile, as compared to other commodities. This makes it an
enticing venture for those looking to “clean-up” laundered funds. Further,
illicit financing can have a detrimental effect on the provenance and liquidity
of art. If one is looking to high-priced works of art, clear title would be of
paramount importance. Without policing and compliance measures in place, the
threat of cleverly designed illegal financing schemes can provide for disastrous
consequences down the road.

The pending legislation would require dealers to
report transaction exceeding $10,000 and would further require those who sell
at least $50,000 worth of goods in a year to submit their financial records to
the U.S. government. With such anti-money laundering measures in place, perhaps
the illegal activities of the 1MDB conspirators would have been detected
earlier. If such regulatory measures are implemented, it is important for art
auction houses and dealers to cooperate with authorities to the fullest extent
so that the industries cannot be used again as safe-havens for laundered funds.

Gerald Ollins Shalam is a JD candidate, 2020, at NYU School of Law.