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.