On October 30, 2020, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) published an advisory highlighting potential sanctions risks arising from dealings in “high-value artwork” (with “particular caution” urged for dealings in artwork worth over $100,000). The advisory puts art dealers and other parties engaging in art-related transactions on notice that high-value artwork transactions may play a role in sanctioned parties obtaining access to the U.S. market and financial system in contravention of OFAC regulations. For sanctions watchers, OFAC also announced that it does not interpret statutory exemptions for “informational materials” to apply to high-value artwork when the artwork serves primarily as an investment asset or medium of exchange for sanctioned parties, signaling an aggressive posture by OFAC in an area that had been viewed by many as exempt from sanctions law.
OFAC’s advisory indicates that Specially Designated Nationals (“SDNs”) have circumvented U.S. sanctions through the art industry. This revelation follows a similar determination by a U.S. Senate subcommittee in a July 28, 2020 report, which identified the art market as a highly conducive mode for money laundering and sanctions evasion given the unregulated and secretive nature of the industry. OFAC’s advisory identifies similar vulnerabilities in the art industry including the ability of actors to discretely operate in the art market, for example by concealing one’s identity through shell companies or third-party intermediaries, helping to hide prohibited conduct from law enforcement and regulators, and due to the “mobility, concealability, and subjective value of artwork.”
The advisory provides recent examples of sanctioned persons who have taken advantage of the art market to launder money or evade sanctions, including:
- A Lebanon-based diamond dealer and art collector, Nazem Said Ahmed, suspected of laundering substantial sums of money in support of Hizballah, a Specially Designated Global Terrorist group;
- Sanctioned Russian oligarchs Arkady and Boris Rotenberg, who used shell companies to engage in high-value artwork transactions following the imposition of sanctions; and
- The North Korean government, known for earning tens of millions of dollars in revenue by producing and exporting statuary to foreign nations.
Given these examples and the future potential for high-value art transactions being a conduit for nefarious activities, the OFAC advisory warns art galleries, museums, private collectors, auction companies, agents, brokers, and other participants in the art market that they face civil liability for direct or indirect transactions with sanctioned parties. OFAC urged these art market participants to adopt risk-based compliance programs to mitigate their exposure to sanctions-related violations and conduct risk-based due diligence, as appropriate.
Interestingly, OFAC also clarified that it does not view statutory exemptions for “informational materials” in its two most prominent statutes – the International Emergency Economic Powers Act and the Trading with the Enemy Act (see 50 U.S.C. § 1702(b)(3); 50 U.S.C. § 4305(b)(4)) – as applying to high-value art transactions involving SDNs or other blocked parties when the artwork functions primarily as an investment asset or medium of exchange. This interpretation is not a slam dunk when compared with the statutory text, which states that these statutes do not grant OFAC, via the President, “the authority to regulate or prohibit, directly or indirectly … the importation from any country, or the exportation to any country, whether commercial or otherwise, regardless of format or medium of transmission, of any information or informational materials, including but not limited to … artworks” (emphasis added).
By adding that the artwork must function primarily as “an investment asset or medium of exchange,” OFAC may be indicating that when artwork functions like a financial asset (which OFAC has long regulated), it ceases to qualify for the informational materials exemption above. It remains to be seen whether a court would accept this argument, but OFAC’s interpretations are rarely challenged in court and generally accorded substantial deference when they are. That said, the specific reference to artworks in OFAC’s underlying statutes may give anyone targeted by OFAC under the new advisory an argument to make in court. In either case, we’ll be monitoring the situation to see if OFAC takes any further actions based on its new art advisory.