Lifting The Veil: Art Deals, The Bank Secrecy Act And The Need For Art Fiduciaries
Bank secrecy act law BSA on the desk.-GETTY
A recent article in the New York Times, “As Money Launderers Buy Dalís, U.S. Looks at Lifting the Veil on Art Sales,” highlights both the use of the art market to launder drug money; and, how the government is dealing with the issue by extending the reporting requirements of the Bank Secrecy Act to the art and antiquities market. The reporting requirement is a sharp departure from the otherwise confidential art market and will require artists and collectors to change their mindset when buying and selling art. Indeed, this change, the proposed changes in the U.S. tax laws and the emergence of non-Fungible Tokens (NFT) is prompting a sea change in how fiduciaries manage these assets during lifetimes and after death.
The Anti-Money Laundering Act of 2020 (the “AMLA”), passed on January 2, 2021, includes provisions bringing art and antiquities dealers under the same anti-money-laundering (“AML”) regulatory framework as previously applied to financial institutions under the Bank Secrecy Act. The U.S. Treasury Department and Financial Crimes Enforcement Network (FinCEN) is directed by the AMLA to issue appropriate regulations to include art and antiquities dealers. This includes identifying the beneficial owners of the art and antiquities with which they are dealing; adopting appropriate compliance policies; keeping accurate ownership; provenance and transaction records; training their staffs on appropriate record keeping; reporting obligations, and, auditing their recordkeeping and compliance measures.
The law requires financial institutions to provide documentation to regulators whenever their clients deal with suspicious cash transactions involving sums over $10,000. The law does not require documentation for every transaction over $10,000. Businesses, however, must file IRS Form 8300, if they receive more than $10,000 in cash from one buyer.
Just as financial institutions were used prior to the BSA, criminals and fraudsters are now using the purchase of artwork to hide their illicit actions under the guise of legitimacy. Cash, rather than traceable electronic transactions, tends to be the preferred means of buying illicit goods, such as drugs. Money laundering tactics are employed to disguise those cash sources of revenue as legitimate transactions by buying artwork and then selling it, showing the cash as a legitimate gain on the transaction.
One ongoing concern with the BSA has been that, once the information is reported, that information can be accessed by the government without a warrant. This means that, conceivably, the government could in the future cross-reference the reported cost basis on the sale of an object with the reports filed when the item was acquired.
These requirements, and the proposed capital gains and estate tax law changes, means that art and other tangible and intangible assets, such as copyrights, NFT, and mineral rights to real estate, cannot be just lumped into the same estate planning techniques work for financial assets, as is commonly done today. The processes and procedures needed to comply with the BSA mandates that information be recorded and organized; the provenance and prior ownership needs to be researched and documented; tracking the success or failure of sales of similar items in the market; providing access to the necessary expertise and experience to value and determine what is a suspicious transaction; and, to make use of the digital tools available without placing the information gathered and reported at risk from cyber-attacks.
Artists and collectors need specialized fiduciary services now more than ever. Many use trusts, foundations and other entities as part of their estate planning for their collections. We have done this and are doing this for clients. This added layer of reporting means rethinking many estate plans.
This act is a good thing if it helps rid the art and antiquities market of the influence of illicit and illegal buyers, sellers and dealers. Since the BSA has very few guidelines defining transactions which are considered suspicious it is up to collectors and artists to proactively plan that they will need to report transactions the same as financial institutions do today. Much will depend on how the FINCEN drafts the new rules to apply to the art market, but a new type of planning, and a new type of fiduciary, is bound to emerge.