A recent New York Times article 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 requirements are 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 U.S. tax laws and the emergence of non-fungible tokens, or NFTs, is prompting a sea change in how fiduciaries manage these assets during lifetimes and after death.
The Anti-Money Laundering Act of 2020
The Anti-Money Laundering Act of 2020, which passed on January 2, 2021, includes provisions bringing art and antiquities dealers under the same anti-money-laundering regulatory framework as previously applied to financial institutions under the Bank Secrecy Act. The U.S. Treasury Department and Financial Crimes Enforcement Network, known as FinCEN, is directed by the Anti-Money Laundering Act to issue appropriate regulations to include art and antiquities dealers.
Given the new and far-reaching jurisdiction of FinCEN, art galleries as well as art and antiquities dealers and other institutions such as Sotheby’s and Christies, will have the same obligations with respect to the Anti-Money Laundering Act, the Bank Secrecy Act and Suspicious Activity Report filing responsibilities as banks and other financial institutions do today.
For galleries and dealers, all of this increased scrutiny entails identifying the beneficial owners of the art and antiquities with which they are dealing, adopting appropriate compliance policies, and keeping accurate ownership, provenance and transaction records. It also put the focus on training their staffs on appropriate record keeping, reporting obligations, and auditing their recordkeeping and compliance measures.
What Is the Bank Secrecy Act?
Also known as the Currency and Foreign Transactions Reporting Act, the Bank Secrecy Act was enacted by the U.S. legislature in 1970 to prevent financial institutions from being used as tools by criminals to hide or launder their ill-gotten gains. The law requires banks and other financial institutions to provide documentation, such as currency transaction reports, to regulators. Such documentation can be required from banks whenever their clients deal with suspicious cash transactions involving sums of money in excess of $10,000. The Bank Secrecy Act grants authorities the ability to more easily reconstruct the nature of the transactions.
The law now 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.
Understanding the Bank Secrecy Act in Regards to Art and Antiquities Dealers
The Bank Secrecy Act was put into action to better identify when money laundering is used to further a criminal enterprise, support terrorism, cover up tax evasion or disguise other unlawful activities. The legislation was initially used to counteract the funding of criminal organizations, but soon came into use to address the funding of terrorist groups.
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.
How the Bank Secrecy Act Works
There is a general rule that any person in a trade or business must file Form 8300 if their business receives more than $10,000 in cash from one buyer. This can be the result of a single transaction or of two or more related transactions. The rule can apply to an individual, a company, corporation, partnership, association, trust, or an estate.
Form 8300 must be filed by the 15th day after the cash transaction took place. This requirement is applicable if any part of the cash transactions occurs within the United States, its possessions or territories. There is a list of exceptions that do not call for such scrutiny. Government departments or agencies and companies listed on major North American exchanges are examples of exempt parties.
One ongoing concern 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 cross-reference the reported cost basis on the sale of an object with the reports filed when the item was acquired. This requires that information will need to be gathered and kept with more accuracy than the box of papers some now use.
The Impact on Planning for Artists and Collectors
These requirements, and the proposed tax law changes, means that art and other tangible and intangible assets, such as copyrights, NFTs and mineral rights to real estate, cannot be just lumped into the same estate planning techniques that work for financial assets, as is commonly done today. The processes and procedures needed to comply with the Bank Secrecy Act mandate that information needs to 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. This added layer of reporting means rethinking many estate plans.
Conclusion
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 Bank Secrecy Act 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.
Matthew Erskine is managing partner of Erskine & Erskine in Worcester, Mass., which provides legal and fiduciary services for unique assets.
