BRIEFING NOTE
MONEY
LAUNDERING
RISK FOR HIGH
VALUE DEALERS
JUNE 2020
THINK TANK | COMMUNITY | ADVISORY | TECHNOLOGY | OUTSOURCING
www.crime.financial
T H E M I S
INTRODUCTION
High value goods are often used to launder the
proceeds of criminal activities. Fine art, yachts,
jewellery and other luxury items have featured in a
number of recent high-profile financial scandals,
ranging from the 1MDB corruption case to the Panama
Papers revelations.
Fine art Antiques and collectibles
Boats and yachts
Luxury motor vehicles
Jewellery
Gold, silver and other precious metals
Diamonds, sapphires and other precious
stones
No universally recognised definition of a “high value
good” exists. However, an examination of AML/CFT
guidelines in Australia, New Zealand and the United
Kingdom finds that the following goods most
frequently qualify as high value and of potential
money laundering risk:
Broadly speaking, a high value dealer (HVD) is,
therefore, someone involved in the buying and
selling of any of the aforementioned goods in the
ordinary course of their business.
02
AML/CFT LEGISLATION COVERING
HIGH VALUE DEALERS
BACKGROUND
Some jurisdictions propose narrower definitions
that delineate specific legal obligations for HVDs. In
the UK, for example, HM Revenue & Customs
(HMRC) defines a business or sole trader as a HVD
where it transacts in goods and receives or makes
cash payments of €10,000 or more (in any
currency). These payments can occur by way of a
single transaction or a series of transactions. When
transactions are below €10,000, represent a
payment for services, or are not executed using
cash, a UK business does not legally qualify as a
HVD and so is not subject to AML regulation
covering the high value goods sector.
A report published by Transparency International
in 2017 found AML/CFT legislation for the luxury
goods sector to be wanting in many high-risk
markets. The organisation called on governments
including China, Japan, the USA and the UK to
introduce more stringent due diligence
requirements on luxury goods sales and improve
enforcement of existing requirements. Notably, it
pointed out that “few countries explicitly include
vehicles, aircraft and boats, for example, under
the sectors that need to comply” with AML
obligations.
A recent legislative change at European Union
level does, however, expand the scope of
AML/CFT obligations in EU Member States to
cover more high value goods. The Fifth EU Money
Laundering Directive (5AMLD), which came into
force on 19th July 2018, amends and broadens the
provisions of the Fourth Directive in a number of
ways that are relevant to HVDs.
Other countries have different approaches to
AML/CFT regulation for HVDs. Canada, for
example, only imposes obligations on dealers in
precious metals and stones (DPMS) – and
moreover, only when they engage in the purchase
or sale of these goods via a single transaction
worth CA$10,000 or more. Certain countries
prohibit any cash transactions over a certain
threshold. This is the case in France, for instance,
with a €1,000 maximum cash limit in place for
payments by residents and for professional activity.
03
AML/CFT LEGISLATION COVERING
HIGH VALUE DEALERS
BACKGROUND
Firstly, “transactions related to oil, arms, precious
metals, tobacco products, cultural artefacts and
other items of archaeological, historical, cultural
and religious importance, or of rare scientific value,
as well as ivory and protected species” are
included in the new Directive. These types of
transactions are highlighted as being of high
potential risk. 5AMLD therefore requires businesses
to consider them when assessing the need for
enhanced due diligence.
Unlike art dealers, dealers in precious metals and
stones are also included in the Financial Action
Task Force (FATF)’s international AML standards.
The FATF classifies DPMS as “designated nonfinancial businesses and professions” (DNFBPs),
to which a series of its 40 AML/CFT
Recommendations apply.
More specifically, the FATF requires dealers in
precious metals and stones to conduct customer
due diligence and file suspicious transaction
reports when engaged in cash transactions of $/
€15,000 or above. This threshold is specified in
Recommendations 22 and 23.
Secondly, 5AMLD introduces “persons trading or
acting as intermediaries in the trade of works of art”
– including when carried out by art galleries,
auction houses and free ports – as “obliged
entities”. Under the Directive, these newly obliged
entities must perform due diligence procedures on
customers where the “value of the transaction or a
series of linked transactions amounts to €10,000 or
more”, irrespective of payment method. Notably,
they have to obtain official documentation to
identify their customers, assess the background
and purpose of transactions as far as reasonably
possible, and conduct specific enhanced due
diligence if a transaction involves a high-risk third
country.
Since the FATF’s 40 Recommendations are the
main driver for financial reporting legislation in the
180+ jurisdictions that have committed to them,
the aforementioned requirements for DPMS are
widely implemented worldwide. However, the
FATF standards do not cover any other HVDs
besides DPMS and real estate, as Transparency
International points out.
EU Member States were required to transpose
5AMLD into their national laws by 10th January
2020. As a result of the new Directive, AML/CFT
controls for the art market in Europe are now much
stronger than elsewhere. In the United States, the
U.S. Bank Secrecy Act (BSA) covers dealers in
precious metals, stones and jewels, but not those in
art or other high value goods. This is despite an
attempt in 2018 to amend the BSA through a bill
concerning art and antiquity dealers.
04
EXAMPLES OF MONEY LAUNDERING IN
THE HIGH VALUE GOODS SECTOR
High value goods are typically used in the so-called “integration phase” of the money laundering process.
This phase involves the movement of previously laundered funds back into the legitimate economy. Buying
a piece of art, jewellery or other such luxury item converts these funds into a “clean” asset. The higher the
value of the asset, the more money derived from illicit activities can be injected into it. This is one reason
why high value goods are favoured by money launderers - another being their increase in value over time
and the associated potential for lucrative (and often anonymous) resale.
Examples of the above process abound.
One of the most iconic cases of money
laundering using high value goods
involved American artist Jean-Michel
Basquiat’s 1981 painting “Hannibal”.
Hannibal, appraised at a value of $8
million, was smuggled into the United
States in 2007 by Edemar Cid Ferreira,
a former Brazilian banker. Ferreira
claimed the painting was worth $100 in
order to avoid customs duty and
associated scrutiny. The painting was
later seized via a civil forfeiture action,
whereas Ferreira was convicted of
money laundering and other offences.
The embezzler had allegedly converted
some of his laundered funds into a
12,000-piece art collection.
Many other ML cases involving high value goods implicate high-level politicians. In September last year, 25
supercars, including Ferraris, Bugattis and Maseratis, fetched nearly $27 million at a charity auction in
Switzerland. These cars had been seized from Teodoro Nguema Obiang Mangue, the vice president of
Equatorial Guinea and son of the country’s president. Obiang was found to have spent over 1,000 times his
official annual salary on luxury goods that also included property and art. He was investigated in several
jurisdictions, and ultimately convicted of money laundering and misappropriation of public assets. The case
demonstrates how corrupt officials can use high value goods to “legitimise suspicious wealth”.
05
TERRORIST FINANCING RISKS
FACED BY HIGH VALUE DEALERS
The Australian Government Attorney-General’s
Department points out that HVDs are generally less
susceptible to terrorist financing than to money
laundering. This is because “TF usually involves
smaller amounts of funds”.
On a more global scale, UN Security Council
resolution 2199 (2015) called on all UN Member
States to prohibit cross-border trade “in Iraqi and
Syrian cultural property and other items of
archaeological, historical, cultural, rare scientific,
and religious importance illegally removed from
Iraq since 6 August 1990 and from Syria since 15
March 2011”.
One category of high value goods does, however,
stand out in terms of TF risk. Cultural and
archaeological artefacts are a “favourite revenue
vehicle for terrorists”, as reports of ISIS using
illegally acquired artefacts for financial gain
demonstrate. In a study published in 2015, the FATF
found that ISIS raised funds from antiquities in two
key ways – through the sale of looted artefacts and
through the taxation of traffickers in ISIS-held
territory. Besides financial gain, these activities were
important to ISIS because they furthered its goal of
destroying culture.
Free ports have been singled out as a particularly
weak link in the terrorist financing-artefact nexus,
most notably by ex-French Finance Minister
Michel Sapin. In December 2016, Swiss
authorities seized antiquities that had been
looted from Syria, Yemen and Libya and were
being stored in the Geneva Free Port. The objects
had been there since 2009/2010, having arrived
via Qatar.
The FATF emphasised the difficulty of estimating the
total amount ISIS earned from artefacts, since the
looting took place in a war zone and the items were
sold on the black market. However, the problem was
serious enough for the EU’s new 5AMLD legislation
to include transactions related to “cultural artefacts
and other items of archaeological, historical, cultural
and religious importance” in its remit. This was
allegedly a move specifically targeting TF as
practiced by groups like ISIS.
In recognition of the ML/TF risks associated with
free ports, 5AMLD specifically covers transactions
over €10,000 “carried out by free ports”.
Accordingly, EU Member States must now take
extra measures to identify and report suspicious
activities in these ports.
06
ML/TF THREAT MITIGATION FOR HIGH
VALUE DEALERS
HVDs face a diverse range of ML/TF risks,
depending on the type of high value goods they
buy or sell, the structure of their business, the
nature of their customers, the jurisdictions they
operate in, and other such factors. The multiplicity
of potential HVD risk profiles means that no onesize-fits-all solution exists when it comes to ML/TF
risk mitigation in the high value goods sector.
Instead, many national and international guidelines
suggest that HVDs adopt a risk-based approach
(RBA), in order to allocate AML resources in a way
that is commensurate with specific business risks.
1. The client’s identity;
2. The object’s provenance;
3. The origin of the buyer’s funds involved in the
transaction.
In the case of high value transactions, client
identity verification must involve customer due
diligence and should attempt to identify the
ultimate beneficial owner. It may necessitate
enhanced due diligence if the client is a politically
exposed person or originates from a high-risk
jurisdiction. These are the requirements set out by
the 5AMLD but can be treated as general best
practice.
In 2008, the FATF published a specific RBA
guidance document for dealers in precious metals
and stones. This seeks to help DPMS identify and
tackle their ML risks. The AML Standards for Art
Market Operators proposed by the Basel Institute
on Governance, an anti-corruption NGO, outline a
risk-based approach for art dealers. They note the
differences in risk exposure and resources
between small art businesses and “large auction
houses or major dealers and galleries”.
Furthermore, efforts should be made to establish
the provenance of a high value good in order to
ascertain its authenticity, ownership history and
geographic risk. The latter is particularly important
for two types of HVDs. Dealers in the antiquities
realm should seek to identify the geographical
origin of artefacts, especially if these could be
linked to countries in which terrorist organisations
operate. Similarly, dealers in precious metals or
stones should ascertain whether their goods were
mined in regions that are vulnerable to ML. Specific
red flags for DPMS to look out for are helpfully
listed in the FATF’s aforementioned DPMS-focused
RBA guidance document.
Although sector-specific, both of the
aforementioned documents contain guidance that
can be instructive for all HVDs. For example, the
Basel Institute’s standards delineate three main risk
categories that dealers should address. These are:
07
ML/TF THREAT MITIGATION FOR HIGH
VALUE DEALERS
Finally, it is important for HVDs to assess the origin of payments and purpose of transactions, especially
when they are cash-based and of particularly high value. Many international guidelines also warn of the
potential risks associated with payments from third party accounts, or payments from accounts in
countries unrelated to the location of the counterparty/transaction.
Once ML/TF risks have been established, HVDs must put in place appropriate AML/CFT policies and
procedures to detect and manage these risks. Although policies should again be business-specific, they
must comply with relevant regulations and can be modelled on certain best practice strategies. Some of
the most common recommendations found in national and international AML guidelines are outlined
below.
Firstly, larger businesses are advised to appoint a compliance officer who will receive suspicious
activity reports from staff and file them to the relevant authorities in a timely fashion.
Secondly, staff must be trained to recognise and respond to ML threats appropriately, including via
liaison with the compliance officer.
Thirdly, “accurate, up-to-date” records of transactions and suspicious activity should be maintained.
Finally, it is important to review the effectiveness of controls frequently and make necessary
adjustments promptly so as to ensure consistent functioning of the AML/CFT system.
08
CONCLUSIONS
Recent scandals such as the 1MDB fraud with its
parade of superyachts, Hermes bags and
actresses clad in rare diamonds show that when
criminals use high value goods it tends to make
the headlines. HVDs are very much in regulators
sights and consequently the sector needs to
develop its own understanding of how it is
targeted by money laundering networks and how
to mitigate the threat.
Solving this problem requires broader education
on the risks associated with bribery and
corruption and an ability to conduct accurate due
diligence on clients, their source of wealth and
the provenance of the high value goods. That
this is taking place when regulators are yet to
develop a comprehensive risk framework on high
value goods and HVDs are unused to the same
consistent regulatory oversight as banks for
example which only makes the problem harder.
Themis can also help high value dealers by
performing a health check on your existing
financial crime risk management approach. We can
help design solutions that are tailored to suit the
specific size and nature of your business.
As the scale of international money laundering
becomes more apparent, HVDs have a growing
role to play in preventing their sector from being
used by criminals with money to hide.
Implementing successful money laundering
controls gives HVDs the chance both to enhance
their reputation through best practice and to play a
leading role in tackling this global problem.
Contact one of our team to find out more.
Themis has developed its own tools to help in
this regard both by educating management and
staff about the risks faced by their businesses
and providing services which enable firms to
outsource their risks. Our online learning tool
provides detailed information about global
corruption, the regulations meant to stop it and
how firms can implement best practice. We also
have a dedicated investigations team who offer
enhanced due diligence across the complete
range of customers’ potential risk profiles.
Sandeep Sroa
Associate Director
sandeep.sroa@themisservices.co.uk
+44 (0) 7786 236 774
Viri Chauhan
MD, Themis Community
viri.chauhan@themisservices.co.uk
+44 (0) 7967 451 523
Henry Williams
Head of Investigations
1
+44 (0) 7780 746 290
henry.williams@themisservices.co.uk
THINK TANK | COMMUNITY | ADVISORY | TECHNOLOGY | OUTSOURCING
www.crime.financial
T H E M I S