Investigative journalists expose art world tax haven scheme
Will governmental authorities implement critical safeguards?
Billed as the largest investigation in journalism history, the Pandora Papers exposed and continues to delve into the shadowy financial system used by the wealthiest people on Earth to enrich themselves at the expense of billions of others. From celebrities to politicians to run of the mill billionaires and wanton criminals, this dark financial system is being brought into the light by the International Consortium of Investigative Journalists (ICIJ).
When the Pandora Papers (approximately 12 million confidential financial records) were first reported on October 3, 2021, it was still relatively opaque how the wealthy were utilizing offshore tax havens, the extent to which they were used and the sheer number of individuals doing so. Regarding the issue of avoiding taxes, Dutch historian and author of Utopia for Realists, Rutger Bregman, told attendees at Davos in 2019:
“This is my first time at Davos, and I find it quite a bewildering experience, to be honest. I mean, 1,500 private jets have flown in here to hear Sir David Attenborough speak about, you know, how we’re wrecking the planet. I mean, I hear people talking about the language of participation and justice and equality and transparency, but then, I mean, almost no one raises the real issue of tax avoidance, right? And of the rich just not paying their fair share. I mean, it feels like I’m at a firefighters conference and no one’s allowed to speak about water, right?
In response to Rutger Bregman, former Yahoo CEO Ken Goldman said “what can we really do to help solve inequality over time beyond taxes?” His question is indicative of what the Panama Papers continues to expose, specifically the possibility that governments being the best financial vehicle for addressing socioeconomic inequality is not up for discussion by those using tax havens.
And now we learn not only are the wealthy directly impacting social uplift programs through tax evasion, but they are also depriving the world of beautiful works of art:
“In a way, we could consider those artworks to be somehow ‘lost art,’ as they will potentially never see the light of the day,” said Maria Nizzero, a researcher at the Centre for Financial Crime & Security Studies in London. “While art has increasingly become a commodity, and we should appreciate its trade value, it is also something that was created to be seen, enjoyed, stimulate emotions and thinking.”
The EU and UK require art dealers and auctioneers to vet buyers prior to sales, while no such requirements exist in the U.S., ostensibly to curb money laundering practices. As the ICIJ article and Pandora Papers detail, there is little to no enforcement as artworks are bought and traded among a select group of very wealthy individuals seemingly operating outside the boundaries of state laws.
“Over the last three decades, the global art market has boomed, evolving from a niche sector for the elite into an estimated $50 billion industry.” The United States is the largest art trade market, representing more than 40% of the global market. In response to this pernicious practice, the U.S. Senate Permanent Subcommittee on Investigations released a bipartisan report in July 2020 detailing how Russian oligarchs are evading U.S. sanctions through this shadowy art market. These oligarchs, according to the report, purchased more than $18 million in art via shell companies. The Subcommittee points out that while private art dealers are not required to have anti-money laundering controls in place, some of the more well known auction houses - Sotheby’s, Christie’s, Phillips, and Bonhams - all have voluntary anti-money laundering controls in place.
As mentioned, these controls supposedly in place in the largest auction houses are not being enforced. The Senate Subcommittee put forth common sense and critical recommendations, which reinforce the specific issues raised by the ICIJ in their findings. Here is a truncated version of those recommendations:
Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art.
Congress should require the Treasury Department to collect beneficial ownership information for companies formed or registered to do business in the United States. This information should be available to law enforcement for investigatory purposes.
When imposing sanctions on an individual, the Treasury Department should consider routinely imposing sanctions on the individual’s immediate family members.
The Treasury Department should implement and announce sanctions concurrently to avoid creating a window of opportunity for individuals to evade sanctions.
The Treasury Department should lower or remove the ownership threshold for blocking companies owned by sanctioned individuals. According to guidance by the Treasury Department, a company is blocked if it is majority owned by a sanctioned individual. If the sanctioned individual has a minority ownership in a company, that company is not blocked, even if the sanctioned individual owns 49 percent of the company.
The Treasury Department should maximize its use of suspicious activity reports (“SARs”) filed by financial institutions. Under the BSA, financial institutions are required to file SARs with the Treasury Department’s Financial Crimes Enforcement Network. These reports document financial transactions that appear to involve money laundering or terrorist financing, among other illicit activities.
OFAC should issue comprehensive guidance on the steps auction houses and art dealers should take to ensure they are not doing business with sanctioned individuals or entities. Also, OFAC should issue guidance interpreting the informational exception to the International Emergency Economic Powers Act related to “artworks.”
These recommendations were considered in the National Defense Authorization Act for Fiscal Year 2021, which directly names Russia, China and Sudan for potential money laundering. Regarding how far spread enforcement will be cast - “the question of exactly which art-market participants will be subject to this law will be hashed out by the Department of Treasury, which has until December 27, 2021 to propose regulations providing those specifics.” Thanks to reporting by the ICIJ and others, we will continue to find out how the wealthy are subverting financial laws so crimes don’t remain in the shadows.
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