On July 29, 2020, the Senate Committee on Homeland Security and Governmental Affairs issued a 150-page bipartisan report that identifies the art market both as the “largest legal, unregulated market in the United States” and a significant weakness in the nation’s sanctions and anti-money laundering regimes.[1]  The Senate Report includes a host of findings regarding art-market practices and the ability of sanctioned individuals to use the art world’s lack of transparency to funnel money in and out of the United States.  The Report offers unique insight into how the art market does – and does not – police itself and issues a number of recommendations, some already incorporated into proposed legislation,[2] that would increase the regulation of auction houses and private art dealers alike, leading to a fundamental change in how they conduct their business.

To illustrate its points, the Senate Report includes a remarkable, 80-page case study of two brothers: Arkady Rotenberg and Boris Rotenberg, a pair of billionaire Russian oligarchs with close ties to President Vladimir V. Putin.  In the days, months and years after President Obama imposed sanctions on certain Russian oligarchs in retaliation to Russia’s annexation of Crimea, the Rotenbergs were allegedly able to engage in over $210 million in post-sanctions transactions.  The Committee’s investigation, aided by the release of the “Panama Papers” in 2016, revealed that the Rotenbergs used a complex web of shell corporations, lawyers and intermediaries to make art-related transactions worth over $91 million.[3]

According to the Senate Report, one of the keys to the sanctions’ failure to stop the Rotenbergs is the “[s]ecrecy, anonymity, and [] lack of regulation” in the U.S. art market that “create[s] an environment ripe for laundering money and evading sanctions.”[4]  In support of that claim, the Committee issued a number of key findings, including that:

  • The U.S. art market is not subject to what is commonly known as the “Bank Secrecy Act,”[5] an amalgam of laws requiring certain U.S. institutions to maintain anti-money laundering and anti-terrorism financing controls. However, all U.S. persons and entities that transact with sanctioned individuals are subject to significant criminal and civil liability.
  • The large auction houses – Christie’s, Sotheby’s, Phillips and Bonhams – all voluntarily implement anti-money laundering policies.[6] Despite this, those auction houses and private dealers often deal with “art advisor” intermediaries and treat those intermediaries as the principal purchaser, even if there is reason to believe the intermediary is working for an undisclosed client.[7]  In fact, one auction house partnered with Gregory Baltser’s[8] Moscow-based art agency and club Baltzer, and agreed to rely on Mr. Baltser to conduct anti-money laundering and sanctions checks on the agency’s clients.[9]
  • These practices allowed the Rotenbergs, through Mr. Baltser, to buy millions of dollars’ worth of artwork, including René Magritte’s La Poitrine for $7.5 million, Henry Moore’s Three Figures for $605,000, Georges Braque’s Pichet et Journal for nearly $3 million, Tamara De Lempicka’s Un Port Sous La Lune for $665,000, Andreas Gursky’s James Bond Island I and Niagara Falls for a combined $1.054 million, and Jean-Paul Riopelle’s Ombre d’Espace for $1.75 million.[10] The Committee also found that Mr. Baltser sought, but ultimately failed to sell, numerous pieces linked to the Rotenbergs, including La Poitrine and Lyonel Feininger’s Brucke II.[11]
  • Still, the Senate Report does not accuse any of the auction houses or private art dealers of breaking any laws; it notes that all of the auction houses and private dealers stopped doing business with Mr. Baltser once made aware of the Committee’s concerns.[12]
  • Private art sales, which accounted for 58% of the U.S. art market by value in 2019,[13] are likewise largely unregulated. The Committee interviewed one New York private dealer with thirty years of experience in the art market; the dealer explained that she did not have anti-money laundering policies in place and instead relied on the advice of lawyers, an awareness of potential “red flags” and her “gut” to self-regulate.[14]  She added that she only questioned a purchaser’s source of funds on occasion, as doing so would have been contrary to industry standards.[15]  However, she noted “that most of her clients are American and that she knows the identity of the ultimate buyer in the ‘majority’ of her transactions.”[16]

In light of these and other findings, the Senate Report issued eight recommendations:

  1. “Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art.”[17]  The report notes that the European Union recently passed similar measures, which require businesses to verify the identity of (i) the seller, (ii) the buyer and (iii) the ultimate beneficiary owner (“UBO”) of art valued at €10,000 or more.
  2. “Congress should require the Treasury Department to collect beneficial ownership information for companies formed or registered to do business in the United States.”[18]
  3. When the Treasury Department imposes sanctions on an individual, it should consider whether it should also impose sanctions on immediate family members.[19]
  4. The Treasury Department should implement and announce sanctions concurrently to avoid creating a window of opportunity similar to the one left open to the Rotenbergs in late March 2014.[20]
  5. “[T]he Treasury Department should lower or remove the threshold for blocking companies owned by sanctioned individuals.”[21]  The current threshold is set at 50%; even if a sanctioned individual owns 49% of a company, the company is not blocked from doing business in the United States.[22]
  6. In order to increase the effectiveness of imposing sanctions, “[t]he Treasury Department should maximize its use of suspicious activity reports (‘SARs’) filed by financial institutions” and “more effectively mine SARs” for information on sanctioned individuals and entities and alert other financial institutions of the risks of transacting with those entities.[23]
  7. The Treasury Department’s Office of Foreign Asset Control (“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.”[24]  The Report specified that the guidance should “clarify what steps auction houses and art dealers should take to determine whether a person is the principal seller or purchaser of art or is acting on behalf of an undisclosed client, and which person[s] should be subject to a due diligence review.”[25]
  8. The Report recommends that OFAC issue new guidance interpreting the International Emergency Economic Powers Act[26] – one of the key statutes that supply the President with his sanctions authority – to allow for application of sanctions to the artwork in which the Rotenbergs traded.  Currently, an amendment to the Act, known as the Berman Amendment, exempts from presidential sanction “information and informational materials, including but not limited to . . . artworks.”[27]  The report recommends that this “artwork” exception be narrowly interpreted to “encompass matters with informational content, while excluding typical works of art such as paintings, etchings and sculpture.”[28]

While the fate of the Committee’s recommendations is uncertain, the Senate Report identifies serious shortcomings in United States sanctions enforcement and may lead to substantial changes in the way auction houses and private dealers conduct art transactions.  At minimum, these changes would increase transaction costs significantly, requiring auction houses and art dealers to conduct more due diligence into the true identities of potential buyers and sellers of works of art.  Although the transactions of billionaire Russian oligarchs are surely the exception rather than the rule, the Committee’s recommendations could, if implemented, lead to a noticeable increase in scrutiny and expense of U.S. art market transactions.

Law Clerk Nicolas Rodriguez assisted with drafting this post.

[1]      Staff of S. Comm. on Homeland Security and Gov’t Affairs, The Art Industry and U.S. Policies that Undermine Sanctions (2020) [hereinafter “Senate Report”].

[2]      See H.R. 6395 § 7211, 116th Cong., 2d Sess. (2020) (proposing application of the Bank Secrecy Act to dealers in antiquities).

[3]      The Senate Report noted that the Rotenbergs were able to transfer the remaining $120 million to Russia in a four-day window between President Obama’s March 16, 2014 announcement of Russia-related sanctions and the Treasury Department’s March 20, 2014 identification of the Rotenbergs as individuals subject to those sanctions.  See Senate Report supra, n.1 at 1.

[4]      See Senate Report supra, n.1 at 3.

[5]      See Money and Finance, Pub. L. No. 97-258 (1982), codified as 31 U.S.C. § 5311 et seq.

[6]      See Senate Report supra, n.1 at 3.

[7]      Id. at 10.

[8]      Baltser, a United States citizen living in Russia, was not interviewed by the Senate investigators.  Id. at 8. Through his attorney, he denied ever representing the Rotenbergs.  Id.  He also noted that two of the companies the Senate Report links to Arkady Rotenberg were not listed as sanctioned by the Treasury Department.  Id.

[9]      Id. at 12.

[10]     See id. at 115-30 (listing “[e]xamples of post-sanctions transactions facilitated by Mr. Baltser linked back to the Rotenbergs.”).

[11]     Id. at 133-43.

[12]     Id. at 142-43.

[13]     Id. at 48.

[14]     Id. at 61-62.

[15]     Id. at 62.

[16]     Id.

[17]     Id. at 14.

[18]     Id.

[19]     Id.

[20]     Id.

[21]     Id.

[22]     Id.

[23]     Id. at 15.

[24]     Id.

[25]     Id.

[26]     Pub. L. No. 95-223, 91 Stat. 1625, codified at 50 U.S.C. § 1701 et seq.

[27]     Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, 102 Stat. 11007, codified at 50 U.S.C. § 1702.

[28]     Senate Report supra, n.1 at 15.