On October 30, 2020, the U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”), which administers and enforces American economic sanctions, issued an advisory titled “Advisory and Guidance on Potential Sanctions Risks Arising from Dealings in High-Value Artwork” (the “Advisory”).  OFAC considers “high-value” any artwork valued at over $100,000.[1]

OFAC appears to have issued the Advisory in response to a bipartisan Senate Committee on Homeland Security and Governmental Affairs report (the “Senate Report”) issued on July 29, 2020 that identified the art market as both the “largest, legal, unregulated market in the United States” and a significant weakness in the nation’s sanctions and anti-money laundering regimes.  As reported previously on this blog, the Senate Report issued eight recommendations, including the following two recommendations to OFAC:

(1) OFAC should issue comprehensive guidance on the steps auction houses and art dealers should take to ensure that they are not doing business with sanctioned individuals or entities; and

(2) OFAC should issue new guidance interpreting the “artwork” exemption, known as the “Berman Amendment,” to the International Emergency Economic Powers Act (“IEEPA”) and the Trading with the Enemy Act of 1917 (“TWEA”), key statutes governing the president’s sanctions authority.[2]

The Advisory addresses both matters, though it is unclear if OFAC intends to provide more comprehensive guidance in the future.

Like the Senate Report, the Advisory identifies features of the high-value art market that pose a high sanctions risk.  The Senate Report illustrated its findings with the story of Arkady and Boris Rotenberg, a pair of billionaire Russian oligarch brothers with close ties to Vladimir Putin, who conducted art-related transactions worth over $91 million, despite having been subject to sanctions following Russia’s annexation of Crimea.[3] The Advisory illustrates its findings with a discussion of Nazem Said Ahmad, a Lebanon-based diamond dealer and art collector whom OFAC designated as a Specially Designated Global Terrorist, or SDGT, in December 2019 for his support of Hizballah.[4]  Mr. Ahmad has an art collection worth tens of millions of dollars and a gallery in Beirut that the Advisory warns is a front to launder money.[5]  The same day that it added Mr. Ahmad to the sanctions list, OFAC updated its Frequently Asked Questions to include guidance specifically on the art community’s obligations[6]—an indication that OFAC is paying particular attention to the art market.

Guidance for the Art Market

In response to the Senate Report’s recommendation that OFAC issue comprehensive guidance on the steps auction houses and art dealers should take to ensure that they are not doing business with sanctioned individuals or entities, OFAC encourages art galleries, museums, private collectors, auction houses, agents, brokers and other participants in the art market who may face exposure to transactions involving blocked persons to implement a risk-based compliance program designed to reduce the possibility of sanctions.[7]  Rather than providing unique requirements for art market participants, the Advisory refers to OFAC’s Framework for OFAC Compliance Commitments (the “Framework”), published in May 2019.  As Hughes Hubbard previously reported, the Framework outlines five essential elements of an effective risk-based sanctions compliance program:  (1) management commitment; (2) risk assessment; (3) internal controls; (4) testing and auditing; and (5) training.  It also provides an overview of situations in which sanctions violations—either inadvertent or purposeful—may arise.  While not mentioned in the Advisory, the U.S. Department of Justice, Criminal Division’s Evaluation of Corporate Compliance Programs provides helpful best practices for compliance programs.[8]

The Artwork Exemption Does Not Categorically Apply

In response to the Senate Report’s recommendation that OFAC issue new guidance interpreting the “artwork” exemption, known as the “Berman Amendment,” to IEEPA and TWEA, OFAC clarifies that it does not interpret this exemption to allow blocked persons or their facilitators to evade sanctions by exchanging financial assets such as cash, gold or cryptocurrency for high-value artwork or vice versa.[9]  This means that OFAC will apply sanctions to transactions involving artworks in which a blocked person has an interest where the artwork functions primarily as an investment asset or medium of exchange,[10] though transactions for purely educational or cultural reasons should continue to be permissible as protected by the First Amendment.  Similarly, although the Berman Amendment may apply to certain transactions involving Specially Designated Nationals, the Advisory underscores prior guidance from OFAC explaining that it does not apply to parties designated as SDGTs, such as Nazem Said Ahmad.[11]  As such, OFAC recommends that any U.S. person considering a transaction with a blocked person involving high-value artwork should seek legal advice or a license from OFAC.[12]

While it remains to be seen how OFAC will implement the Advisory, art market participants should be prepared for increased scrutiny of transactions involving high-value artworks, and should consider implementing or updating compliance programs, or conducting increased due diligence to mitigate exposure to sanctions-related violations.

 


[1] Advisory at 1 n.2.

[2] The “artwork” exemption, or the “Berman Amendment,” is found in two key sanctions statutes:  the IEEPA and the TWEA.  It “generally exempts from regulation ‘the importation from any country, or the exportation to any country . . . of any information or informational materials, including but not limited to . . . artworks.’ 50 U.S.C. § 1702(b)(3); 50 U.S.C. § 4305(b)(4).”  Advisory at 3.

[3] These art-related transactions made up a significant portion of the brothers’ $210 million of post-sanctions transactions.

[4] Advisory at 2-3; see U.S. Department of the Treasury, Press Releases, Treasury Designates Prominent Lebanon and DRC-Based Hizballah Money Launderers (Dec. 13, 2019), available at https://home.treasury.gov/news/press-releases/sm856.

[5] Advisory at 3.

[6] U.S. Department of the Treasury, “813. As a member of the art community, what are my compliance obligations with respect to Executive Order 13224, as amended?” (Dec. 13, 2019), available at https://home.treasury.gov/policy-issues/financial-sanctions/faqs/813.

[7] Advisory at 3

[8] See Hughes Hubbard, How is this Guidance Different from All Other Guidance?—DOJ Asks Three Questions of Corporate Compliance Programs (May 2, 2019), available at https://www.hugheshubbard.com/news/how-is-this-guidance-different-from-all-other-guidance-doj-asks-three-questions-of-corporate-compliance-programs.

[9] Advisory at 3.

[10] Id.

[11] See Advisory at 2; see also U.S. Department of the Treasury, “812. As a U.S. person, am I prohibited from engaging in transactions involving information or informational materials, including artwork, that are the property or subject to an interest in property of persons designated as Specially Designated Global Terrorists (SDGTs) under or otherwise blocked pursuant to Executive Order 13224, as amended, (E.O. 13224)?” (Dec. 13, 2019), available at https://home.treasury.gov/policy-issues/financial-sanctions/faqs/812.

[12] Advisory at 3.