Art & Money Laundering in Switzerland

French version, published in Bilan: Marché de l’art: l’opacité se dissipe


Priti Patnaik, November 2015

Bilan, Geneva

A slew of changes in the legal and regulatory environment in Switzerland aim to tighten the noose around suspicious investors, who launder money by buying art and possibly, store them in customs free zones such as freeports. These changes, might, in the future be able to shed some light on the opaque art market and its use to evade taxes and worse, launder money gained through illegal means.

For the first time ever, art dealers who also act as financial intermediaries will be covered under the anti-money laundering rules and will need to take due diligence measures, including reporting cash transactions over CHF 100,000. The government is also reviewing mechanisms on improving regulations at freeports – custom free warehouses used to store precious art works.

Sandrine Giroud, a lawyer with LALIVE, a Geneva-based law firm, and also, director, Art Law Foundation (Fondation pour le droit de l’art), says “Switzerland is not immune to the issue of the use of the art market for money laundering purposes as its art market ranks among the five most prominent markets with 2% of the global activity and a turnover of 1 to 1.5 billion of Swiss francs.” In 2014, the global art market was estimated at 51 billion Euros.

Art as an asset class has been interesting, particularly gaining importance in the aftermath of the financial crises. It is also attractive for money launderers for a number of reasons.

Monika Roth, lawyer and professor at Lucerne’s University of Applied Sciences and Arts, says, “Art is portable and easily transported across borders. The appeal of a lucrative and easily movable asset is an obvious choice for money laundering.” Ms Roth has just finished on ‘Money Laundering and the Art Market’, a contribution that will be published in 2016 by Brill Nijhoff (Boston) in a new book on ‘Regulation of Art Investments’.

Money launderers are seeking primarily to turn dirty cash into other assets as quickly as possible rather than turn a profit or to invest prudently.  They are happy to pay more than a fair price for goods and services. “That distorts everything”. The art market is especially exposed because there is no “correct” price and a defined quality for art works.

“As there are no rules the players make up their own rules as they go along to suit their own purposes so nearly everything is possible and without consequences,” Ms Roth says.

She identified over 45 factors that make it easy to launder money in the art market. The art market has an ingrained culture of widespread anonymity and non-transparency.  Agreements of nondisclosure of names and prices are very common. Not all these factors are risks per se, but the combination of these issues shows clearly that money laundering and many of the weaknesses of the art market are no strangers to each other, she adds.

Laundering techniques in the art world are multiple and can take diverse forms such as the use of false bills for the fictitious purchase of artworks, fictitious auctions where an artwork is bought by an accomplice with money provided by the owner (money launderer) himself, artificial speculations over the price of an artwork or telephone auctions or bid orders guaranteed by a security that is subsequently returned by, and in the name of, a recognised bank because the uncommitted buyer (money launderer) renounces the artwork, explains Ms Giroud at LALIVE.

But all this may change soon. Starting 2016, a series of legal measures will take effect. This is a result of the Swiss Parliament adopting in December 2012, a set of recommendations framed by the Financial Action Task Force (FATF). The Paris-based FATF, seated in the OECD, sets the international standard in the fight against money laundering and financing of terrorism.  These recommendations entail extensive changes to laws including the Anti Money Laundering Act (AMLA). The Swiss Federal Act on the Implementation of the Revised FATF Recommendations comes into force in two stages – on 1 July 2015 and 1 January 2016.

Changes to the AMLA include reporting cash transactions and identifying contracting parties – measures that could impact the art market. While art dealers are not specifically mentioned, these measures will be applicable to them. The Act defines dealers as individuals or legal entities who deal professionally in goods and in the course of these activities receive cash payments. This is likely to have an impact on the art market globally and in Switzerland, experts say.

Cecile M Ringgenberg, a Geneva attorney who has extensive experience in tracking economic crime, says, “Going forward, not only financial intermediaries, but also, as of 1st January 2016,  dealers in high value goods  will have due diligence obligations under the anti-money laundering law in  conformity with the 2012 Revised FATF Recommendations.

Dealers in cash deals over CHF 100’000 will have due diligence obligations, unless they entrust a financial intermediary with transactions over CHF 100,000. The due diligence obligations include, identifying the contractual party, identifying the final beneficiary of the transaction and establishing the necessary documentation.

Dealers have to look out for “unusual transactions” or whether the funds may be the result of a crime or a “qualified tax violation” as defined by the penal law. In case of “founded suspicion” they have to inform the Money Laundering Reporting Office in Switzerland, Ms Ringgenberg explains. A “revisor”, as defined by the anti-money laundering law, needs to be appointed by the dealer. The revisor will oversee the dealer’s compliance with the due diligence obligations.

These rules will affect the art commerce as well as other high value markets such as real estate, jewellers and luxury car dealers. The exact scope of art dealers’ obligations under the new rules is uncertain as the implementing legislation is still under works, experts say. The European Union already imposes a cap of 10,000 Euros for cash payments with dealers.

The handling stolen goods is already a criminal offense under Swiss law. But going forward, the qualification of serious tax crimes as predicate offences to money laundering, has consequences for the art market, Ms Giroud says. Beginning 2016, the scope of predicate offences to money laundering will be extended in particular to qualified (serious) tax crimes or offenses (direct taxes). This includes misleading the authorities by using documents which are false, falsified or recognised as being incorrect, or by committing tax fraud by evading taxes more than 300,000 Swiss francs per tax period. If assets resulting from as serious tax offences are used as an investment in a work of art, such work could be seized in the context of money laundering proceedings. It will be up to the authorities to take the necessary action to supervise, she adds.

However, there could be a loop hole – namely freeports or duty-free privately run warehouses where goods can be stored without triggering import duties and taxes, with a promise of a high degree of secrecy.

2014 Deloitte report identified freeports as important hubs for the art and wealth management industry given the increasingly global nature of the art trade and market, “the demand for storage facilities and duty-free zones is likely to increase”.

In a report in January 2014, the Swiss Federal Audit Office (SFAO) in Bern, estimated that the value of goods in open customs warehouses was pegged at CHF 15 billion in 2012 according to Swiss Customs. However, authorities have no similar estimate for freeports. In its report, the audit office said that there is lack awareness on the political and economic stakes regarding customs warehouses. To be sure, since 2007, these warehouses (both freeports and open customs warehouses) became a part of the Swiss customs territory, but the number of inspections is an area of concern.

While Swiss authorities are aware of economic benefits of freeports, they are also concerned. These warehouses, play a role in lowering the technical barriers of trade by temporarily storing merchandise without clearing them. However, it has been found that some of the warehouses function for management of private or institutional assets and tax optimisation for high-value goods, according to the Swiss Federal Audit Office.

There are perceptions that certain freeport warehouses are not used primarily for commercial cargo in transit – that is without having to pay customs fees, but rather for a long term storage of high value pieces of art with no real ‘end user’ in the sense of an art museum or an art collector.

Thomas Christ of the Basel Institute on Governance, who co-authored and drafted guidelines for self-regulation of the art market, (the Basel Art Trade Guidelines) said, “These warehouses give the impression they serve as a hiding place for undeclared values of unknown origin and partly unknown beneficiary owners”. He cites the example of art dealers like Yves Bouvier, who also run warehouses, as a sign of a doubtful optimization of high value asset management. Mr Bouvier was arrested earlier this year, exposing the cracks in the art market given the confidentiality around the prices, the buying, the selling and the storage of art, making it vulnerable to money laundering.

However, following the report by the audit office, the Federal Council has since decided to look at this issue more closely. In March 2015, the Federal Council announced that it will review the Federal Customs Act and work on a strategy to address freeports. “The strategy foresees in particular to increasing transparency, strengthen controls and use existing national and international cooperation schemes more efficiently,” Mr Mario Tuor, spokesperson for State Secretariat for International Financial Matters told Bilan in an email. Most of the measures will be implemented through the adaption of the Customs Ordinance in early 2016, he added.

Further, in June this year, the Federal Council also acknowledged a report by The interdepartmental coordinating group on combating money laundering and the financing of terrorism (CGMT) that advocated greater supervision and closer scrutiny of warehouses so that goods are exported on time and not stored indefinitely. It also pushed for transparency on the names of owners of goods at freeports.

What is troubling is that freeports are not subject to anti-money laundering provisions. Cathy  Maret, spokesperson of Federal Office of Police, said that the anti-money laundering law is not applicable to freeports. They do not fall under the jurisdiction of the Money Laundering Reporting Office in Switzerland.

But some believe that the art market is not ideal for money launderers. Marion Manekar who runs Art Market Monitor believes that art is an illiquid market. “There are numerous other, more efficient, ways to move money internationally. There is simply not enough liquidity or enough transactions to make buying of art a reliable means to move money.”

However, one is tempted to make a correlation between the loosening of banking secrecy norms and an increase in money laundering in the art market especially given the rise in speculation in the art market. Although there is no definitive link, it might be worthwhile to keep this hypothesis in mind.

The Art Law Foundation in Geneva has a conference on art and money laundering on November 13th later this year.

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