On October 30, 2020, the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”) issued an advisory on potential sanctions risks arising from dealings in high-value artwork (the “Advisory”). The Advisory follows a July 2020 report from the U.S. Senate Permanent Subcommittee on Investigations detailing how the art industry could be used to evade U.S. sanctions, notably in regard to sanctioned Russian individuals.
The Advisory focuses on the market for high-value artwork and provides guidance on mitigating risks related to transactions involving persons on the OFAC List of Specially Designated Nationals (“SDNs”) and territories subject to comprehensive sanctions (i.e., Crimea, Cuba, Iran, North Korea, Syria).
The Advisory targets art galleries, museums, private art collectors, auction companies, agents, brokers, and other participants in the art market. In describing the vulnerabilities in the market, the Advisory notes that the lack of transparency and high degree of anonymity and confidentiality in the sale and purchase of high-value artworks make the market attractive for illicit actors to obscure their identities and source of funds.
Of note, the Advisory clarifies that artwork that function primarily as an investment asset or medium of exchange would not be covered by the “informational material” exception in the International Emergency Economic Powers Act (“IEEPA”) and the Trading with the Enemy Act which exempts certain published materials (including artwork) from sanctions. This clarification is in line with earlier guidance given in OFAC’s FAQs 812 to 814, published in 2019, which state that transactions involving Specially Designated Global Terrorists and artwork are prohibited without exception.
The July 2020 Senate Report, which discussed Russian SDNs’ use of the art industry to evade U.S. sanctions, also recommended that OFAC issue comprehensive guidance interpreting IEEPA’s informational exception’s application to artworks, and urged OFAC to interpret this exception narrowly.
The Advisory makes reference to the Senate Report in describing how sanctioned Russian individuals used shell companies to purchase high-value artwork, thereby evading OFAC’s blocking sanctions. The Senate Report also described the art industry as the “largest legal, unregulated market in the United States” without a requirement to maintain anti-money laundering (“AML”) and anti-terrorism financing controls. It found that, although several large auction houses had voluntary AML controls, some failed to perform adequate due diligence on purchasers and undisclosed clients.
In this regard, the Advisory reminds U.S. persons, in particular, of the broad prohibition against engaging in direct or indirect transactions with SDNs and comprehensively sanctioned territories, which could provide OFAC a basis for imposing civil penalties. Under OFAC’s “strict liability” regime, a U.S. person dealing in art could be held liable for breaching OFAC sanctions, even if the U.S. Person did not positively know of the involvement of a sanctioned person. Similarly, non-U.S. persons that process transactions related to such sales through the United States or the U.S. financial system could be held liable for violating OFAC sanctions.
The Advisory recommends that persons involved in the high-value art trade, who may face exposure to transactions involving sanctioned persons, undertake a sanctions risk assessment and consider implementing risk-based compliance measures to mitigate any identified risks.