In Brief:
- The US Treasury issued a warning that the NFT art market is prone to money laundering and other forms of fraud.
- Also suggests that some (but not all) NFTs could be considered virtual assets under the rules of the Financial Action Task Force.
- The Treasury made no direct comments on other NFT-related issues.
Fine art is not only appealing to look at but also to those seeking to launder money, fund terrorism, and trade illegal drugs and weapons. The US Treasury Department wants art dealers and financiers to act on it.
The United States Department of the Treasury published a study on the facilitation of money laundering and terrorism financing through the trading of high-value artworks.
The 40-page study recommends that financial institutions and art dealers establish an information-sharing database to track how fine art sales are linked to bad actors who make anonymous purchases.
Also mentions that art is relatively easy to transport, and the art market has a “long-standing culture of privacy” that allows for easily manipulated prices, making high-value art vulnerable to money laundering. Additionally, various pieces of artwork have already been used to conceal the transfer or holding of funds obtained illegally, citing the 1MDB scandal as an example.
The Treasury Dept. specifically warned that NFTs can be used for self-laundering, a practice in which users spend money on an NFT they already own in order to create obfuscated transaction trails on the blockchain.
It was noticed that NFTs have recently moved a significant amount of value. It stated that NFTs saw $1.5 billion in trading volume in Q1 2021, representing a 2,627% increase over the previous quarter.
The government agency also stated that NFTs used for payments and investments could be classified as ‘Virtual Assets’. As a result, companies that create or transact NFTs may be classified as Virtual Asset Service Providers (VASPs) and subject to Financial Action Task Force (FATF) regulations, and as a result, existing Know-Your-Customer (KYC) and Anti-Money Laundering (AML) laws will apply.
It went on to say that NFT platforms like Dapper Labs, SuperRare, OpenSea, and art houses might be subject to these rules “depending on the nature and characteristics of the NFTs offered.”
The Treasury Department declined to take more aggressive steps toward creating new regulations on art sales in its study, citing limited evidence of terrorist financing risk.
The department did, however, discover evidence of money laundering in the high-value art market. A recurring theme is that criminals use shell companies to purchase art and conceal their identities behind a corporate veil.
Entities with lower annual sales turnover (such as small galleries) and entities that only occasionally transact in high-value art (such as third-party online marketplaces, museums, and other non-profits) — may pose a lower risk,
Whereas entities with higher annual sales turnover and regularly transact in high-value art in the ordinary course of business — may pose a higher risk.
The study also cites an example where Brazilian authorities seized former bank owner Edemar Cid Ferreira’s multimillion-dollar art collection after he was discovered to have illegally used bank funds to purchase the art. A painting titled “Hannibal” by Jean-Michel Basquiat, as well as a Roman Togatus statue, had been illegally smuggled into the United States in violation of customs law.
The regulation studies were developed through interviews with a number of art market participants across the US. And this isn’t the first to happen. While plans are being intended, Brazil Commission last year approved some strict punishment for money laundering crimes involving crypto.
