US Department of Treasury Reports on Money Laundering in the Art Market, NFTs May Present New Risk

Yesterday, the US Department of Treasury issued a statement on illicit activity in the “high-value art market.” More specifically, activities that include money laundering and terrorist financing risks. The study found that while there is some evidence of money laundering risk in the high-value art market, there was limited evidence of terrorist financing risk. The information was part of a study that was mandated by Congress in the Anti-Money Laundering Act of 2020.

Treasury noted that the way art was bought and sold creates opportunities for bad actors. The nature of art sales and the opportunity for illicit activity is exacerbated by a “longstanding culture of privacy and use of intermediaries (e.g., shell companies and art advisors), and the increasing use of high-value art as an investment class.”

According to the report, participants most vulnerable to money laundering in the art market are businesses that offer financial services, such as art- collateralized loans, but are not subject to “comprehensive anti-money laundering/countering the financing of terrorism (AML/CFT) obligations.” Treasury claims that asset-based lending can be used to disguise the original source of funds and provide liquidity to criminals.

While traditional art may have limited risks for money laundering concerns, Treasury stated that the emerging digital art market, such as the use of non-fungible tokens (NFTs), may present new risks.

The study said that auction houses and art dealers are “increasingly offering NFTs in the primary market.” Additionally, NFTs could expand to selling these pieces in the secondary market as well.

Treasury pointed to NFT platforms Dapper Labs, SuperRare, and OpenSea that allow owners of digital art to sell the assets on virtual exchanges. The report cautioned that these exchanges may be deemed virtual asset service providers or “VASPs” by FATF and then fall under FinCEN’s regulations (the enforcement sector of Treasury) – IE the travel rule where VASPs must maintain buyer and seller records on digital asset transactions.

The report indicates that NFTs may be used to “conduct self-laundering.” This is described as when nefarious actors purchase an NFT with illicit funds and proceed to transact with themselves to create records of sales on the blockchain.

The NFT could subsequently be sold to an unrelated individual thus laundering funds.

In completing the study, Treasury said they conducted dozens of interviews with art market participants, including auction houses, galleries, financial institutions, art advisors, art subject matter experts across the U.S. government, and more. Treasury did not indicate if they spoke to emerging NFT platforms or participants.

Scott Rembrandt, Deputy Assistant Secretary for Strategic Policy in the Office of Terrorist Financing and Financial Crime, commented on the report:

“As we tackle systemic challenges like corporate transparency and other loopholes that allow criminals to abuse the US financial system, we will look at what else might be needed to address money laundering risks specific to other industries, including the art industry.”

The study recommends several “non-regulatory and regulatory options” including:

  • Encouraging the creation and enhancement of private-sector information-sharing programs to foster transparency among art market participants;
  • Updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies;
  • Using FinCEN recordkeeping authorities to support information collection and enhanced due diligence; and
  • Applying AML/CFT requirements (such as suspicious activity reporting and know-your-customer procedures) to certain art market participants and/or obligating them to create and maintain AML/CFT

The Treasury Study is available below.


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