Painting Over the Problem: Regulatory Gaps in the U.S. Art Market
- Lucy Sagoo
- 2 days ago
- 6 min read
I. Introduction
Deep infatuation with free-market capitalism is a time honored and singularly American tradition. However, economic advantage in many commercial sectors is curbed by a swath of well-established federal regulations. One hugely lucrative industry is often left out among the many heavily regulated sectors: Art. As one of the last markets without any major anti-money laundering obligations, the fine art industry remains a target of nefarious and anonymous economic malfeasance.
The scandal of 1Malaysia Development Berhad illustrates the heights to which large players in the industry can embezzle funds through the purchases of fine arts. This particular issue began when Malaysia created a sovereign wealth fund to promote economic development through global partnerships. The fund was fraudulently used by trusted members to purchase extravagant items, such as million dollar properties, investments in movie studios and record labels, diamonds, and pieces by artists like Monet, Van Gogh, Basquiat, and Picasso, in foreign jurisdictions. Since filing the asset forfeiture motion, the United States Justice Department has attempted to return at least $1.4 billion dollars of embezzled funds related to items purchased. The misappropriated funds of 1Malaysia Development Berhad is one of the largest financial scandals in recent history. *
With billions of dollars in illicit funds at stake, the fine art industry has become an attractive target for financial misconduct. Many United States legislators are looking for legal pathways to close the market’s regulatory gap, however, the issue remains largely unresolved. Looking at both how other countries approach this issue and suggestions offered by field experts will be vital to sealing the regulatory gap.
II. Why the Art Market Enables Laundering
Before approaching regulations to fix the issue, it is crucial to identify the vulnerabilities of the art industry that leave it susceptible to money laundering. Notably, the art industry allows, and even encourages, large cash purchases by anonymous buyers. Art and Object explains the typical plot best,
“Let’s suppose someone has $10 million dollars on hand. They could buy a Picasso at an auction in, say, Geneva, and have the painting immediately moved to storage at a “freeport,” or a high-security storage space near the airport. [That] painting could be then anonymously sold without ever moving an inch, and the new buyer would have it retrieved from the same freeport. Suddenly, the original buyer, [now] turned seller, has money from what is considered a legitimate business deal. The Economist estimated in 2013 that the Geneva freeport might hold $100 billion worth of U.S. art, sitting tucked away in a space that also functions as a tax haven”.
As a real-world example, an indictment from the US Justice Department described that Robert Newland received wire transfers from an art dealer who was selling the art to multiple buyers and spreading the funds to prevent anyone from tracing it. There was no structure of reporting or financial tracing in place to hold either party responsible until it became a serious issue for buyers who had purchased a painting which had already been resold and was now unavailable. The anonymity and lack of tracing attached to wire transfers in fine art transactions create the perfect opportunity for those who want to capitalize on the weakness. In contrast, the similarly flashy businesses of casinos are heavily taxed and controlled. This illustrates that there is a real blind spot for regulation in the art market where legislators have not yet found a productive way to control buyers without stifling trade. Together these examples show why the aloof and anonymous art world is an attractive safe-haven for these types of financial crimes.
III. Regulatory Gap
United States legislators have made some attempts to reign in the trend of fraudulent art transactions, with the Anti-Money Laundering Act of 2020 (AMLA) as the most recent of these attempts. AMLA bolsters the existing anti-money laundering statutory framework under the Bank Secrecy Act of 1970 (BSA), which imposes reporting requirements on financial institutions and other businesses to help detect and prevent money laundering. In particular, the AMLA includes a provision “for Dealers in Antiquities” which requires a person engaged as a business in solicitation or sale of antiquities to conform to the requirements of the BSA. Ultimately, this allows the Financial Crimes Enforcement Network (FinCEN), a law enforcement branch of the United States Department of the Treasury, to enforce anti-money laundering laws in the art world. Dealers in antiquities are now treated as “financial institutions” which are regulated by the BSA, and requires annual reporting of financial activity and other relevant information to FinCEN.
Though this is a large step in the development of regulation, these are only preliminary recommendations advanced after an AMLA directive to research money laundering in the art industry. Ultimately, “Antiquities” is an ambiguous category that the Act itself does not define. It is uncertain whether pure art dealers like those in US v. Philbrick – where an art dealer who was using his own gallery to sell to multiple bidders – will be held responsible under this provision. In this way, FinCEN and the ALMA acknowledged that there was a problem in the market, but stopped short of actually legislating towards a solution.
IV. The EU Model
Other countries have made more headway on curbing laundering of art than the United States. Most notably, the European Union (EU) enacted the 5th Anti-Money Laundering Directive (5AMLD). This legislation brought previously elusive high-value art dealers under a set of formal anti-money laundering rules. Dealers, auction houses, and galleries must now conduct due diligence, report any suspicious transactions, and verify the identity of their buyers. In fact, under 5AMLD, dealers must conduct client screenings for cash payments or those that are over 10,000 euros.
However, the 5AMLD did disclaim that artists who sell their own works of art directly to consumers do not fall under the Directive. This means that the individual sale of personal art stays unaffected by stricter monetary and reporting requirements.
This model keeps a strict eye trained on large art transactions in EU countries, while attempting to leave artistic individuals and their transactions unstifled. Though it is not all-encompassing of the industry's issues, the Directive is a huge step for the United States to follow.
V. Business Implications
Even if Congress was able to pass a reform to the AMLA that would include art dealers, there could be some serious setbacks.
There are privacy concerns with revealing customer information. There is a possibility that the market could be disrupted if large buyers are intimidated by the threat of exposure.
Additionally, small galleries might face serious strain under a heavier regulatory framework. However, each of the included suggestions to strengthen US anti-money laundering regulations contribute to a safer and more regulated art industry. This is where the focus should be for any future legislation.
VI. Recommendations
Beyond simply copying the EU model, experts have other suggestions for the path forward in the light of the U.S. laissez-faire attitude toward constraining the free trade of art. These suggestions begin with encouraging lawmakers to enforce a binding requirement on art dealers who sell pieces for large amounts of money similar to the EU framework. This could be a low-end threshold of anywhere between $10,00 to $50,000 dollars. This could include reporting buyer information, requiring tracing of funds, and reporting to FinCEN. A threshold would allow the US to give more room to high bidders without completely compromising the BSA framework.
Secondly, using the Corporate Transparency Act of 2025 (CTA), Congress could attempt to close any kind of shell company loophole that may exist as it applies to art purchases. Enacted as part of the AMLA, the CTA’s main purpose is to unveil shell companies by requiring them to submit Beneficial Ownership Information (BOI) and reveal all real owners to FinCEN. However, this regulates the company, not the singular transaction.
Lastly, art dealers have no current obligation to background check their customers or perform customer verification in any way. Anonymous buyers are some of the larger purchasers in the industry. A possible solution is to give art dealers access to FinCEN’s BOI database so that they can verify LLC customers in large transactions. These suggestions would be a major step toward a larger network of accountability.
VII. Conclusion
The art market's current opacity may not be a mere accident. However, there is no evidence that it is. Over time, the acceptance of anonymity has become a socially enforced feature of the art industry which bad actors continue to exploit. A new set of regulations that set up a FinCEN enforcement structure can only help to unclog the industry for legitimate seekers of rare arts. Beautiful paintings, fantastic antiquities, and priceless sculptures have survived the rise and fall of empires. Such reforms would not diminish the cultural or economic value of artworks, but rather ensure that their trade is conducted with greater transparency and accountability. In this sense, carefully designed regulation is not a constraint, but a necessary foundation for a more stable and credible art market.
*The views expressed in this article do not represent the views of Santa Clara University.
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