Another Blow to Tax Evasion and Money Laundering: UK Targets Art Market After US Goes After Anonymous Shell Companies

Governments in advanced economies are getting more serious about chipping away at hidden wealth. Admittedly, they have a long way to go. Gabriel Zucman, in his The Hidden Wealth of Nations, estimated that 8% of household wealth, which was $7.6 trillion when he published his book in 2013, was in tax havens. Sometimes people with lots of dough hidden in these lockboxes want to use it, hence the use of shell companies and other devices to make use of the funds without tipping off the tax man. Although real estate has been a big fave for stashing foreign, and sometimes secret, funds in nice safe places like London and New York, art has been another vehicle.

As we’ll soon explain, the UK looks like it is about to crack down on anonymous purchases of art beyond a fairly low threshold amount. The US hasn’t yet joined but as we’ll explain below, the US has recently implemented measures ending hidden ownership of companies so it may not need to do much more with respect to art.

For instance, the last time I was in Paris, I attended a art show at a museum with a top tax maven friend. She recognized quite a few of the paintings, to the degree that she knew which “anonymous owner” pieces never went to the US because the US did have a pretty good idea as to who the owner actually was and would impound them.

The US started down this path with post 9/11 anti-money-laundering and “terrorist finance” reforms, and was able to crack open Switzerland’s bank secrecy. Americans who held Swiss bank accounts were given an amnesty: confess, and pay the taxes and interest due and you won’t be subject to penalties and prosecution. Experts speculate the reason Mitch Romney showed only one year of tax returns was that individuals who had held Swiss bank accounts were require to refile past returns, with the front page of the return “stapled,” making the changes obvious. Had Romney or his wife held a Swiss bank account and filed amended returns, the last year filed would have been the one for the year prior to the one he did publish.

Another click of the ratchet has come with the effective end of anonymously-owned shell companies in the US at the start of 2021. A big impetus for this change came with the publication in 2018 of a New York Times series, Towers of Secrecy, by Louise Story and Stephanie Saul, on condos owned by shell companies in the super luxury development, the Time Warner Center, at the old Coliseum site at the southwest corner of Central Park South. Lloyd Blankfein lived there, for instance. The reporters found quite a few shell-company owned units and for most of them, as intended, they could not find who the actual owners were. But they were successful more often than I would have anticipated, and in every case, the person behind the shell looked pretty unsavory.

The article kicked off a call for reforms, with first New York City and eventually New York State too requiring all real estate purchases by LLCs report who the beneficial owners are (if press accounts are correct, the info is only kinda hidden, it’s not public but can be obtained by FOIL, New York’s version of FOIA).

And now….drumroll…the Feds get in on the act. From Gothamist in January:

On January 1st, Congress passed a measure to end the secrecy around shell companies that has fueled a boom in high-priced New York condominiums. The new law could discourage the flow of international capital into Manhattan real estate, while giving investigators powerful new tools to detect money laundering and other financial crimes.

The National Defense Authorization Act, passed over a veto by President Donald Trump, empowers the Treasury Department to create and maintain a registry of the “beneficial” or true owners of most businesses created in the United States, including limited liability companies. LLCs are a popular vehicle for purchasing real estate, in part due to the secrecy they confer….

Following a New York Times series on anonymous money in New York real estate, the New York City Department of Finance began requiring that beneficial ownership information be reported on transfer records when a property changes hands. (The information is not publicly available but can be obtained through a freedom of information request.)

The following year, the Treasury Department adopted a “geographic targeting order” monitoring all-cash purchases in Manhattan and Miami. An academic paper found an immediate and dramatic dropoff of about 70% in the aggregate dollar value of anonymous transactions. The program has been renewed and expanded to include the outer boroughs, Chicago, Los Angeles, San Francisco, and several other cities.

The information collected in Treasury’s new database will include the beneficial owner’s name, address, date of birth, and a driver’s license or other government ID number. In a move that disappointed transparency advocates, Congress decided to make the information available to investigators and prosecutors, but not to the public. A similar registry in Britain, Companies House, is free for anyone to search.

Note that we have repeatedly and energetically stressed that the real estate seller is not responsible for ascertaining if the payment he is getting for his property comes from dirty money or not if it comes via the banking system. Cash in paper bags are another kettle of fish. But I am nevertheless surprised to learn that all cash payments weren’t considered to be covered by “know your customer” rules. This is clearly a regulatory matter and I’m surprised this wasn’t addressed via the Treasury’s new rules. But foreign banks typically have a New York branch, which puts them under the New York state banking regulator. Regular readers may recall that the first superintendent of the New York Department of Financial Services (which consolidated banking and insurance regulation), threatened to pull the New York banking license of Standard Chartered for money laundering. That would have put it out of the dollar business (foreign banks need US licenses in order to clear dollar transactions) which would mean putting it out of business altogether. It thus appears New York was unwilling to change the laws to allow its regulator to crack down on foreign bank transfers, since Lawsky wasn’t shy about enforcement. Informed readers are encouraged to pipe up.

Now to the UK art market wrinkle, from the Financial Times’ John Dizard:

The art market’s high rollers have created a serious image problem for themselves. Over the past 30 years, and particularly at the beginning of this century, they sold the story of mystery international billionaire buyers and their glamorous hangers-on at flashy evening auctions. Answering slight nods in packed sale rooms, mellifluous auctioneers would post gasp-inducing record prices for works by artists most middle-class people only ever see in museums…

Now the auction houses, art dealers and private advisers face the prospect of emerging from Covid-19 lockdowns only to be enlisted as enforcers of anti-money-laundering (AML) regulations as strict as those in the banking industry. They are not entirely ready for this. They signed up to be courtiers, not investigators.

By June, the UK tax authority, will require what it calls “Art Market Participants” (AMPs) to register before they continue to carry on their business, defined as “a transaction of €10,000 or more, or a series of linked transactions of €10,000 or more”. In other words, every auction house, professional art dealer, art financier, or adviser better sign up.

Even though the UK has left the EU, it will continue to enforce the EU’s Fifth Money Laundering Directive. The AMPs will have to do customer due diligence (CDD) on the ultimate beneficial owners (UBOs), of the art they help buy or sell.

So even as they grovel and smile before the oligarchs, they must ask pointed questions about the source of their money.

The US authorities have not entirely made up their minds about how to bring the art world under a bank regulation-like AML regime.

Dizard correctly points out that gold and other commodities are much better suited for money laundering. However, it’s not hard to imagine that the lack of reporting of art transactions lends itself to tax evasion over time. How many tax men are going to ferret out that that painting that you just sold for $750,000 (nice but not juicy enough to merit mention in an art publication) was purchased ten years ago for $100,000, and not $600,000, as you might pretend? So the US even with its shell company crackdown is being more lax. How long that lasts is up in the air.