(CN) — Searching for clues as to why U.S. sanctions against Russia have proven relatively ineffective in recent years, congressional investigators followed a trail of breadcrumbs into the elite and largely unregulated world of multimillion-dollar art auctions.
“If wealthy Russian oligarchs can purchase millions in art for personal investment or enjoyment while under sanction, it follows that their businesses or hidden resources could also continue accessing the U.S. financial system,” Senate leaders wrote in their executive summary of a 150-page report from the Permanent Subcommittee on Investigations.
The report focuses on one case study where the entities linked to the sanctioned Russian oligarchs Arkady and Boris Rotenberg, and Arkady’s son Igor, managed to spend $91 million, some $18 million of which went to art.
Sold in May 2014 for $7.5 million, René Magritte’s “La Poitrine” was one of at least 16 paintings that now has a varnish of Rotenberg money attached.
Money laundering in the art world is “far more common than you would think,” Pamella Seay, a professor of justice studies at Florida Gulf Coast University, said in an interview by phone Wednesday.
After making cash on the black market, particularly in criminal enterprises, a party will put the money in a spread of bank accounts and then transfer the sums from one to another. “The more transfers you can get, the less likely it is it can be traced,” Seay explained, noting that this is how the shell companies that purchase the art are formed. When the art is resold, it becomes “legitimate money.”
The U.S. imposed the sanctions at issue on the Rotenbergs in 2014 Russia annexed of Crimea. In more recent years, Russians have drawn additional U.S. sanctions for election interference, human rights abuses, and providing support to Venezuela and Syria regimes.
The sanctions related to Crimea were set to expire in March 2020, but President Trump extended them to last an additional year. “To date, Russia has not withdrawn from Crimea and has even expanded its military operations in surrounding waters,” the report notes.
Senate investigators have identified three shell companies linked to the Rotenbergs: Highland Business Group; Highland Ventures Group, which bought “La Poitrine,” and Advantage Alliance. During a four-day window in 2014 between President Obama’s executive order declaring a U.S. intent to sanction and the Treasury Department specifically applying such sanctions to the Rotenbergs, these outfits transferred more than $120 million to Russia out of the United States.
Transactions from Rotenberg-linked shell companies “continued in the U.S. financial system long after,” the report adds.
Though the report accuses U.S. citizen and Moscow-based art adviser and dealer Gregory Baltser of having helped the Rotenbergs conceal such dealings, Baltser’s attorney denied these allegations in a letter to the congressional subcommittee.
As the art market is not subject to transparency requirements of the Bank Secrecy Act, which prevents money laundering by imposing transparency requirements on many cash transactions, buyers are often anonymous in the art world. The report says the industry’s lack of regulations can “create an environment ripe for laundering money and evading sanctions,” noting that auction houses have voluntary Anti-Money-Laundering (AML) polices.
“But these voluntary AML policies are just for sales through the auction houses. … The majority of art sales are private transactions,” the report says. “A private dealer interviewed by the subcommittee stated she had no written AML policies, tries to work with people she knows and trusts, looks for red flags, and relies on her gut.”
Seay said that art sellers often don’t investigate who middlemen represent or if there are sanctions against them.
“That’s where the failing is in the art world in the art industry — they are not going beyond the representative,” she said. “You need to know who that ultimate beneficiary is in the purchase because that’s the person who’s going to have the funds available to them later.”
As found by Senate investigators, major U.S. auction houses said they did not ask for buyers’ names even when dealing with an obvious intermediary. A 2020 report from Art Basel and UBS says the global art market is currently valued at around $64 billion and that U.S. sales make up half of its market.
The Democratic ranking member of the subcommittee, Delaware Senator Tom Carper, bashed the lack of regulations in a statement on Wednesday’s report.
“It is alarming and completely unacceptable that common sense regulations designed to prevent money laundering and the financing of terrorism do not apply if someone is purchasing a multimillion-dollar piece of art,” said Carper. “As a result, criminals, terrorists and wealthy Russian oligarchs like the Rotenbergs are able to use an unregulated art industry, as well as real estate and other investments, to hide assets, launder funds, and evade sanctions. Unfortunately, our failure to close these obvious loopholes make U.S. sanctions — an important national security tool — far less effective than they could be.”
The report recommended that Congress amend the Bank Secrecy Act to add businesses handling transactions on the art market and noted that the European Union has recently required that art transactions valued at €10,000 or more to comply with AML laws.
Seay predicted that reforms would need to be widespread, focused not only on the Bank Secrecy Act but IRS rules and other laws like the Patriot Act.
“When you’re talking about money laundering, it’s not just one small part — it’s interconnected,” she said. “It’s a massive hornet’s nest of making changes to address this. It’s not just one simple little fix.”
The professor also noted hypothetically how the issue plays into U.S. politics, since campaigns are not permitted to use international funds.
“Anybody that thinks they might obtain a benefit from someone in office is surely going to try to find a way to have an impact,” Seay said. “So art sales can be used to support U.S. politicians.”