Portman, Carper: Bipartisan Report Reveals How Russian Oligarchs Use Secretive Art Industry to Evade U.S. Sanctions
Jul 29 2020
WASHINGTON, DC — Today, U.S. Senators Rob Portman (R-OH) and Tom Carper (D-DE), the Chairman and Ranking Member of the Permanent Subcommittee on Investigations, released a new bipartisan report detailing how Russian oligarchs have used the secrecy of the art industry to evade U.S. sanctions. Following a two-year investigation, which included the major auction houses, private New York art dealers, and seven financial institutions, the report shows how a lack of regulation allows the art industry to avoid the same anti-money laundering requirements that apply to financial institutions. The Subcommittee found that the art industry’s secretive nature allowed art intermediaries to purchase more than $18 million in high-value art in the United States through shell companies linked to Russian oligarchs after they were sanctioned by the United States in March 2014. The Subcommittee also found the shell companies linked to the Russian oligarchs were not limited to just art and engaged in a total of $91 million in post-sanctions transactions.
“This bipartisan report demonstrates that Russian oligarchs like the Rotenbergs have used the secrecy of the art industry to evade U.S. sanctions,” said Senator Portman. “It is shocking that U.S. banking regulations don’t currently apply to multi-million dollar art transactions, and we cannot let that continue. The art industry currently operates under a veil of secrecy allowing art advisors to represent both sellers and buyers masking the identities of both parties, and as we found, the source of the funds. This creates an environment ripe for laundering money and evading sanctions. I look forward to working with Senator Carper on legislation to ensure necessary reforms in the art industry as well as working with federal agencies to make sure American sanctions are effective.”
“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 multi-million dollar piece of art,” said Senator 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. As Senator Portman and I have highlighted in this bipartisan report, there are reforms that we know can be put in place to ensure that wealthy bad actors cannot use valuable works of art to evade U.S. sanctions. I look forward to continuing to work with Senator Portman, in conjunction with our federal agencies and law enforcement, to address the secrecy around these transactions and ensure that the same rules that apply to our financial institutions apply to the art industry.”
The report’s key findings include:
· The art market is the largest legal, unregulated market in the United States. The art industry is not subject to the Bank Secrecy Act (BSA) and is not required under U.S. law to maintain anti-money laundering and anti-terrorism financing controls for transactions. However, all U.S. persons and entities are prohibited from transacting with sanctioned individuals or entities as determined by the U.S. Treasury Department Office of Foreign Asset Control (“OFAC”).
· Sotheby’s, Christie’s, Phillips, and Bonhams all have voluntary anti money laundering (“AML”) controls in place. Despite no legal requirement to do so, the four auction houses reviewed by the Subcommittee had established voluntary AML policies.
· Private art dealers are not subject to AML requirements. One private dealer told the Subcommittee she had no written AML or sanctions policies and instead relied on her gut and worked with people she knew. She also explained that questioning the identity of the buyer and the source of funds in an art transaction was not done in the art industry, nor would the dealer for the purchaser want to provide that information.
· The auction houses treated an art agent or dealer as the principal purchaser of art, even if they had reason to believe they were working with an undisclosed client. This practice enables the auction house to perform due diligence on the art agent or dealer instead of identifying and evaluating the undisclosed client, creating a significant AML vulnerability.
· The United States sanctioned members of the Rotenberg family in March 2014. On March 16, 2014, President Obama signed Executive Order 13661 imposing sanctions on Russia due to its annexation of Crimea. Arkady and Boris Rotenberg were among the Russian citizens specifically sanctioned on March 20, 2014 due to their close ties to Russian President Vladimir Putin, which included awards of large government contracts to companies they owned. The U.S. Treasury Department later sanctioned specific Rotenberg-owned companies (on April 28, 2014), Boris Rotenberg’s son Roman (on June 30, 2016), and Arkady Rotenberg’s son Igor (on April 6, 2018). Both Roman and Igor Rotenberg were sanctioned due to their financial ties to their sanctioned fathers.
· Information released in 2016 from the law firm of Mossack Fonseca — known as the “Panama Papers”— linked the Rotenbergs to certain shell companies involved in high-value art purchases reviewed by the Subcommittee. The Panama Papers included an email chain made public that listed nine shell companies in the British Virgin Islands (“BVI”) linked to Arkady, Boris, and Igor Rotenberg. That email copied attorney Mark Omelnitski and identified Igor Rotenberg as the UBO for Highland Business Group Limited (“Highland Business”) and Boris Rotenberg as the UBO for Highland Ventures Group Limited (“Highland Ventures”).
· Gregory Baltser is a Moscow-based art advisor who facilitated art purchases linked to the Rotenbergs. Mr. Baltser purchased art in the United States with funds that the Subcommittee traced back to Highland Business and Highland Ventures. Prior to the implementation of sanctions on Arkady and Boris Rotenberg in March 2014, the funds Mr. Baltser used to purchase certain art followed a pattern: Highland Business wired the funds to purchase the art to Steamort Ltd (“Steamort”). Steamort then wired the funds from its bank account in Estonia to the auction house and took title to the art.
· Mr. Baltser established a private art agency and club called BALTZER in Moscow in 2013. Mr. Baltser used BALTZER to take title and purchase art for his clients. This change altered the payment pattern outlined above to include BALTZER as the entity paying the auction houses for art Mr. Baltser purchased. In addition, following the imposition of sanctions on the Rotenbergs by the United States in March 2014, the Subcommittee traced funds to purchase art to Highland Ventures. Highland Ventures would wire the funds to Steamort; Steamort would wire the funds to BALTZER; and BALTZER would wire funds to the auction house and take title for the art.
· Despite having voluntary AML and sanctions policies, auction houses failed to ask basic questions of Mr. Baltser, including for whom he purchased art. This allowed Mr. Baltser to continue to purchase art despite the imposition of sanctions by the United States on the Rotenbergs, completely undermining any action taken by the auction houses to block transactions by sanctioned individuals.
· Mr. Baltser purchased over $18 million in art from May to November 2014 using funds traced to Rotenberg-linked shell companies. These transactions included a $7.5 million private sale of René Magritte’s La Poitrine in which Highland Ventures took title to the painting, and Advantage Alliance wired the purchasing funds. The Subcommittee traced those funds from Advantage Alliance to Senton Holdings Ltd, which one financial institution determined was owned by Arkady Rotenberg. An employee of Mr. Omelnitski’s signed the contract for sale on behalf of Highland Ventures.
· Rotenberg-linked companies continued to move at least $91 million through the U.S. financial system following the imposition of U.S. sanctions in March 2014. The Subcommittee determined that companies linked to the Rotenbergs continued to have access to the U.S. dollar and the U.S. financial system despite the imposition of sanctions against Arkady and Boris Rotenberg.
The report makes the following recommendations:
· Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art. The art industry is currently not subject to AML requirements under the BSA. The European Union recently required businesses handling art transactions valued at €10,000 or more to comply with AML laws, including verification of the identity of the seller, buyer, and UBO of the art.
· Congress should require the Treasury Department to collect beneficial ownership information for companies formed or registered to do business in the United States. This information should be available to law enforcement for investigatory purposes. Beneficial owner information maintained by the Treasury Department should include appropriate privacy and security protections.
· When imposing sanctions on an individual, the Treasury Department should consider routinely imposing sanctions on the individual’s immediate family members. While the U.S. sanctioned Arkady and Boris Rotenberg in March 2014, for example, it did not sanction the brothers’ children until later dates. The Treasury Department stated it imposed sanctions on Igor Rotenberg in 2018 because he “acquired significant assets from his father, Arkady Rotenberg, after OFAC designated [Arkady] in March 2014.” This allowed Arkady and Boris Rotenberg to evade U.S. sanctions by transferring their interests in companies to their children while maintaining operational control.
· The Treasury Department should implement and announce sanctions concurrently. While President Obama announced sanctions for Russia’s annexation of Crimea on March 16, 2014, the Treasury Department did not officially impose sanctions on specific individuals and entities until March 20, 2014. During this four-day window, millions of dollars were transferred through the United States and back to Russia. The Treasury Department should take necessary actions to both announce and implement sanctions to avoid creating a window of opportunity for individuals to evade sanctions.
· The Treasury Department should lower or remove the ownership threshold for blocking companies owned by sanctioned individuals. According to guidance by the Treasury Department, a company is blocked if it is majority owned by a sanctioned individual. If the sanctioned individual has a minority ownership in a company, that company is not blocked, even if the sanctioned individual owns 49 percent of the company.
· The Treasury Department should maximize its use of suspicious activity reports (“SARs”) filed by financial institutions. Under the BSA, financial institutions are required to file SARs with the Treasury Department’s Financial Crimes Enforcement Network. These reports document financial transactions that appear to involve money laundering or terrorist financing, among other illicit activities. The Treasury Department should more effectively mine SARs for information related to Specially Designated Nationals and add these entities to the Specially Designated Nationals and Blocked Persons List or alert other financial institutions of the risks of transacting with the entities. This would increase the effectiveness of imposing sanctions.
· OFAC should issue comprehensive guidance on the steps auction houses and art dealers should take to ensure they are not doing business with sanctioned individuals or entities. That guidance should clarify what steps auction houses and art dealers should take to determine whether a person is the principal seller or purchaser of art or is acting on behalf of an undisclosed client, and which person should be subject to a due diligence review.
· OFAC should issue guidance interpreting the informational exception to the International Emergency Economic Powers Act related to “artworks.” That guidance should interpret the artworks exception narrowly to encompass matters with informational content, while excluding typical works of art such as paintings, etchings, and sculpture.