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The New Digital Art Trade Is Ideal for Criminals

April 27, 2021 11:18 AM | Office IFCPP (Administrator)

Reposted from Bloomberg Law

This year, a new piece of art made history at a dizzying price—a $69.3 million piece by Beeple called Everydays: The First 5000 Days. But, the price alone wasn’t what was shocking. The sale made headlines because it is a purely digital work of art that can never be touched, held, or hung on a wall.

The sale not only shook up the art world, launching the beginning of a new era of the art trade, but also made waves in the financial sector, as banking institutions took note of an increasingly popular method to move funds—non-fungible tokens (NFTs).

The Perfect Place for Fraud and Money Laundering

NFTs are digital assets that act as non-replaceable rights to real-world assets. They operate on the blockchain and are nontransferable, meaning when someone purchases a piece of digital art (or any other asset), the original will belong to them and no one else, even if others have identical copies.

As assets, NFTs can be incredibly valuable. They also present a new set of challenges for identifying and preventing fraud and money laundering. The art trade historically has been susceptible to criminality due to issues of anonymity, high-valued transactions, and limited global regulations.

Now, as NFTs continue to grow, the sale of digital art presents even more challenges than traditional art sales, and is an enticing place for criminals to operate. The value of a piece of art is already highly flexible, rising and falling in value as artists rise and fall in importance and influence. Still, there’s an established set of rules and insights used to value such pieces—era, materials used, condition upon sale, rarity and proper documentation, to name a few.

Digital art, on the other hand, is both newer and even more subjective in its pricing as collectors and financiers struggle with a new set of questions surrounding how much an artwork can be worth if it can never be physically viewed or stored. This creates a perfect landscape for criminality, as dealers and sellers can determine the value of a piece of work with little historical context to compare prices.

It’s an excellent cover to launder money, adding even more secrecy to an already challenging market where locations, identities, and source of funds are often kept private.

New But Familiar Crimes

As the art world works at speed to enter this new era of NFT transactions, financial institutions are facing a new set of issues. There are arguments over whether NFTs should be seen as a piece of art or security asset, which triggers extra regulations and legal complications.

For some time, government organizations have been increasing regulation of cryptocurrency, virtual asset service providers, and non-banking finance companies, but financial crime risks within the space are moving much more quickly than government regulations can be implemented. As NFTS are gaining traction with consumers, private institutions and government bodies are struggling to identify what NFTs even are and how to handle them. This in turn leaves potential opportunities open for criminals to quickly infiltrate the market.

While institutions may find themselves overwhelmed trying to navigate new methods for fraud and money laundering, the fundamentals remain the same. Institutions undoubtedly need to develop and uplift their on-boarding, monitoring, and surveillance systems to confront these risks, but the principles of the crimes remain the same—laundering money through the art trade.

To truly manage risk, including fraud and money laundering, financial institutions, particularly those offering wealth management and private banking to an international high net-worth client base, will need to gain a deeper understanding of the source of their clients’ wealth and funding, including the role of digital assets within their portfolios. 

Similarly, NFT platforms will also likely see increasing focus on their legal know your customer/anti-money laundering obligations to help them understand their client base and report on the risks they present.

It’s therefore vital to use a holistic and contextual approach to understand this emerging risk type, and its inherent risks. Using entity resolution technology, financial institutions can consolidate data from across the institution and enrich it with external data, such as adverse media, watch lists, and corporate registry data, to help obtain a complete customer and counterparty view.

With network analytics, financial institutions can then build an understanding of the customer’s network to visualize behaviors and relationships that may elucidate money flows and suspicious connections.

In an industry that’s designed to be discrete, it’s up to financial institutions and those involved in the art trade to conduct their own internal risk management. Financial institutions must prioritize regulatory compliance and adherence to international law in their clients’ art transactions, whether they’re trading a surrealist painting or a tokenized gif.

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