On February 4, 2022, the U.S. Treasury released a report entitled "Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art" (the "Report") that was mandated by Congress in the Anti-Money Laundering Act of 2020. The Report discusses that the emerging digital art market, such as the use of non-fungible tokens ("NFTs"), may present new money laundering risks because "[t]he ability to transfer some NFTs via the internet without concern for geographic distance and across borders nearly instantaneously make[s] digital art susceptible to exploitation by those seeking to launder illicit proceeds of crime, because the movement of value can be accomplished without [incurring] potential financial, regulatory, or investigative costs of physical shipment." The Report also explains that NFTs are particularly vulnerable to money laundering because "NFT platforms range in structure, ownership, and operation, and no single platform operates the same way or has the same standards or due diligence protocols."
After noting that auction houses and art dealers are increasingly offering NFTs in the primary market, and could expand to selling those pieces in the secondary market, the Report stated that NFT platforms that allow owners of digital art to sell the assets on virtual exchanges may be deemed virtual asset service providers ("VASPs") by the Financial Action Task Force ("FATF"), which would subject them to the Financial Crime Enforcement Network's ("FinCEN") regulations. The Report specified that (i) NFTs or other digital assets that are used for payment or investment purposes may fall under the virtual asset definition, and, in this context, some NFT platforms may qualify as VASPs, depending on the characteristics of the NFTs that they offer; and (ii) platforms or other persons doing business transferring virtual assets during the buying or selling of NFTs may have U.S. anti-money laundering ("AML")/countering the financing of terrorism ("CFT") obligations under FinCEN's rules for money service businesses if they are doing business in the United States. The Report also details how NFTs may be used to "conduct self-laundering."
To address the money laundering risks identified in the Report, consideration of the following options was recommended:
- Providing government support for the creation and enhancement of private sector information-sharing programs to encourage transparency among art market participants;
- Updating guidance and training for law enforcement, customs enforcement, and asset recovery agencies;
- Using targeted FinCEN recordkeeping and reporting requirements to support information collection and money laundering activity analyses; and
- Applying comprehensive AML/CFT measures to certain art market participants.
The full text of the Report is available here.
DISCLAIMER: This article was originally published by McGonigle PC prior to their combination with Davis Wright Tremaine LLP. The article is published here with permission.