On October 30, OFAC published an advisory (the “Advisory”), which highlights sanctions risks arising from transactions involving high-value artwork associated with persons on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDNs”). OFAC suggests that “high-value artwork” generally includes artwork with an estimated market value of more than $100,000 USD.
OFAC explains that certain features of high-value artwork, including anonymity, confidentiality, and a lack of transparency, make it attractive to individuals engaged in illicit financial activity. Furthermore, the Advisory explains that shell companies and intermediaries are frequently used to purchase, hold, or sell such artwork. This could allow SDNs to conceal their identity from other market participants, and disguise prohibited conduct from law enforcement and regulators. The Advisory provides several recent examples of SDNs exploiting the sanctions compliance vulnerabilities in high-value artwork transactions.
Prohibitions on Dealings with SDNs and the Importance of Risk-Based Compliance Programs
US persons are generally prohibited from engaging in transactions, directly or indirectly, with SDNs. OFAC may impose civil penalties for sanctions violations based on strict liability, which means that a person or corporation could be held civilly liable even if it did not know or have reason to know that it was engaging in prohibited conduct.
As such, the Advisory emphasizes that OFAC encourages companies to implement a risk-based compliance program to mitigate exposure to sanctions-related violations. In particular, art galleries, museums, private collectors, auction companies, agents, brokers, and other participants in the art market, who may face exposure to transactions involving SDNs, should assess the risks they may face and consider implementing measures reasonably designed to reduce such risks. This should include conducting risk-based due diligence.
In 2019, OFAC published frequently asked questions (“FAQs”) on its website, reminding members of the art community of their sanctions compliance obligations. The 2019 FAQs are available here.
Transactions Involving High-Value Artwork Are Not Categorically Exempt from OFAC Regulation
The Berman Amendment to International Emergency Economic Powers Act (“IEEPA”) and Trading with the Enemy Act (“TWEA”) generally exempts from US sanctions “the importation from any country, or the exportation to any country . . . of any information or informational materials, including but not limited to . . . artworks.” 50 U.S.C. § 1702(b)(3); 50 U.S.C. § 4305(b)(4).
In the Advisory, OFAC notes that it does not interpret this exemption to allow SDNs to evade sanctions by exchanging financial assets such as cash, gold, or cryptocurrency for high-value artwork, or vice versa. Accordingly, OFAC will apply IEEPA- and TWEA-based sanctions to transactions involving artwork in which an SDN has an interest, to the extent the artwork functions primarily as an investment asset or medium of exchange.
Finally, the Advisory recommends that any US person considering a transaction with an SDN, involving high-value artwork, seek guidance or a license from OFAC. OFAC notes that its review of a license request will depend on the particular facts and circumstances of the specific proposed transaction.
OFAC’s Advisory is available here.
We will continue to monitor developments. Please contact the authors or your usual Herbert Smith Freehills contacts for more information.