Russian oligarchs will be able to exploit loopholes in the British art market to evade sanctions and launder money, experts say, despite Boris Johnson’s claim that there will be “nowhere to hide” from the wealth crackdown linked to the Kremlin.
It comes as Labor MP Chris Bryant said supporters of Vladimir Putin were likely to exchange “valuable assets”, and call Christie’s and Sotheby’s, the major auction houses, refuse to handle them.
However, experienced advisers said the last “beneficial” owner of priceless works of art could still be hidden, aided by the market’s global scale and growing online presence.
Kremlin-linked cash could also be laundered through collectibles such as stamps, wine and the burgeoning market for non-fungible tokens (NFTs), which do not feature in UK money laundering regulations dating back to 2017.
Meanwhile, there have been questions about whether Sotheby’s and Christie’s will keep their Moscow offices, with calls for a boycott of Phillips, a major auctioneer owned by a Russian luxury goods company.
The tremors from the Ukraine invasion have already reverberated through the art market, with Christie’s citing “the current world situation” for the recent postponement of an auction of rare Russian avant-garde art books, and a former CEO of the house of Leading auction rival Bonhams calls for a boycott of Phillips.
Phillips, which is owned by Russia’s Mercury group, told The Guardian it was “business as usual” and its auctions were proceeding as planned. However, the company has faced criticism for proceeding with a £30m sale in London last week of works by artists including David Hockney, Claude Monet and, a favorite among wealthy Russians, Francis Bacon.
Although the company announced that it would donate the entire net proceeds of the auction (5.8 million pounds sterling) to the Ukrainian Red Cross Society, it continues to be questioned.
According to Companies House, Phillips has two “significantly controlling” owners: Leonid Fridlyand and Leonid Strunin, Russians who give their addresses as the company’s headquarters in Mayfair and their countries of residence as Monaco and Cyprus, respectively. Both men have yet to comment, but company CEO Stephen Brooks said he unequivocally condemned the Ukraine invasion and “called for an immediate cessation of all hostilities in the strongest possible terms.”
Sotheby’s, Phillips, Christie’s and other companies stress that they comply with all anti-money laundering and “know your customer” obligations, conducting due diligence to ensure that sanctioned individuals and institutions cannot do business through of their sales rooms.
In response to Bryant’s comments, Sotheby’s said it conducted business in strict compliance with all applicable laws and regulations, including global sanctions. He was “absolutely rigorous” about tracking current sanctions, and was closely monitoring any updates to the lists. Its Moscow office is currently closed to the public.
Christie’s, which said its Moscow office “currently” remained open, said it had taken immediate action through its customer identification and screening processes. He said he was not allowing designated individuals or companies on applicable sanctions lists to transact with him. “Politically exposed persons” were also subject to enhanced due diligence.
However, Professor Louise Shelley, director of the Center on Terrorism, Transnational Crime and Corruption at George Mason University in the US, said the global nature of the market and “gaping holes” in US safeguards. The US made London very vulnerable.
“Many buyers in the UK market are in the US, a jurisdiction where we are simply not doing enough. You can have someone representing a corporation that can protect itself on numerous fronts and no one will have a clue who is behind it,” she said.
“Clearly there is a lot of desperate movement of all kinds of commodities and resources through investment vehicles at the moment, but art markets are the ideal way to move wealth and hide the beneficial owners. We have a huge loophole in our laws here in the US right now, which ultimately means it’s possible to buy art in other jurisdictions quite easily. The oligarchs and their nominees would be busy exploiting all the holes they can find.”
The London-based experts said larger auction houses had started to devote more resources and time to due diligence since money laundering regulations were introduced in 2017, but smaller companies may struggle.
“It has become more difficult to hide the identity of the beneficial owner, but you can do a number of things, such as structuring your affairs to have nominees here and there. Or you can just lie,” said one. “If someone wants to find a way to hide the beneficial owner, he will always find a way.”
Right now, sanctioned oligarchs and others connected to the Putin regime could be seeing the art market as a means of monetizing the art they’re sitting on, albeit having an impact on price, or as a way to put money in a highly mobile investment market that can also be physically stored discreetly offshore.
Brexit, which made it more cumbersome to bring art to the UK, means the second scenario is likely to be more appealing.
Other experts highlighted more glaring gaps in the 2017 legislation and shortcomings when it comes to its narrow definitions of what art is.
“Think about the collectibles that are not subject to those regulations. If you were inclined to use art to move dirty money, you’d be thinking of things like stamps, vehicles, and other expensive equipment outside of that range,” said one.
HMRC has been contacted for comment.