United States: OFAC Issues Guidance On Sanctions Risks In The Art Scene

In December 2019, the United States blacklisted one of the top donors to Hizballah—Nazem Said Ahmad—as a result of financial support he had provided to the terrorist group.¹ OFAC cited Ahmad's personal and "extensive art collection worth tens of millions of dollars," which he purportedly used to "mitigate the effects of U.S. sanctions," as well as his Beirut-based art gallery which served as a front for money laundering.² Ahmad invested money in Warhols and Picassos, which are high-value, fungible assets that are easy to exchange without drawing attention. Ahmad purportedly was able to skirt his blacklisted status in part by exploiting certain long-standing practices of the art world—practices that have now come under fire by U.S. regulators.

On October 30, 2020, the Treasury Department's Office of Foreign Assets Control (OFAC) issued an advisory to highlight the potential risks posed by transactions involving high-value artwork.³ The advisory puts the art community on notice that high-value works of art are subject to OFAC regulation and enforcement, and accordingly cautions participants in the art market to exercise diligence in their efforts to comply with sanctions regulations. Players in the art world should sit up and pay attention.

The market for high-value art often is said to be relatively opaque.⁴Many collectors and art dealers desire anonymity or confidentiality, usually for entirely legitimate reasons (including reasons relating to privacy and security). In OFAC's view, however, opacity in the art market can make the art world especially vulnerable to the risk of sanctions violations. The very techniques that enable legitimate buyers, sellers, and dealers to discretely deal in the market—for instance, transacting through companies or other intermediaries—can also be leveraged by Specially Designated Nationals (SDNs) and other wrongdoers to conceal illicit transactions from authorities. Moreover, according to OFAC, the "mobility, concealability, and subjective value of artwork" further contributes to the market potentially being fertile ground for people to evade U.S. sanctions.⁵

As such, OFAC's guidance urges that participants in the art market—including art galleries, museums, private art collectors, auction companies, agents, and brokers—maintain "risk-based compliance program[s] to mitigate" the risks inherent in their business, and to exercise risk-based due diligence where appropriate.⁶ OFAC further recommends that U.S. persons seek guidance or a license from OFAC before engaging in high-value transactions with SDNs involving works of art.⁷

OFAC has consistently asserted that high-value works of art fall within its regulatory purview, despite statutory language to the contrary.⁸ Indeed, while certain statutory exemptions significantly curtail the U.S. government's ability to regulate such dealings, OFAC has made clear that such exemptions do not apply to high-value art sales under the most restrictive sanctions regimes or, more generally, where such transactions are conducted for the purpose of evading sanctions. OFAC's authority to regulate transactions between U.S. persons and SDNs derives in large part from the International Emergency Economic Powers Act (IEEPA), which enables the President (and, via delegation, OFAC) to regulate transactions during times of emergency. IEEPA contains a limited number of express exemptions, limiting the powers of the President from restricting personal communications,⁹ humanitarian donations,¹⁰ and the transfer of certain kinds of information—including "artworks."¹¹

However, the exemptions under IEEPA are not absolute. Indeed, OFAC "does not interpret [the information] exemption to allow blocked persons or their facilitators to evade sanctions by exchanging financial assets . . . for high-value artwork or vice versa."¹² Instead, IEEPA-based sanctions apply with full force where "the artwork functions primarily as an investment asset or medium of exchange."¹³ What is more, IEEPA's exemptions regarding communications, donations, and information (including artwork) are simply unavailable in the context of certain of OFAC's most restrictive sanctions regimes, including those that regulate transactions with Specially Designated Global Terrorists (SDGTs) or persons otherwise designated under Executive Order 13224.¹⁴ Accordingly, regardless of the exemptions under IEEPA, dealings in high-value art may nevertheless implicate OFAC's sanctions regulations.

OFAC's recent guidance specifically cites the cautionary tale of Ahmad, who was designated as an SDGT on December 13, 2019, under Executive Order 13224, as "one of Hizballah's top donors," including through his apparent dealings in high-value art.¹⁵ As a result of Ahmad's activities and on the same day OFAC announced his SDGT designation, OFAC also published three FAQs alerting the art community to sanctions compliance issues in the industry, along with certain regulatory requirements and recommendations for navigating those issues.¹⁶

OFAC's October 30, 2020 advisory further underscores OFAC's willingness to seek enforcement of sanctions violations against transactions arising from the art world. Many players in the art market—especially the large and well-established players—have long focused on doing all they can to avoid violating U.S. sanctions laws, including by working only with known or well-vetted counterparties, conducting due diligence, prohibiting cash transactions, and transacting only through reputable banks. But art businesses of all types and sizes will be wise to pay close attention to OFAC's pronouncement and to consider the recent advisory as an important warning shot. Auction houses, dealers, brokers, and other participants in the market would do well to take all the precautions they need to make sure they avoid sanctions violations and stay out of the cross hairs of U.S. regulators and law enforcement.

If you need assistance in assessing potential U.S. sanctions risks, undertaking compliance steps more generally, or have any other questions about navigating U.S. law in the art industry, these authors have significant experience helping clients understand and deal with those issues.

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