On July 29, 2020, the Senate Permanent Investigative Subcommittee issued a report detailing how a prominent family of Russian oligarchs, sanctioned by the U.S. since Russia’s annexation of the Crimea, has used the opacity of the U.S. art industry to evade sanctions.
The report traced over $18 million in purchases from U.S. art sellers, including auction houses and private dealers, to Arkady and Boris Rotenberg, who derive their wealth from energy and construction. President Barack Obama placed sanctions the Rotenbergs in 2014, following Russia’s annexation of the Crimea, due to the family’s close relationship to President Putin. They often received large government contracts, including some for the Sochi Olympics.
However, three different shell companies, Highland Business Group Limited, Highland Ventures Group Limited and Advantage Alliance, obscured the identity of the Russian buyers behind the high value purchases.
Gregory Baltser, a U.S. citizen and an art dealer based in Moscow, served as the buyer and middleman for the Rotenberg. Baltser used a shell company named Steamort Limited to transfer art purchases made in the U.S. to the Rotenberg’s shell companies. His attorneys denied wrongdoing on his part, saying, “Baltser Limited’s compliance program has relied, and will continue to rely, on the United States Department of Treasury’s own Office of Foreign Assets Control’s (OFAC) Specially Designated Nationals and Blocked Persons List (SDN). According to the OFAC list, Baltser has acted appropriately and responsibly.”
Optimal Conditions for Money Laundering
As the largest unregulated legal market in the U.S., the art industry is extremely vulnerable to money laundering. Even though the Treasury Department of Foreign Asset Control (OFAC) forbids U.S. people and entities from transacting with sanctioned persons, the Bank Secrecy Act (BSA), which establishes certain AML and anti-terrorism financing controls for U.S. entities, does not apply to the art industry.
Senator Tom Carpenter, who is Vice Chair of the Committee on Investigations, said, “It is alarming and completely unacceptable that common sense regulations designed to prevent money laundering and the financing of terrorism do not apply if someone is purchasing a multi-million dollar piece of art. As a result, criminals, terrorists and wealthy Russian oligarchs like the Rotenbergs are able to use an unregulated art industry, as well as real estate and other investments, to hide assets, launder funds, and evade sanctions.”
Rotenberg purchased some pieces from auction houses including Christies and Sotheby’s, both of which have voluntary AML policies in place. However, the auction houses treat the buyer, whether it is an agent, or dealer as the sole subject of interest when conducting due diligence research. Therefore, neither house detected Baltser’s connection to the Rotenbergs.
Sotheby’s and Christies representatives explained that Baltser paid out of his own bank account, leaving them no reason or right to question further the source of the money.
The report made a number of recommendations, the first being that Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art. This recommendation is based on the European Union’s policy requiring businesses handling art transactions of €10,000 or more to comply with AML law.
More broadly, it stated that Treasury Department should be required to collect beneficial ownership information for companies formed or registered to do business in the United States. This possibly would have included some of the shell companies that ultimately linked U.S. dealers to the Rotenbergs.
It also recommended that OFAC “issue comprehensive guidance on the steps auction houses and art dealers should take to ensure they are not doing business with sanctioned individuals or entities.” Such guidance would ideally prevent auction houses from confusing middlemen, such as Baltser, with their buyers.