Call it: “Indiana Jones and the Suspicious Activity Report.”

It is certainly the sort of problem that doesn’t end up on a compliance officer’s desk very often: finding out your company was illegally buying up historic artifacts.

Craft supply retailer Hobby Lobby, however, is facing the consequences for doing so. The case elucidates government efforts to fight the financing of terrorists through illicit funding channels that often entail money laundering.

To equate antiquities with artwork (and by a broader extension, collections of luxury goods) compliance officers, especially at financial institutions, must be wary of being caught up in one of those schemes. As for other companies, the paintings that adorn hallways and tchotchkes in the lobby might be an unknown source of regulatory pain.

A controversial hobby

On July 5, the Department of Justice filed a civil action demanding the forfeiture of thousands of ancient Iraqi artifacts imported by Oklahoma City-based Hobby Lobby, a national retailer.

As alleged in the complaint, the ancient clay artifacts originated in the area of modern-day Iraq and were smuggled into the United States through the United Arab Emirates and Israel, contrary to federal law.

In October 2010, an expert on cultural property law retained by Hobby Lobby had warned the company that the acquisition of cultural property likely from Iraq, including cuneiform tablets and cylinder seals, carried a risk that such objects may have been looted from archaeological sites in Iraq.

The expert also advised Hobby Lobby to review its collection of antiquities for any objects of Iraqi origin and verify that their country of origin was properly declared at the time of importation into the United States. The expert warned that an improper declaration of country of origin for cultural property could lead to seizure and forfeiture of the artifacts.

Notwithstanding these warnings, in December 2010, Hobby Lobby executed an agreement to purchase over 5,500 artifacts, comprised of cuneiform tablets and bricks, clay bullae, and cylinder seals, for $1.6 million.

“The acquisition of the artifacts was fraught with red flags,” the Department of Justice said.

Shipping labels misleadingly described their contents as “ceramic tiles” or “clay tiles (sample).” Some packages bore shipping labels that falsely declared that their country of origin was Turkey.

The government filed a stipulation of settlement with Hobby Lobby, in which it consented to the forfeiture of approximately 144 cylinder seals and an additional sum of $3 million to resolve the civil action.

Hobby Lobby also agreed to adopt internal policies and procedures governing its importation and purchase of cultural property, provide appropriate training to its personnel, hire qualified outside customs counsel and customs brokers, and submit quarterly reports to the government on any cultural property acquisitions for the next eighteen months.

“We should have exercised more oversight and carefully questioned how the acquisitions were handled,” Hobby Lobby President Steve Green said in a statement. “Hobby Lobby has cooperated with the government throughout its investigation and, with the announcement of today’s settlement agreement, is pleased the matter has been resolved.”

Why was it done? “Developing a collection of historically and religiously important books and artifacts about the Bible is consistent with the company’s mission and passion for the Bible,” Green said. “The goals were to preserve these items for future generations, to provide broad access to scholars and students alike to study them, and to share the collection with the world in public institutions and museums.”

“There is now growing concern and compelling evidence that archaeological site looting is implicated in the financing of organized criminal activity and other terrorist networks.”
Brian Daniels, Research Associate, Smithsonian Institution

“At no time did Hobby Lobby ever purchase items from dealers in Iraq or from anyone who indicated that they acquired items from that country,” he added. “[The company] condemns such conduct and has always acted with the intent to protect ancient items of cultural and historical importance.”

In response, the nationwide retailer has implemented “acquisition policies and procedures based on the industry’s highest standards established by the Association of Art Museum Directors.”

“The AAMD policies have been vetted by global museum directors and lawmakers alike, and represent the gold standard for protecting ancient heritage artifacts,” the statement says.

While Green blamed importing troubles on his company’s “passion for the Bible,” more nefarious deeds are often linked to the trade of ill-gotten antiquities and artwork.

Funding terrorism?

Days before the Hobby Lobby settlement was announced, on June 23, concerns over the illegal acquisition of art were raised at a hearing entitled “Examining Illegal Activity in the Antiquities and Art Trade.”

“There is now growing concern and compelling evidence that archaeological site looting is implicated in the financing of organized criminal activity and other terrorist networks,” said Brian Daniels, research associate for the Smithsonian Institution and director of research and programs for the Penn Cultural Heritage Center at the University of Pennsylvania.

“In recent years, an increasing number of reports have circulated linking organized criminal and terrorist activities to antiquities sales,” he added. “Some of these accounts are more credible than others, but their frequency is sufficient to suggest that they warrant further investigation and that changes are occurring to the structure of the illicit antiquities trade.”

In fiscal year 2016, the Department of Homeland Security’s Immigration and Customs Enforcement division worked 238 domestic and 79 international property investigations.

Last year, ICE, through its Cultural Property, Art, and Antiquities program, repatriated a first-edition of Charles Darwin’s book, “Origin of the Species,” to Canada; terra cotta figures, jade implements, and a 115–million-year-old micro-raptor fossil to China; a dinosaur skull to Mongolia; imperial decrees to Russia; and several million dollars in statuary and sculptures of cultural and historical significance to the Prime Minister of India during his official visit to the United States.

Since 2007, the agency has returned more than 8,000 items to more than 30 countries.

“The criminal networks and individuals that trade in illicitly obtained antiquities, and cultural and religious items, tend to also trade in other illicit commodities such as drugs and illegal weapons,” said ICE Homeland Security Investigations International Operations Assistant Director Raymond Villanueva. “We see this tendency manifest in cases in which ICE investigations of smuggled drugs end up revealing cultural items that are also part of the criminals’ cache of illegal items.”


The following are among the artwork-related cases involving the U.S. Department of Justice.
Forfeiture Of More Than $15M Worth Of Artwork Sought
March 1, 2013
The U.S. Attorney’s Office for the District of New Jersey United States filed a civil asset forfeiture complaint seeking a collection of artwork containing more than 2,200 pieces and valued at more than $15 million.
The complaint alleges that the artwork—bought with money from the sale of fraudulent credits for renewable fuel—was transported in interstate commerce knowing that it was the proceeds of fraud and was utilized in laundering the proceeds of fraud.
Federal law requires gasoline and diesel refiners and importers to introduce renewable, non-fossil fuel into the national fuel mix. To ensure this, the Environmental Protection Agency created a system of credits known as “Renewable Identification Numbers”—or “RINs”—to track and boost renewable fuel production.
RINs can be obtained by: producing renewable fuel; importing renewable fuel produced by approved foreign producers; purchasing renewable fuel, with associated RINs, from approved domestic producers; and purchasing RINs without the underlying renewable fuel.
A market for RINs has developed, and thousands of RIN transactions are electronically recorded with EPA every week. Hundreds of millions of dollars’ worth of RINs are exchanged every year.
A company known as Green Diesel held itself out as operating a facility in Houston, Texas, that generated biomass-based diesel fuel. It did not, however, actually generate any such biodiesel. From November 2007 through at October 2011, Green Diesel sold RINs to companies such as Shell Oil, BP, CITGO, and Exxon that were invalid because they did not, in fact, represent the production of any biodiesel at all. Purchasers of invalid RINs from Green Diesel reported losses exceeding $78 million.
The owner of Green Diesel, Philip J. Rivkin, used part of the proceeds of the fraud to purchase at least $18 million worth of artwork, chiefly photographs. On Jan. 30, 2012, Rivkin caused 396 packages of artwork to be transported to a warehouse on Frelinghuysen Avenue in Newark. The artwork was stored there until late June 2012, when it was moved to a warehouse in New York on its way to Spain. On July 12, 2012, it was seized for forfeiture pursuant to a warrant issued by a U.S. Magistrate Judge Mark Falk in Newark.
The seized artwork has been appraised by New York Fine Art Appraisers, which concluded that it has a total fair market value of $15,773,128.
On March 7, 2016, Philip Joseph Rivkin, also known as Felipe Poitan Arriaga, was sentenced in Houston, Texas, to 121 months in prison, three years of supervised release and to pay more than $87 million in restitution and was ordered to forfeit $51 million for generating and selling fraudulent biodiesel credits in the federal renewable fuel program.
In June 2015, Rivkin pleaded guilty to one count of mail fraud and one count of making a false statement under the Clean Air Act.
Transfer of  Works Of Art To Victims
August 12, 2013
The U.S. Attorney for the Southern District of New York announced that the U.S. Marshals Service transferred 18 seized works of art by such well-known artists as Andy Warhol, Mark Rothko, Roy Lichtenstein, and Damien Hirst to a victim of the fraud committed by Marc Dreier.
Dreier was the founder and managing partner of Dreier LLP, a law firm that employed more than 270 attorneys. From approximately 2002 through December 2008, he allegedly conspired to engage in securities and wire fraud involving the sale of fake promissory notes and the embezzlement of client funds.
During the course of the scheme, he collected more than $700 million through the sale of the fake promissory notes, only a portion of the principal and interest of which he actually paid. He also misappropriated more than $46 million in client funds.
The total out-of-pocket losses to purchasers of the various fake notes, and to law firm clients whose funds were embezzled, was approximately $400 million.
Dreier, 63, pled guilty in May 2009 to one count of conspiracy to commit securities and wire fraud, one count of securities fraud, five counts of wire fraud, and one count of money laundering. In July 2009, U.S. District Court Judge Jed S. Rakoff sentenced him to 20 years in prison and ordered him to pay roughly $388 million in restitution.
Rakoff also issued a preliminary order of forfeiture covering various assets, including the artwork that was seized from Dreier.
Return of Masterpieces to Brazil
June 18, 2015
The U.S. Attorney for the Southern District of New York and the U.S. Immigration and Customs Enforcement announced that a painting by Jean-Michel Basquiat called “Hannibal” as well as a Roman Togatus statue, were returned to Brazil at a repatriation ceremony.
The painting and the statue were smuggled into the United States in violation of customs law and were forfeited to the government as a result of civil forfeiture action.
In related repatriation ceremonies held in September 2010 and May 2014, the U.S. Attorney’s Office for the Southern District of New York returned three paintings to Brazil—“Modern Painting with Yellow Interweave” by Roy Lichtenstein, “Figures dans une structure” by Joaquin Torres-Garcia, and “Composition abstraite” by Serge Poliakoff—that were smuggled into the United States.
The Basquiat and the Togatus once belonged to Brazilian banker Edemar Cid Ferreira.  Ferreira, the founder and former president of Banco Santos, S.A. was convicted in Brazil of crimes against the national financial system and money laundering.  In December 2006, Ferreira was sentenced in Brazil to 21 years in prison.
As part of the case, a Sao Paulo Court judge also ordered the search, seizure, and confiscation of assets that Ferreira, his associates, and members of his family had acquired with unlawfully obtained funds from Banco Santos. 
Those assets included artwork valued at $20 million to $30 million. The Basquiat alone was appraised at $8 million.
Source: Justice Department

Money laundering concerns about artwork and other collections are noted in a March report from Transparency International, which highlights an “urgent action to keep corrupt cash out of luxury goods market.”

The report examines the risk of luxury goods and assets being used to launder the proceeds of corruption, “including in the art world and the marketplaces for super-yachts, precious stones and jewels, high-end apparel and accessories, and real estate.”

“Luxury goods sellers—jewelers and real estate agents to yacht builders and diamond brokers—are doing little to check if their customers are using corrupt money to fund their high-end purchases,” the report says.

Transparency International is calling for governments in high-risk countries, including China, Japan, the United States, and the United Kingdom, to introduce specific laws to mandate due diligence for high-risk luxury goods sales and establish a designated authority to enforce them.

As cited by the report, an estimated €100 billion is laundered in Germany every year, according to a 2016 study commissioned by the German Finance Ministry. The majority of these transactions involve property, cars, artworks, yachts, and other luxury items.

In the United Kingdom, auction houses filed just 15 suspicious transaction reports out of 381,882 total reports covering all sectors from September 2013 to September 2014, and there were no known cases of regulatory enforcement involving auction houses or art dealers, the report adds.  In Antwerp, the largest diamond exchange in the world, no suspicious activity reports by the precious stones sub-sector had been filed up to 2014, despite the market being identified as having a high money laundering risk.

“The red flags that point to a risk of money laundering include the widespread use of anonymous shell companies to disguise the ultimate owner of assets in addition to long-standing luxury industry traditions of discretion and confidentiality,” the report says. “Sectors such as precious jewels or luxury accessories also feature high-value goods that are easily transportable, yet anti-money-laundering measures are scant.”

Among Transparency International’s recommendations: leading brands and luxury multinationals should establish effective customer due diligence and reporting systems in their retail and customer service chains. Also, as the international standard setter against money laundering—the Financial Action Task Force—should strengthen recommendations to ensure high-value luxury sectors are adequately covered by global standards.

Concerns over luxury collectibles have increasingly vexed federal prosecutors, international authorities, and anti-corruption watchdogs. Like the importation of artifacts, artwork sales are often a convoluted process involving middlemen. Art also lends itself to money laundering (especially of the trade-based variety) and tax evasion because valuation is fickle, subjective, and easily under-reported.

In 2015, authorities discovered that an $8 million Jean Michel Basquiat painting was shipped to the United States with a declared $100 value by Edemar Cid Ferreira, founder and former president of Banco Santos. Convicted of money laundering in his home country, he had attempted to shield assets using the ploy.

Amid this backdrop, international scrutiny is turned up on so-called “free ports,” an international array of tax-free warehouses that allow the duty-free importation, storage, and eventual exporting of goods. These locations are frequently used by wealthy collectors to store artwork, artifacts, and other luxury collections without much, if any, of a paper trail.

French Finance Minister Michel Sapin has called free ports a “weak link” in combatting terrorism. “We have to fight the trade in works of art as part of the fight against terrorist financing,” he said at a meeting of G20 finance ministers last year.

The Financial Action Task Force, an intergovernmental body based at the headquarters of the Organization for Economic Co-operation and Development, has pointed out another concern that there is a lack of clarity and transparency regarding regulations covering the control of free zones. In some cases, it says, it is not clear who has jurisdiction to exercise controls.

The United Nations Educational, Scientific, and Cultural Organization once argued that Switzerland could be charged with terrorism financing by allowing stolen antiquities from Iraq and Syria to be stored at a Geneva free port (Egyptian mummies and a Roman sarcophagus were among the items recovered there). The pressure led to a series of enhanced customs and money laundering laws.

Earlier this year, the Responsible Art Market Initiative, a cross-market initiative formed in Geneva, published “Guidelines for Countering Money Laundering and Terrorist Financing Threats,” a set of best practices to be adopted by art market practitioners.

The guidelines are intended to raise awareness in the art market of the threats and risks of money laundering and terrorist financing and to help art businesses implement “risk based” anti-money laundering and terrorist financing measures appropriate to the size and nature of their business.

In many ways, the guidelines mirror standards financial institutions have followed (or should be following) for years.

To determine exposure to money laundering and terrorist financing risks, any business involved in the commerce of art or antiquities is advised to consider what AML measures it has adopted; what information about clients is gathered and recorded; what due diligence on artworks is undertaken; and what controls are in place regarding cash payments and checking the source of funds.

“It is generally accepted that responsible AML measures for art transactions should be founded on a ‘risk based’ approach,” RAM advises. “This means adopting AML processes, procedures, and compliance controls based on the type and level of risk associated with your business.” This includes watching for red flags such as clients that are “politically exposed persons,” offshore companies, or residents of countries on the FATF watch list.