Luxury Goods and Financial Crime

Luxury items are frequently – but not always – found at the end-point or 'integration' stage of a money-laundering scheme, following the introduction of illegal gains into the financial system and the layering process, whether through offshore accounts or other means. Integration typically involves dirty money locating a home in respectable-looking business investments or blue-chip stock, but high-value luxury goods (such as yachts, jewelry, and aircraft) are often a better resting place for it because they, too, are saleable, confer prestige on their owners, and are a source of pleasure. Any laundry procedure involving high-value commodities will do so if it can avoid the somewhat strictly regulated private banking industry. This is why criminals frequently invest the profits of their crimes in what the anti-money-laundering (AML) sector refers to as 'high-value commodities.'

Money Laundering in the Luxury Goods Industry

The luxury goods industry is a popular target for money laundering due to the high value and easy transferability of luxury goods. Criminals can use luxury goods to move large sums of money across borders without detection. For example, a criminal may purchase a luxury watch for $500,000 in one country and then sell it for $600,000 in another country, effectively laundering $100,000 of illegally obtained funds. Luxury goods can also be used to transfer value without the need for physical currency, making them an attractive alternative to traditional money laundering methods.

The United Kingdom, the United States, China, France, Germany, Italy, and Japan have the greatest luxury markets. The global luxury goods market was estimated to be worth €1 trillion in 2015 by consulting firm Bain & Company, with the European Fine Art Fair or TEFAF assessing the art market independently at $63 billion, focused in the United States (43 percent of the total), the United Kingdom (21 percent), China (19 percent), France, Germany, and Switzerland. According to KPMG, luxury goods are products and services that are not essential to fundamental necessities and whose demand increases more proportionately than income growth.

Beyond The Threshold

The EU's sixth anti-money laundering regulation went into effect on 3 December 2020, lessening the reporting threshold for high-value goods traders from €15,000 to €10,000, mirroring the $10,000 requirement for currency transaction reports in the US Bank Secrecy Act (BSA) 1970. Despite the fact that €10,000 is the amount that the average multi-millionaire would pay at a birthday party for one of his or her kids, Europol considers the sum to be still a very high threshold, given that it is not in line with certain domestic cash payment criteria as low as €1,000. The reason for this is that the EU is the main actor in what the press refers to as "the bankster war on cash." According to Europol, cash is still king in the empire of money laundering, but the organization believes that EU nations should also make efforts to prevent alternative ways for criminals to transit deals across borders. Gold, other special metals, and precious stones, as well as high-end watches and jewelry, are among the most valuable.

The EU has increased its regulation on the art market, which is now subject to official supervision and must abide by AML rules. In Ireland, the Department of Justice has placed 234 art businesses in a compliance monitoring database and plans 20 inspections in 2022 to clamp down on organized crime groups and drug cartels using high-value art purchases to launder money and finance terrorism. In the UK, the Money Laundering Regulations align with EU changes, and Unexplained Wealth Orders (UWO) are used to compel targets to explain how an asset was acquired. The UAE has urged financial institutions to increase scrutiny of dealers in precious stones and metals, and Israel has imposed more stringent AML policies and suspicious transaction reporting requirements on jewelers and high-value dealers. Luxury brands must comply with sanctions laws to avoid financial, regulatory, and reputational repercussions. The changing regulatory landscape has sparked concerns about firms' ability to improve compliance controls without negatively affecting their bottom line, with training being a significant burden and brands worried about the impact on their position in the market. However, not doing anything poses a bigger risk.

Examples of 'Integration' Utilizing Luxury Items

There are several examples of 'integration' utilizing luxury items:

• When Ukrainian President Viktor Yanukovych was deposed in 2014, crowds of journalists, activists, and ordinary Ukrainians stormed his country's palace, discovering chandeliers in the lavatories, bottles of Cristal, a Fabergé egg, and, ironically, the multimillion-dollar white Steinway piano on which John Lennon sang "imagine no possessions."
• The Tunisians toppled the governing Ben Ali family in 2011. Mohammad Sakher el-Materi, President Zine el-Abidine Ben Ali's son-in-law, was rumored to operate a number of luxury automobile businesses. Citizens discovered his Hammamet beach property to be filled with antique relics, such as Roman columns, frescoes, and a lion's head from which water spilled into an infinity pool.
• According to local officials, 'Operation Car Wash' in Brazil has also revealed a preference for expensive products among corruption suspects. The Petrobras scandal, named for the state-owned oil corporation at the center of a money-laundering investigation, has resulted in searches on the residences of many senators, deputies, and executives. Last month, authorities discovered large sums of money and fancy automobiles at the Sao Paulo and Brasilia locations. 
• In late 2016, Dutch officials confiscated a $120 million superyacht named Ebony Shine, and Swiss authorities seized eleven of the world's most expensive automobiles, all of which allegedly belonged to Teodorin Obiang, Equatorial Guinea's vice president, who has been charged with corruption in French courts.
• A centuries-old culture of confidentiality and discretion aids 'integration' in the art industry. Buyers and sellers frequently utilize foreign and offshore accounts to conduct transactions and middlemen (typically via telephonic or online auctions) to strike and/or complete deals. The famous Panama Papers leaked by the International Consortium of Investigative Journalists and led to the arrest of the founders of Mossack Fonseca in Panama in February – have revealed numerous cases of high-value art being held through anonymous shell companies to conceal their true owners.

What Should Luxury Firms Do to Reduce Financial Crime Risks?

As luxury firms navigate the changing regulatory landscape, there are several areas they should focus on to ensure compliance and avoid financial crime.

1. They should invest in compliance training and education for their staff, particularly those involved in sales. Many luxury firms have a high turnover of sales staff who may have little compliance knowledge or experience, making training a significant burden. However, ensuring staff is adequately trained in AML, Know Your Customer (KYC), and sanctions laws are critical to prevent financial crime.
2. Luxury firms should conduct thorough due diligence on their customers and business partners, particularly those from high-risk jurisdictions or with unusual transaction patterns. This includes verifying the source of funds and wealth of customers, as well as monitoring for suspicious activity and transactions.
3. They should implement robust compliance controls, including procedures for AML and sanctions screening and transaction monitoring. This can include using technology such as artificial intelligence and machine learning to enhance due diligence and monitoring capabilities.
4. They should establish a culture of compliance and ethics throughout their organization, with senior management leading by example. This includes ensuring that compliance is integrated into business decisions and that compliance failures are taken seriously and addressed promptly.
5. They should keep up-to-date with regulatory changes and industry best practices and be prepared to adapt their compliance programs accordingly. This includes monitoring regulatory developments across different jurisdictions and seeking expert advice where necessary.
6. By focusing on these key areas, luxury firms can mitigate the risk of financial crime, protect their reputation, and maintain their position in the market.

How Can Sanction Scanner Help Luxury Firms?

Sanction Scanner is a comprehensive solution for luxury firms looking to combat financial crime risks. Its AI-powered screening tool can instantly check customers and transactions against a global database of sanctions lists, PEP lists, and adverse media sources. By using Sanction Scanner, luxury firms can identify potential high-risk customers and transactions, as well as conduct Enhanced Due Diligence (EDD) reports to understand the potential risks better. Sanction Scanner's solution provides detailed reports on high-risk customers or transactions, helping luxury firms to make informed decisions about their business relationships. Additionally, Sanction Scanner's customizable risk assessment feature can help luxury firms tailor their AML policies to meet their specific needs.