On February 4, 2022, the United States Department of the Treasury (the Treasury) issued a report titled, "Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art." The report discusses how the high-value art market, including certain non-fungible tokens (NFTs), is vulnerable to financial crime and susceptible to abuse by illicit actors. The report concludes with recommendations that would require certain art market participants to implement and maintain anti-money laundering / countering financing of terrorism (AML/CFT) programs.
Art market participants, such as auction houses, galleries, and online marketplaces, typically are not required by current federal law to maintain an AML/CFT program. However, some market participants voluntarily maintain policies and procedures or customer identification programs to combat potential financial crime. When the art market industry, particularly online marketplaces, fail to confirm and verify the identity of sellers and purchasers, the industry can become vulnerable to illicit actors seeking to launder the proceeds of criminal activity. To address this issue, the report recommends that the Treasury consider "bringing certain art market participants under the AML/CFT legal framework and obligating them to create and maintain AML/CFT programs," including customer identification programs and suspicious activity reporting.
As it relates to NFTs, the Treasury's report is in line with the Financial Action Task Force's (FATF) October 2021 guidance on financial activities involving virtual assets, which recommends that virtual asset providers be regulated for AML/CFT purposes. FATF is an international organization that sets AML/CFT standards for its member states, including the United States. The Treasury's report adopts the FATF's definitions of "virtual asset" and "virtual asset service provider." The FATF defines "virtual asset" as "a digital representation of value that can be digitally traded, or transferred, and can be used for payment or investment purposes." While NFTs can be digitally traded or transferred, some NFTs are carved out from the definition of "virtual asset" because they generally are not used for payment or investment purposes. A "virtual asset service provider" is generally any person that, on behalf of another, exchanges virtual assets (either for fiat or other virtual assets), transfers virtual assets, takes custody of virtual assets for safekeeping, or provides financial services related to the purchase of virtual assets. Depending on the nature and characteristics, NFTs may be considered virtual assets, and those providing services for those types of NFTs may be considered to be acting as virtual asset service providers.
While the FATF guidance is not U.S. law, the Treasury's report signals that regulating virtual assets and virtual asset service providers may be on the horizon. Companies offering certain NFTs or operating certain NFT exchanges may ultimately be required to implement and maintain an AML/CFT program. However, all companies are currently subject to criminal money laundering laws that generally prohibit engaging in transactions where the proceeds at issue derive from, or are intended to facilitate, illegal activity, or where a party to the transaction is willfully blind to the illegal sources of the proceeds. To reduce criminal exposure, companies operating NFT platforms or other online marketplaces may consider proactively implementing policies and procedures to guard against being "willfully blind" and transacting with illegal funds.
For more information about NFTs and guarding against potential money laundering risks, please contact Wilson Sonsini attorneys Stephen Heifetz, Josh Kaplan, or Troy Jenkins.
