Luxury goods dealers do too little to limit sales to the corrupt

Luxury goods sellers – from jewellers 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.

This is the conclusion of a new report, Tainted Treasures: Money laundering risks in luxury markets, from the anti-corruption movement Transparency International, which found that little due diligence is done on luxury goods buyers and where there are laws, there is little enforcement.

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

“For the corrupt, the luxury sector is more than just a money laundering vehicle. The behaviour of kleptocrats who amass millions in properties, sports cars, and art in a short period of time shows that the desire to own luxury can in fact be one of the drivers of corrupt behaviour. The luxury sector has a responsibility to prevent public funds, which could have gone to schools and hospitals, from being splurged on their products even if it means fewer sales,” said Transparency International Chair José Ugaz.

The most recent due diligence data shows a pattern of lax reporting. For example:

• Despite facing corruption charges in a French court following a widely reported, multi-year investigation, the Vice President of Equatorial Guinea, Teodorin Obiang, continues to be able to purchase expensive real estate and cars. On a regular basis these items have been confiscated from him in places like Malibu, Geneva and Paris.

• 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 UK, 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.

• In Japan in 2014, real estate agents submitted just one suspicious transaction report out of a total of 377,513.
  
• 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 this 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. Sectors such as precious jewels or luxury accessories also feature high-value goods that are easily transportable, yet anti-money-laundering measures are scant.

Despite these risks, there are limited anti-money obligations in leading luxury markets such as China, Japan and the US. In countries where anti-money laundering legislation at least partially applies to luxury dealers, such as France, Germany, Italy and the UK, there is little evidence of effective enforcement of these rules by authorities.

The report makes the following recommendations to address risks of dirty money being used to buy luxury goods and assets:

• Countries that host the largest luxury markets – such as China, France, Germany, Italy, Japan, the UK and the US – should strengthen legislation to ensure dealers in high-value goods and in specific high-risk luxury sectors have customer due diligence and reporting requirements that meet best practice international standards.
• Governments should also ensure luxury sectors have a designated authority charged with oversight and regulation. These authorities should have the mandate, resources and independence necessary to effectively carry out their oversight duties, which should include having the ability to sanction non-compliant businesses.
• Leading brands and luxury multinationals should establish effective customer due diligence and reporting systems in their retail and customer service chains. These should also be established in countries where they are not yet legally required, in line with the public commitments to ethical behaviour and integrity already made by many companies.
• As the international standard-setter against money laundering, the Financial Action Task Force (FATF) should strengthen its recommendations to ensure high-value luxury sectors are adequately covered by global standards.

Click here to download the full report.