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The Case of the Rotenberg Brothers Art Scandal—What to Take Away?

In the wake of the Russian-Ukrainian conflict that erupted in February 2022, global tensions have experienced an alarming surge, straining relations between the United States and Russia. Since 2014, the United States imposed numerous economic sanctions towards the Russian Federation as condemnation for its military aggression towards Ukraine. Consequently, these sanctions issued by the US Treasury Department, notably Executive Order 13611 bars “any individual or entity that is owned or controlled by, that has acted for or on behalf of, or that has provided material or other support to, a senior Russian government official.” Therefore, halting any Russian-affiliated access to the world’s largest economy. However, in 2020, the US Senate produced a report presenting a legal loophole within the national art market posing a significant challenge to the effectiveness of these sanctions. Using the Rothenberg brothers scandal as a case study, this article will explore the economic influence wielded by the US art market and the pressing need to address its current legal deficiencies in upholding both sanction policies and anti-money laundering initiatives.

 

The United States art market is the largest commercial art market in the world, taking up a staggering 45% of the industry’s total market share and boasting sales exceeding $30 billion in the year 2022. A leader in the sales of Impressionist, post-war and post-contemporary art, the US commercial art sector is a lucrative business. The secondary art market proves to be the biggest contributor, where auction houses and galleries such as Sotheby’s and Christie’s accumulate sales of over 2 billion pounds each auction season. Therefore, the size of the US commercial art market proved itself to be an important sector within the country’s economy with its unique legalities that both encourage economic prosperity while also promoting the dangers of financial crimes. The 2020 U.S. Senate investigation into the Rotenberg  case has declared the US art market as “the largest, legal unregulated industry in the United States.” According to Title 12, Chapter III, part 326 of the Code of Federal Regulations, the Bank Secrecy Act is issued by the Federal Deposit Insurance Corporation (FDIC) under section 3 of the Bank Protection Act of 1968 that requires each “FDIC-supervised insured depository institutions” to “adopt appropriate security procedures to discourage robberies, burglaries, and larcenies” including assisting in identifying and apprehending persons who commit such acts. Thus, a legally required level of transparency is to be implemented for any business entities that the FDIC is the appropriate Federal banking agency. However, as economically influential and under the agency of the FDIC, the art industry remains largely unregulated. Not subject to the Bank Secrecy Act’s requirements, auction houses mainly rely on Anti-Money Laundering legislative policies  (AML) that only recently became compulsory on January 1st 2022. Therefore, the art industry’s unregulated market, with its exemption from mandated detailed procedures to verify a customer’s identity plays a large part in the undermining of economic sanctions, such as the Rotenberg brother’s ability to purchase millions of dollars of art from well-known auction houses such as Sotheby’s while under United States sanctions.

 

Due to the Rotenberg’s close affiliation with Russian President Vladimir Putin, the brothers were eventually listed by then President Obama’s Executive Order as individuals that are “owned or controlled by, that has acted for or on behalf of, or that has provided material or other support to, a senior Russian government official.” However, due to the art market’s exemption from the Bank Secrecy Act, many financial transactions remained anonymous, hence the difficulty for the 2014 sanction to fully achieve its legal effect. In the Senate report published in 2020, the investigation centers around the Rotenberg’s purchases of artworks at auction houses and through private art dealers in New York that totalled $18.4 million in value, which were made after they came under United States sanctions—precisely less than a month after 2014. To retain anonymity, the Rotenberg brothers purchased all $18.4 million worth of artwork through their art adviser, Gregory Baltzer. Despite being based in Moscow, the art adviser is a naturalized US citizen, falling under the sanction radar due to his citizenship. Acting as an intermediary for the brothers, Baltzer utilises funds from more than nine off-shore shell companies owned by the brothers which were based in the British Virgin Islands to purchase works of art from auction houses such as Christie’s and Sotheby’s. Securing funds with a background “clean” from “Russian origins”, Baltzer was then able to purchase René Magritte’s La Poitrine for $7.5 million through a private equity group named Highland Ventures under his own name. The artwork was then shipped off to Germany for storage in a facility called HasenKamp in the name of “Highland Business”. Therefore, through art advisors such as Gregory Baltzer and shell companies, from March to November of 2014, the brothers managed to avoid strict economic sanctions by working around the legal fallacies within the art market, eventually obtaining a collection of $18 million in artworks first through auction houses then private sales and back to companies that are funded or owned by the Russian oligarchs.

 

The revelation surrounding the activities of the Rotenberg brothers has sent shockwaves through the global financial landscape. The ability with which one of the mostly heavily sanctioned Russian oligarchs to conduct financial activities or months through the art industry with ease shows the need to look at the legal fallacies of the US art market honestly. It has been a heated debate within the commercial art world about how much money they generate, and how little legal regulation it has been given. Calls have been made within Congress to amend the Bank Secrecy Act to make up for the reality of how little transparency and formal regulatory requirements the art market has been imposed. The amendment as initiated by both Congress and in the Senate report calls for the need to include transactions including high-value art within the existing secrecy act, while also suggesting the AML to be made compulsory. A striking disparity becomes apparent when comparing these proposed reforms to the more proactive stance taken by European counterparts. The European Union, as of 2023, has required businesses handling art transactions valued at €10,000 or more to comply with AML laws, including verification of the identity of the seller, buyer, and UBO of the art. As the largest economy and the most influential art market, the case of Arkady and Boris Rotenberg should be ringing enough alarm bells for the United States Government to truly examine the legal fragility of the commercial art market—where sometimes art can get pretty ugly.

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