Purchases of flashy luxury items such as foreign cars, fine jewelry, yachts, and private jets are often high on the agenda for those wealthy enough to afford them. While many utilize these material items as nothing more than a means of flaunting personal wealth, recent reports back the fact that these already lucrative goods may be even more attractive to wealthy individuals who have acquired their wealth by illicit means, this given that they can be valuable tools for laundering ill-gotten funds. The luxury goods sector was valued at a whopping $312 billion in 2022, with many of the purchases and sales contributing to this figure being of the cash variety. Given the difficulty in tracking all-cash transactions, law enforcement bodies are unable to pinpoint the exact amount of money laundered through the realm of luxury goods on an annual basis, though it is widely believed that this figure is on the rise at the international level.
Recent studies of the American financial crime space have found that revenue created by the luxury goods market from year-to-year is rising at a very fast pace. Income from the luxury goods market is expected to increase by approximately 5.40% annually over the next five years.1 Experts believe that this growth proves that the luxury goods market may be immune to certain factors that have hindered other industries over the last several years (i.e. the Covid pandemic and rising inflation rates), which backs the idea that its global market value – as well as associated money laundering through this realm – will continue its current trajectory. This in part is due to several key identified factors.
One simple but often overlooked factor that makes luxury goods attractive for money laundering is the ease and accessibility provided by the goods themselves. For example, it takes much less work to launder money by purchasing one expensive painting or vehicle for millions of dollars than buying the equivalent value in pencils or paperclips. This also means that fewer transactions are required to legitimize the illicit funds in question, saving precious steps that might otherwise expose criminals to potential detection. Some luxury items such as artwork also lend themselves well to clandestine activity, as many of these types of sales are made via private auctions where there is no public record of a monetary exchange nor the parties involved. This makes it all the more difficult for law enforcement agencies to track those behind these potentially massive deals. Furthermore, criminals have been found to commonly store their exquisite paintings, sculptures, and even vintage wines in warehouses within “freeports.” These are essentially free economic zones or foreign trade areas where goods can be stored without being subject to that particular country’s customs duties. In what is viewed internationally as a well-known (and oft-abused) money laundering loophole, items held in these freeports are considered to be “just passing through” and technically never “enter” the country officially, meaning that as such they cannot be taxed and there is no public ledger of potential holdings. All told, approximately $899 billion worth of goods are laundered through freeports each year in various regions of the world. In speaking on the topic of financial crime via art and luxury goods, the European Union (EU) has stated,
“It is far easier to move a valuable painting to the other side of the world than a similar amount of money. [Free ports provide operators] with a safe and widely disregarded storage space, where trade can be conducted untaxed and ownership can be concealed.”4
Jewelry remains arguably the most attractive vehicle for money laundering however, as precious stones and metals in the form of rings, necklaces, watches and pendants are highly-valued and very easily transportable across international borders. Couple that with the fact that the value of certain jewelry also varies dependent on supply (which is generally limited on “priceless” pieces) and high demand, and given that items are likely to only appreciate over time, criminals and politically-exposed persons can essentially choose to sit on them as an investment and watch their respective values increase over time. Purchases of larger items such as the above-mentioned super-yachts and exotic vehicles are often synonymous with shell companies where true beneficial ownership of those making purchases (and sales) can be shrouded, further hindering the proper authorities from apprehending those behind these buys.The most egregious real-world example of this trend came forth as one of the many revelations from the now-infamous 1MDB scandal found that Malaysian financier Jho Low ultimately purchased valuable works by renowned artists such as Claude Monet, Vincent Van Gogh, and Andy Warhol, in addition to making several purchases of high-end yachts and jetliners as part of efforts to launder hundreds of millions of dollars from the Malaysian Development Fund. In total, over $4.5 billion was diverted into the bank accounts of multiple senior officials of the Malaysian government, including their former Prime Minister Najib Razak, and their associates.
When dealing in luxury goods, one must also not overlook the role of counterfeiting. The counterfeit goods industry accounts for approximately 3.3% of all global trade2 – an estimated $500+ billion dollar business – which contributes to annual losses of approximately $30 to $50 billion for American businesses and consumers alone. The diversion of these funds from local and national economies not only affects the respective countries directly impacted by counterfeiting, but also countries that depend on trade with these regions. The trend also forces companies that are not being reimbursed for counterfeits of their legitimate products to increase the prices of their commodities, subsequently leading to inflation and effectively reducing the value of real money, among other negative effects.
With crimes of this variety on the upswing, several major international watchdogs including the Treasury’s Financial Crimes Enforcement Network (FinCEN), the Financial Action Task Force (FATF) and others are strengthening their defenses to crack down on wrongdoing within the luxury goods market. Given that dealers of luxury goods generally are not governed by the staunch regulatory standards that cover their counterparts in the financial sector, financial institutions and luxury firms alike need to remain vigilant and continue the implementation of proper training protocols for staff to better detect potential money laundering threats. FTI Consulting writes that from the perspective of banks and companies associated with the purchases/sales of luxury goods, “there is a need to better understand jurisdiction and firm-specific risks, which requires assessing the firm’s customer base, products, geographies and third-party network.” They continue, noting that this “is particularly important for the luxury sector, where many firms have international supply and distribution chains and a global customer base spanning all levels of wealth.”2
Citations
- “Criminals Drawn to Luxury Brands for Money Laundering: I-Aml Israel Anti-Money Laundering.” i-AML, 14 Feb. 2023.
- McLeod, Craig, and Karl Payeur. “Following the Treasure Trail: Luxury Goods and Financial Crime.” FTI Consulting, 1 Nov. 2022.
- “Trade in Fake Goods Is Now 3.3% of World Trade and Rising.” OECD, 18 Mar. 2019.
- Wood, L. Todd. “Freeports or Free Crime?” The Washington Times, The Washington Times, 13 May 2019.
