United States Senate PERMANENT SUBCOMMITTEE ON INVESTIGATIONS Committee on Homeland Security and Governmental Affairs Rob Portman, Chairman Tom Carper, Ranking Member THE ART INDUSTRY AND U.S. POLICIES THAT UNDERMINE SANCTIONS STAFF REPORT PERMANENT SUBCOMMITTEE ON INVESTIGATIONS UNITED STATES SENATE THE ART INDUSTRY AND U.S. POLICES THAT UNDERMINE SANCTIONS TABLE OF CONTENTS   I.  EXECUTIVE SUMMARY .................................................................................. 1  II.  BACKGROUND ................................................................................................ 16  A.  U.S. Sanctions Enforcement ........................................................................ 16  1.  The U.S. Treasury Department ................................................................ 16  2.  Sanctions Following the Russian Federation’s Invasion of Crimea ....... 20  B.  The Art Market ............................................................................................... 33  1.  Money Laundering in the Art Market ..................................................... 35  2.  The Art Industry is the Largest Legal, Unregulated Market in the United States ............................................................................................ 36  3.  The Applicability of the Berman Amendment to High-value Art ........... 38  4.  Shell Companies........................................................................................ 39  C.  The Four Major Auction Houses ................................................................ 41  1.  Sotheby’s .................................................................................................... 41  2.  Christie’s.................................................................................................... 43  3.  Phillips....................................................................................................... 45  4.  Bonhams .................................................................................................... 46  5.  Online Auctions during the COVID-19 Pandemic ................................... 47  D.  Art Dealers, Art Galleries, and Art Fairs ................................................. 48  E.  Voluntary Anti-Money Laundering and Sanctions Programs in the Art Industry ......................................................................................... 49  1. Sotheby’s .................................................................................................... 50  2.  Christie’s.................................................................................................... 55  3.  Phillips....................................................................................................... 58  4.  Bonhams .................................................................................................... 59  5.  Private Art Dealer..................................................................................... 61  III.  ROTENBERG CASE STUDY: USING OFFSHORE COMPANIES, LAWYERS, AND ART ADVISORS TO MASK OWNERSHIP ............................ 63  i A.  Attorney Mark Omelnitski and the Markom Group .............................. 63  1.  The Markom Group Established Rotenberg-linked Shell Companies .... 67  2.  Rotenberg-Linked Shell Companies were Used to Purchase Art ........... 69  B.  Art Advisor Gregory Baltser ....................................................................... 79  1.  The Auction Houses Viewed Mr. Baltser as the Principal Buyer ........... 81  2.  Mr. Baltser Purchased Art as an Agent for Steamort ............................. 84  3.  Mr. Baltser Established BALTZER Auction Agency and Club in Moscow ................................................................................................................... 90  4.  Examples of Pre-Sanctions Art Purchases ............................................ 105  5.  The United States Sanctioned Arkady and Boris Rotenberg on March 20, 2014 ......................................................................................................... 112  6.  Examples of Post-Sanctions Art Purchases ........................................... 114  7.  Mr. Baltser Shipped Art Purchased by Rotenberg-linked Companies to the Hasenkamp Storage Facility in Germany ....................................... 130  8.  Mr. Baltser Attempted to Sell Art Purchased with Funds Traced to Rotenberg-linked Companies ................................................................. 132  9.  Mr. Baltser Did Not Cooperate with the Subcommittee’s Investigation ................................................................................................................. 141  10.  During the Course of the Subcommittee’s Investigation Phillips, Christie’s, and Sotheby’s Stopped Transacting with Mr. Baltser ......... 142  IV.  ADDITIONAL U.S. DOLLAR TRANSACTIONS BY ROTENBERGLINKED SHELL COMPANIES............................................................................. 144  V.  CONCLUSION ................................................................................................ 147  ii THE ART INDUSTRY AND U.S. POLICIES THAT UNDERMINE SANCTIONS I. EXECUTIVE SUMMARY The United States government imposes economic sanctions on foreign adversaries in attempt to change their behavior. In theory, sanctions are simple. U.S. persons and companies are prohibited from doing business with sanctioned persons and entities. This prohibition should bar access to the world’s largest economy. The United States imposes sanctions for a wide range of reasons. For example, the United States has imposed sanctions on Russia for election interference, human rights abuses, providing support to Venezuela and Syria, but mainly in response to Russia’s invasion of Ukraine. This report focuses, in particular, on a case study documenting how certain Russian oligarchs appear to have used transactions involving high-value art to evade sanctions imposed on them by the United States on March 20, 2014 in response to Russia’s invasion of Ukraine and annexation of Crimea. Specifically, the Subcommittee traced purchases of high-value art back to anonymous shell companies linked to sanctioned individuals Arkady and Boris Rotenberg, two Russian oligarchs, and Arkady’s son, Igor. It appears the Rotenbergs continued actively participating in the U.S. art market by purchasing over $18 million in art in the months following the imposition of sanctions on March 20, 2014. Shell companies linked to the Rotenbergs also transferred over $120 million to Russia during a four-day window between President Obama’s March 16, 2014 executive order stating that the U.S. would be sanctioning certain Russian Arkady Rotenberg and Vladimir Putin (Photo Credit: The New Yorker) individuals and the Treasury Department specifically naming the Rotenbergs as sanctioned on March 20, 2014. In addition, certain Rotenberg-linked shell companies continued transacting in the U.S. financial system long after Arkady and Boris Rotenberg were sanctioned. The Subcommittee determined these Rotenberglinked shell companies engaged in over $91 million in transactions post-sanctions. While Russia-related sanctions, including those against the Rotenbergs, were set to expire in March 2020, President Trump extended them for another year. The effectiveness of these sanctions, however, is in question. To date, Russia has not withdrawn from Crimea and has even expanded its military operations in 1 surrounding waters. The Subcommittee sought to understand why the sanctions have not been more effective and, after reviewing a number of suspect transactions, launched a narrow investigation into high-value art. If wealthy Russian oligarchs can purchase millions in art for personal investment or enjoyment while under sanction, it follows that their businesses or hidden resources could also continue accessing the U.S. financial system. * * * * * * * * * * * The Subcommittee’s investigation uncovered a complex set of facts involving shell companies with hidden owners, intermediaries who mask purchasers and sellers, and lax money laundering safeguards in the U.S. art industry. The art industry is largely unregulated. The art industry is considered the largest, legal unregulated industry in the United States. Unlike financial institutions, the art industry is not subject to Bank Secrecy Act’s (“BSA”) requirements, which mandate detailed procedures to prevent money laundering and to verify a customer’s identity. While the BSA does not apply to art transactions by art dealers and auction houses, sanctions do. No U.S. person or entity is allowed to do business with a sanctioned individual or entity. The art industry has been enjoying a boom. According to the 2019 Art Basel and UBS Global Art Market Report, world-wide art sales hit $64.1 billion in 2019. That report found the United States was the world’s largest art market comprising 44 percent of global sales, or around $28.3 billion. The art industry is generally divided into sales at public auctions and by private dealers. In 2019, sales at auction houses made up 42 percent of total art sales, while the remaining 58 percent of sales were through private dealers. The four biggest auction houses by sales—Sotheby’s, Christie’s, Phillips, and Bonhams—are selling art for sizeable amounts. In November 2017, Leonardo da Vinci’s Salvator Mundi sold at auction at Christie’s in New York for over $450 million. In May 2019, Christie’s New York sold Jeff Koon’s Rabbit for over $91 million, the highest price ever paid for a piece by a living artist. Even during the COVID-19 pandemic, an online auction at Sotheby’s brought in $234.9 million in total sales, including $84.55 million for Triptych Inspired by the Oresteia of Aeschylus by Francis Bacon. In turn, the auction houses report large annual sale numbers. Sotheby’s reported $4.8 billion in sales for 2019, while Christie’s reported $2.8 billion in sales for just the first six months of 2019. Investors have taken notice. Deloitte’s 2019 Art and Finance Report noted that “artnet’s Index for Top 100 Artists produced an 8 percent Compound Annual Growth Rate between 2000 and 2018, compared with 3 percent for the S&P 500.” For example, Banksy’s Devolved Parliament sold at Sotheby’s in London on October 2 3, 2019 for around $12.2 million; the artist’s previous record for a painting sold at auction was $1.87 million for Keep It Spotless in 2008. Secrecy is pervasive in the art industry. While the art market is not regulated by the BSA, it is governed by unwritten rules. A large number of art sales happen through intermediaries referred to as “art advisors” who can represent both purchasers and sellers. In a typical transaction, a purchaser may not ask who owns the piece of art they are purchasing; the seller may not ask for whom it is being purchased or the origin of the money. And in general an art advisor would be reluctant to reveal the identity of their client for fear of being cut out of the deal and losing the business. Auction houses have voluntary AML and sanctions polices. Because the art industry is not subject to BSA requirements, when a piece of art is sold, there is no legal requirement for the selling party to confirm the identity of the buyer or that the buyer is not laundering money through the purchase. While the four biggest auction houses have voluntary anti-money laundering (“AML”) programs, the employees who facilitated art purchases in the Subcommittee’s case study said they never asked the art advisor the identity of his client. Instead, the auction houses considered the art advisor the principal purchaser, even when it was well-known that the ultimate owner was someone else. With regard to the funds used to purchase art, the auction houses told the Subcommittee they rely on financial institutions to ensure the integrity of the funds, even though the auction houses interact directly with the buyer. But these voluntary AML policies are just for sales through the auction houses. As stated above, the majority of art sales are private transactions. A private dealer interviewed by the Subcommittee stated she had no written AML policies, tries to work with people she knows and trusts, and relies on her gut. She also explained that her practices have significantly changed over the years and that she relies on advice from AML lawyers and looks for red flags. Secrecy, anonymity, and a lack of regulation create an environment ripe for laundering money and evading sanctions. Tracing the ownership of anonymous shell companies, including those involved in high-value art transactions, is difficult. That difficulty continues even though corporate secrecy suffered a blow in the spring of 2016 when the International Consortium of Investigative Journalists (“ICIJ”) shocked the world by releasing information on 214,488 offshore entities from the Panamanian law firm Mossack Fonseca (the “Panama Papers”). One email chain included among the Panama Papers and made public described links between nine offshore companies to the Rotenbergs. The email chain listed Boris Rotenberg as the ultimate beneficial owner (“UBO”) of Highland Ventures Group Limited (“Highland Ventures”) and Arkady Rotenberg’s son Igor as the UBO of Highland Business Group Limited (“Highland Business”). The email copied London-based attorney 3 Mark Omelnitski, who used his firm the Markom Group to establish and maintain shell companies for the Rotenberg family. The true ownership of the listed shell companies was not, however, as straightforward as the Panama Papers email chain suggested. For example, based on financial information reviewed by the Subcommittee during its investigation, Arkady Rotenberg appeared to be the UBO of Highland Ventures, not his brother Boris. That information included non-public wire transfers showing multi-million dollar transfers from a company owned by Arkady Rotenberg to Highland Ventures. In 2012 and 2013, that company—Milasi Engineering—transferred over $124 million marked as annual dividends to Highland Ventures. The December 31, 2014 Financial Report for Milasi Engineering listed Arkady Rotenberg as its UBO, making it clear that Highland Ventures received its funding from a company owned by an individual the U.S. would later sanction. Milasi Engineering also held 100 percent of shares in Stroygazmontazh, a gas pipeline company sanctioned in April 2014 by the United States due to its ownership by Arkady Rotenberg. Arkady Rotenberg transferred his business interests to his son, Igor. In July 2014, four months after the United States sanctioned Arkady, Mr. Omelnitski’s firm, the Markom Group, executed paperwork that appeared to transfer Arkady’s interest in Milasi Engineering to his son, Igor, who was not sanctioned at the time. Milasi Engineering was owned by two other holding companies. The Markom Group transferred the ownership of those two companies to Highland Ventures, which it asserted had always been owned by Igor. Therefore, from July 2014 to April 2018, when Igor was finally sanctioned by the United States, Milasi Engineering was owned on paper by an unsanctioned individual. A report by a bank investigator produced to the Subcommittee determined the transfer of Milasi Engineering from Arkady to Igor was done solely to evade sanctions, and the Markom Group “intentionally structured [the ownership of these shell companies] to be opaque in order to hide the identities of true beneficiaries.” In response, the bank closed all accounts associated with the Markom Group. This included closing accounts held by art advisor Gregory Baltser. Art advisor Gregory Baltser facilitated purchases for the Rotenbergs. Intermediaries played a central role in the Rotenbergs’ art purchases in the United States. As previously explained, Mr. Omelnitski and his company, the Markom Group, established and maintained shell companies for the Rotenbergs to mask their identities. The Rotenbergs also employed art advisor Gregory Baltser, who facilitated the purchase and sale of high-value art both before and after sanctions without disclosing the names of his clients. Mr. Baltser is a naturalized U.S. citizen, who must comply with U.S. sanctions laws, but his business is based in Moscow. Prior to sanctions, funds Mr. Baltser used to purchase art linked to the Rotenbergs followed a unique and 4 recognizable financial path: Mr. Baltser bid on specific artworks at auction, purchased the art, and then assigned the title to the art to a Belize company named Steamort Limited (“Steamort”). Steamort paid for the art using funds traced back to Highland Business. Mr. Baltser, however, was not the owner of Steamort; he had a contract with Steamort to serve as a consultant to purchase art on behalf of the company. A copy of that contract was produced to the Subcommittee by Christie’s. Both the contract and financial records showed that Steamort paid Mr. Baltser $9,500 a month for his services. In total, between March 2010 and October 2018, financial records show Mr. Baltser received $1,116,000 in fees for his consulting services under the Steamort Agreement. Company documents obtained by the Subcommittee listed Steamort’s only director and shareholder as Jason Hughes. According to a report by ICIJ, Mr. Hughes was associated with over 200 other companies as a nominee director—an individual who masks the true UBO of a shell company. The owner of Steamort remains unknown. In 2012, Christie’s questioned Mr. Baltser about who owned Steamort, and asserted that Mr. Baltser could no longer bid at auctions until he provided Steamort’s UBO. Initially, Mr. Baltser responded that he did not know who owned Steamort. When pressed and threatened with missing the opportunity to bid at an upcoming auction, Mr. Baltser verbally told Christie’s that Steamort was owned by “Luisa Brown.” Christie’s accepted this verbal assertion, conducted AML checks on Ms. Brown, found no derogatory information, and cleared Mr. Baltser to continue bidding at auctions. Mr. Baltser never provided any documentary evidence of Steamort’s ownership by Ms. Brown. The Subcommittee was unable to confirm if an individual named Luisa Brown was the UBO for Steamort, or if she even existed at all. Mr. Baltser opened an auction agency and club in Moscow. In late 2012, Mr. Baltser announced he was planning to open BALTZER Auction Agency and Club. The agency would be located in Moscow and its members would be “the leading Moscow and Russian collectors – the active BALTZER Auction Agency and Club (Photo Credit: BALTZER) participants of auction biddings at many world marketplaces.” Mr. Baltser proposed to partner with both Christie’s and Sotheby’s. As part of the proposed agreement, Mr. Baltser stated that he would bid at auctions on behalf of his clients under an account in the name of BALTZER. 5 This allowed Mr. Baltser to guarantee on his website that “we can give you complete anonymity.” Under the proposed agreement, Mr. Baltser pledged to conduct all AML and sanctions checks on his clients and provide an annual certification to the auction houses that no member of BALTZER was engaged in money laundering. Mr. Omelnitski served as BALTZER’s chief AML officer and represented Mr. Baltser in contract negotiations with the two auction houses. To be clear, Mr. Baltser put the same attorney who established and maintained shell companies to mask the Rotenbergs’ ownership in charge of his new venture’s AML compliance. Christie’s partnered with BALTZER. Christie’s accepted Mr. Baltser’s proposal and signed the agreement with BALTZER on February 4, 2014. At the end of 2014, Mr. Omelnitski certified to Christie’s that “despite BALTZER having a significant number of Russian clients there were no transactions, which fall under recent sanctions against Russia.” Mr. Omelnitski failed to provide another such certification for the next three years, despite repeated requests from Christie’s to provide the annual certificate promised in the agreement. In 2018, Christie’s renegotiated its agreement with BALTZER to require client due diligence documents after each purchase. A Sotheby’s employee identified Arkady and Boris Rotenberg as Mr. Baltser’s clients. Sotheby’s also considered Mr. Baltser’s business proposal, but ultimately declined. During negotiations, a Sotheby’s employee represented to Sotheby’s management that Mr. Baltser had told her that his clients included Russian oligarchs. In fact, she told Sotheby’s management that Mr. Baltser had identified Arkady and Boris Rotenberg as two of his clients (five months prior to U.S. sanctions). During her Subcommittee interview, however, the same Sotheby’s employee said Mr. Baltser had never told her that Arkady and Boris Rotenberg were his clients. Instead, she asserted she fabricated this information in an effort to convince Sotheby’s to accept BALTZER’s proposal. Despite declining the proposal, Sotheby’s continued to conduct business as usual with Mr. Baltser and his new company, BALTZER, and never questioned whether Arkady and Boris Rotenberg were his clients. The Subcommittee independently traced post-sanction purchases by BALTZER to shell companies linked to the Rotenbergs, suggesting the Sotheby’s employee was not truthful in her Subcommittee interview. Mr. Baltser continued to purchase art with funds linked to the Rotenbergs even after March 2014 sanctions. Following the imposition of sanctions by the United States on Arkady and Boris Rotenberg in March 2014, the funds Mr. Baltser used to purchase works of art at auction houses continued to follow the same general financial path as before sanctions. By this time, BALTZER provided another layer of anonymity for the funds used to purchase art. After Mr. Baltser successfully bid at auction, funds were wired from Highland Ventures to Steamort, just as they had arrived from Highland Business before sanctions. Steamort then 6 wired funds to BALTZER, which paid the auction house and took title of the purchase. All four auction houses considered Mr. Baltser the principal purchaser, rather than an agent for a buyer, and never asked for whom he was purchasing the art. Any client due diligence was performed only on Mr. Baltser and not his undisclosed clients, satisfying the voluntary AML policies at the auction houses. Highland Ventures purchased a painting through a private art dealer. The funds used to purchase René Magritte’s La Poitrine for $7.5 million in May 2014 through a private art dealer followed a different path. In this transaction, Highland Ventures took title to the painting and was listed on the invoice as the buyer. Anna Wilkes, an employee of Mr. Omelnitski’s Markom Group, signed on behalf of Highland Ventures as its Director. The funds used to pay for the painting were wired to the private dealer from a company named Advantage Alliance. The Subcommittee traced those funds to a company called Senton Holdings. An investigation by a financial institution–produced to the Subcommittee–determined Senton Holdings was owned by Arkady Rotenberg, linking him through the chain of wire transfers to the purchase of the painting. Art was shipped to Germany for storage. La Poitrine, like much of the art traced to companies linked to the Rotenbergs, was shipped to a storage facility in Germany called Hasenkamp. The Subcommittee contacted Hasenkamp and was told the art was originally stored there under the name Highland Business; no individual was named. Later, a company named Taide Connoisseur Selection took over the contract to store the art at Hasenkamp. The only individual named on Taide Connoisseur Selection’s website was Mr. Omelnitski. In August 2019, during the course of the Subcommittee’s investigation, the Taide Connoisseur Selection account at Hasenkamp was closed and all art stored under the account was shipped to Moscow. Art purchases linked to the Rotenberg shell companies totaled millions of dollars. In total, the Subcommittee traced funds for over $18 million in art purchased in the United States from March 2014 to November 2014, both at auction houses and through private sales back to shell companies that appeared to be funded or owned by Arkady Rotenberg. Sotheby’s agreed to sell Brucke II for Mr. Baltser during the Subcommittee’s investigation. Mr. Baltser also sold paintings owned by his clients. In late 2018, he attempted to sell Lyonel Feininger’s Brucke II. Brucke II was originally purchased through Mr. Baltser on February 4, 2014 at an auction at Christie’s in London. The painting later appeared on a list of 31 paintings sent to Christie’s by a BALTZER employee, who stated that the list represented the collection of one of Mr. Baltser’s clients. The Subcommittee traced 16 paintings on the list purchased in the United 7 States back to suspected Rotenberg shell companies. This suggests that all 31 paintings were owned by the Rotenbergs. When Mr. Baltser attempted to sell Brucke II in late 2018, both Christie’s and Sotheby’s expressed interest in having the painting at their auctions. Ultimately, Mr. Baltser’s client chose Sotheby’s to sell Brucke II at auction in February 2019. At the time, the Subcommittee was actively investigating the auction house and Mr. Baltser. Sotheby’s requested Mr. Baltser provide the name of the UBO of the painting, including whether that individual Lyonel Feininger's Brucke II (Photo Credit: Christie's) was currently sanctioned. Mr. Baltser said Brucke II had been resold since it was purchased at Christie’s in February 2014 and now belonged to a company incorporated in the Marshall Islands and provided a Russian passport for the company’s UBO. The Subcommittee asked Sotheby’s to request the name of the February 2014 purchaser of the painting; Mr. Baltser declined to disclose the name of that purchaser due to a non-disclosure agreement. Sotheby’s ultimately pulled the painting from the 2019 auction due to a lack of interest. The Subcommittee asked to interview Mr. Baltser, but through his attorney, he declined the request and stated he was in Moscow and had no plans to return to the United States. Through his attorney, Mr. Baltser stated that: he has never represented or transacted with Arkady or Boris Rotenberg; Highland Business and Highland Ventures were not listed as sanctioned by the Treasury Department; and he did not have access to the Panama Papers. A delay between the 2014 announcement and imposition of sanctions created a window to send U.S. dollars to Russia. On March 16, 2014, President Obama signed an executive order imposing sanctions for Russia’s annexation of Crimea, but the Treasury Department did not officially impose sanctions on certain individuals and entities until March 20, 2014. During this four-day window, Rotenberg-linked shell companies transferred over $120 million through the United States to Russia. On March 18, 2014, Highland Ventures transferred over $39.5 million from its account at The Pictet Group in Switzerland through the U.S. financial system to its account at Gazprombank in Moscow. That same day, Culloden Properties transferred over $82 million from its Pictet Group account in Switzerland through 8 the U.S. financial system to its account in Moscow at the Gazprombank. Both the Panama Papers and documents produced to a financial institution by the Markom Group—and subsequently provided to the Subcommittee—identify Boris Rotenberg as the owner of Culloden Properties. Rotenberg-linked shell companies transacted in U.S. dollars post-sanctions. Shell companies linked to the Rotenbergs continued conducting transactions through the U.S. financial system even after the imposition of sanctions in March 2014. For example, including its art purchases, Highland Ventures was involved in transactions worth over $16 million. Advantage Alliance was involved in transactions worth over $29 million. And while the UBO of Steamort remains hidden, the company served as an intermediary between Rotenberg-linked shell companies and BALTZER in the purchase of art. Following the imposition of sanctions in March 2014, Steamort was a part of transactions totaling over $22 million. In total, the Subcommittee identified over $91 million in transactions by Rotenberg-linked shell companies after sanctions were imposed on the Rotenbergs in March 2014. The Subcommittee’s Investigation The Subcommittee initiated its investigation after reviewing a number of suspicious transactions that appeared to involve art purchased through auction houses and private dealers. Funds used in these transactions originated at entities linked to the Rotenberg family through the Panama Papers and other public information. As part of its investigation, the Subcommittee reviewed over one million documents from the four major auction houses, a private art dealer, an independent public gallery, and seven financial institutions. The Subcommittee interviewed current and former employees of Sotheby’s, Christie’s, Phillips, and Bonhams. The Subcommittee also interviewed a private dealer based in New York and two art advisors located overseas who were all involved in the same multimillion dollar transaction. All entities cooperated with the Subcommittee’s requests, except for Mr. Baltser. Through his attorney, Mr. Baltser declined to be interviewed by the Subcommittee and stated he was in Moscow with no plans to return to the United States. 9 FINDINGS OF FACT AND RECOMMENDATIONS Findings of Fact (1) The art market is the largest legal, unregulated market in the United States. The art industry is not subject to the BSA and is not required under U.S. law to maintain AML and anti-terrorism financing controls for transactions. However, all U.S. persons and entities are prohibited from transacting with sanctioned individuals or entities as determined by the U.S. Treasury Department Office of Foreign Asset Control (“OFAC”). (2) Sotheby’s, Christie’s, Phillips, and Bonhams all have voluntary AML controls in place. Despite no legal requirement to do so, the four auction houses reviewed by the Subcommittee had established voluntary AML policies. (3) Private art dealers are not subject to AML requirements. One private dealer told the Subcommittee she had no written AML or sanctions policies and instead relied on her gut and worked with people she knew. She also explained that questioning the identity of the buyer and the source of funds in an art transaction was not done in the art industry, nor would the dealer for the purchaser want to provide that information. During an interview with the Subcommittee, she explained that her practices have changed over the years and that she relies on the advice of lawyers with expertise in AML and related areas and looks for potential red flags in transactions. (4) The auction houses treated an art agent or dealer as the principal purchaser of art, even if they had reason to believe they were working with an undisclosed client. This practice enables the auction house to perform due diligence on the art agent or dealer instead of identifying and evaluating the undisclosed client, creating a significant AML vulnerability. (5) The United States sanctioned members of the Rotenberg family in March 2014. On March 16, 2014, President Obama signed Executive Order 13661 imposing sanctions on Russia due to its annexation of Crimea. Arkady and Boris Rotenberg were among the Russian citizens specifically sanctioned on March 20, 2014 due to their close ties to Russian President Vladimir Putin, which included awards of large government contracts to companies they owned. The U.S. Treasury Department later sanctioned specific Rotenberg-owned companies (on April 28, 2014), Boris Rotenberg’s son Roman (on June 30, 2016), and Arkady Rotenberg’s son Igor (on April 6, 2018). Both Roman and Igor Rotenberg were sanctioned due to their financial ties to their sanctioned fathers. 10 (6) Information released in 2016 from the law firm of Mossack Fonseca— known as the “Panama Papers”—linked the Rotenbergs to certain shell companies involved in high-value art purchases reviewed by the Subcommittee. The Panama Papers included an email chain made public that listed nine shell companies in the British Virgin Islands (“BVI”) linked to Arkady, Boris, and Igor Rotenberg. That email copied attorney Mark Omelnitski and identified Igor Rotenberg as the UBO for Highland Business Group Limited (“Highland Business”) and Boris Rotenberg as the UBO for Highland Ventures Group Limited (“Highland Ventures”). (7) Mark Omelnitski is a London-based attorney linked to the Rotenbergs and art advisor Gregory Baltser. Mr. Omelnitski—through his company the Markom Group—assisted the Rotenbergs in establishing and maintaining shell companies. He also assisted art advisor Gregory Baltser in establishing his art agency BALTZER in Moscow. In discussions Mr. Baltser had with Sotheby’s and Christie’s about partnering with BALTZER, Mr. Omelnitski served as Mr. Baltser’s attorney and also represented that he administered Mr. Baltser’s AML and sanctions policies as his Money Laundering Reporting Officer. (8) Both Highland Business and Highland Ventures received funding from companies linked to Arkady Rotenberg. Highland Business received funding from Advantage Alliance Ltd (“Advantage Alliance”), which an internal bank investigation linked to Arkady Rotenberg. Highland Ventures received over $124 million in funding from Milasi Engineering Limited. The 2014 Milasi Engineering Financial Statement listed Arkady Rotenberg as the ultimate beneficial owner of the company. (9) Gregory Baltser is a Moscow-based art advisor who facilitated art purchases linked to the Rotenbergs. Mr. Baltser purchased art in the United States with funds that the Subcommittee traced back to Highland Business and Highland Ventures. Prior to the implementation of sanctions on Arkady and Boris Rotenberg in March 2014, the funds Mr. Baltser used to purchase certain art followed a pattern: Highland Business wired the funds to purchase the art to Steamort Ltd (“Steamort”). Steamort then wired the funds from its bank account in Estonia to the auction house and took title to the art. (10) Steamort’s UBO remains unknown. In 2012, Christie’s questioned Mr. Baltser about the ownership of Steamort, a company formed in Belize. Mr. Baltser told Christie’s that he did not know and could not provide the name of the owner. After Christie’s threatened Mr. Baltser would be unable to bid at an auction unless he identified the owner of Steamort, Mr. Baltser told Christie’s the UBO for Steamort was “Luisa Brown.” Christie’s accepted this verbal assertion and cleared Mr. Baltser to bid in the auction. Mr. Baltser never 11 provided any documentation that Luisa Brown was the owner of Steamort. The Subcommittee was unable to determine Steamort’s UBO or if Ms. Brown existed. (11) Mr. Baltser established a private art agency and club called BALTZER in Moscow in 2013. Mr. Baltser used BALTZER to take title and purchase art for his clients. This change altered the payment pattern outlined above to include BALTZER as the entity paying the auction houses for art Mr. Baltser purchased. In addition, following the imposition of sanctions on the Rotenbergs by the United States in March 2014, the Subcommittee traced funds to purchase art to Highland Ventures. Highland Ventures would wire the funds to Steamort; Steamort would wire the funds to BALTZER; and BALTZER would wire funds to the auction house and take title for the art. (12) Christie’s partnered with BALTZER, including allowing Mr. Omelnitski to conduct AML and sanctions checks on BALTZER clients. In the February 2014 agreement, Christie’s agreed to rely on BALTZER to conduct due diligence on clients and provide an annual AML compliance certification. Mr. Omelnitski provided the first AML compliance report in December 2014 and confirmed that no BALTZER clients were sanctioned. Mr. Omelnitski did not provide another report until October 2017 when he emailed the amounts associated with BALTZER art purchases; he provided no certification regarding AML or sanctions compliance. Christie’s renegotiated the agreement in March 2018 and required BALTZER to produce customer due diligence to the auction house within 10 days of every purchase. (13) Sotheby’s declined the BALTZER proposal, but continued business as usual. While considering Mr. Baltser’s proposal, the Sotheby’s Baltser Account Representative told Sotheby’s management that Mr. Baltser’s clients included Russian oligarchs, specifically Arkady and Boris Rotenberg before they were sanctioned by the United States. During her Subcommittee interview, the Baltser Account Representative stated that Mr. Baltser never told her that Arkady and Boris Rotenberg were his clients. Instead, she fabricated this information to convince Sotheby’s to agree to the proposal with BALTZER. (14) Despite having voluntary AML and sanctions policies, auction houses failed to ask basic questions of Mr. Baltser, including for whom he purchased art. This allowed Mr. Baltser to continue to purchase art despite the imposition of sanctions by the United States on the Rotenbergs, completely undermining any action taken by the auction houses to block transactions by sanctioned individuals. (15) Mr. Baltser purchased over $18 million in art from May to November 2014 using funds traced to Rotenberg-linked shell companies. These transactions included a $7.5 million private sale of René Magritte’s La Poitrine 12 in which Highland Ventures took title to the painting, and Advantage Alliance wired the purchasing funds. The Subcommittee traced those funds from Advantage Alliance to Senton Holdings Ltd, which one financial institution determined was owned by Arkady Rotenberg. An employee of Mr. Omelnitski’s signed the contract for sale on behalf of Highland Ventures. (16) Mr. Baltser sought to sell art linked to the Rotenbergs. In August 2015, an employee of BALTZER sent Christie’s a list of 31 artworks, including 16 works the Subcommittee linked to Rotenberg-related shell companies. The BALTZER employee indicated the 31 pieces belonged to the same collection and sought “any opportunities to promote these works or to make this collection more valuable.” That list included René Magritte’s La Poitrine and Lyonel Feininger’s Brucke II. (17) In February 2019, Sotheby’s and Christie’s competed to sell Lyonel Feininger’s Brucke II; Sotheby’s was selected to sell the painting. Both Sotheby’s and Christie’s provided enhanced deal terms to sell the panting at auction. Sotheby’s planned to auction the painting at its February 26, 2019 Modern Art Evening Sale in London. The painting was estimated to sell for between £4 million and £6 million. Prior to the auction, however, Sotheby’s stated it pulled the painting due to a lack of interest. (18) When questioned by Sotheby’s, Mr. Baltser declined to provide the February 2014 purchaser of Brucke II. Brucke II was purchased by Mr. Baltser on behalf of an undisclosed client at a Christie’s auction in February 2014. In April 2019, Sotheby’s asked Mr. Baltser to reveal the name of the February 2014 buyer. Mr. Baltser did not reveal the name, but asserted the February 2014 buyer no longer owned Brucke II. Instead, he stated the painting now belonged to a Marshall Islands company and provided a Russian passport for the UBO of the company. (19) During the course of the Subcommittee’s investigation, Sotheby’s, Christie’s, and Phillips stopped transacting with Mr. Baltser and BALTZER. (20) Rotenberg-linked companies continued to move at least $91 million through the U.S. financial system following the imposition of U.S. sanctions in March 2014. The Subcommittee determined that companies linked to the Rotenbergs continued to have access to the U.S. dollar and the U.S. financial system despite the imposition of sanctions against Arkady and Boris Rotenberg. 13 RECOMMENDATIONS (1) Congress should amend the Bank Secrecy Act to add businesses handling transactions involving high-value art. The art industry is currently not subject to AML requirements under the BSA. The European Union recently 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. (2) Congress should require the Treasury Department to collect beneficial ownership information for companies formed or registered to do business in the United States. This information should be available to law enforcement for investigatory purposes. Beneficial owner information maintained by the Treasury Department should include appropriate privacy and security protections. (3) When imposing sanctions on an individual, the Treasury Department should consider routinely imposing sanctions on the individual’s immediate family members. While the U.S. sanctioned Arkady and Boris Rotenberg in March 2014, for example, it did not sanction the brothers’ children until later dates. The Treasury Department stated it imposed sanctions on Igor Rotenberg in 2018 because he “acquired significant assets from his father, Arkady Rotenberg, after OFAC designated [Arkady] in March 2014.” This allowed Arkady and Boris Rotenberg to evade U.S. sanctions by transferring their interests in companies to their children while maintaining operational control. (4) The Treasury Department should implement and announce sanctions concurrently. While President Obama announced sanctions for Russia’s annexation of Crimea on March 16, 2014, the Treasury Department did not officially impose sanctions on specific individuals and entities until March 20, 2014. During this four-day window, millions of dollars were transferred through the United States and back to Russia. The Treasury Department should take necessary actions to both announce and implement sanctions to avoid creating a window of opportunity for individuals to evade sanctions. (5) The Treasury Department should lower or remove the ownership threshold for blocking companies owned by sanctioned individuals. According to guidance by the Treasury Department, a company is blocked if it is majority owned by a sanctioned individual. If the sanctioned individual has a minority ownership in a company, that company is not blocked, even if the sanctioned individual owns 49 percent of the company. 14 (6) The Treasury Department should maximize its use of suspicious activity reports (“SARs”) filed by financial institutions. Under the BSA, financial institutions are required to file SARs with the Treasury Department’s Financial Crimes Enforcement Network. These reports document financial transactions that appear to involve money laundering or terrorist financing, among other illicit activities. The Treasury Department should more effectively mine SARs for information related to Specially Designated Nationals and add these entities to the Specially Designated Nationals and Blocked Persons List or alert other financial institutions of the risks of transacting with the entities. This would increase the effectiveness of imposing sanctions. (7) OFAC should issue comprehensive guidance on the steps auction houses and art dealers should take to ensure they are not doing business with sanctioned individuals or entities. That guidance should clarify what steps auction houses and art dealers should take to determine whether a person is the principal seller or purchaser of art or is acting on behalf of an undisclosed client, and which person should be subject to a due diligence review. (8) OFAC should issue guidance interpreting the informational exception to the International Emergency Economic Powers Act related to “artworks.” That guidance should interpret the artworks exception narrowly to encompass matters with informational content, while excluding typical works of art such as paintings, etchings, and sculpture. 15 II. BACKGROUND A. U.S. Sanctions Enforcement Sanctions are a critical tool for combatting national security threats and advancing foreign policy objectives.1 Sanctions as a U.S. foreign policy tool have grown in recent years, with presidents using sanctions to target terrorist organizations, punish foreign governments, and encourage adversaries to enter negotiations with the United States without resorting to military action.2 In fact, during his first year in office, President Trump designated approximately 1,000 individuals and entities.3 This is triple the number listed by President Obama during his first year, and 30 percent more than his last year in office.4 1. The U.S. Treasury Department In 1789, Congress established the Treasury Department (“Treasury” or the “Department”) to promote economic prosperity and ensure financial security.5 Treasury’s mission is to “maintain a strong economy and create economic and job opportunities by promoting the conditions that enable economic growth and stability at home and abroad, strengthen national security by combatting threats and protecting the integrity of the financial system, and manage the U.S. Government’s finances and resources effectively.”6 This multi-faceted mandate reflects its central role in the U.S. economic and financial system.7 A key part of the Department’s mission involves the implementation of economic sanctions against foreign actors and entities.8 Established in 2004, the Department’s Office of Terrorism and Financial Intelligence (“TFI”) is responsible Jack Lew, Secretary, U.S. Dep’t of Treasury, Remarks on the Evolution of Sanctions and Lessons for the Future at the Carnegie Endowment for International Peace (Mar. 30, 2016), https://www.treasury.gov/press-center/press-releases/pages/jl0398.aspx. 2 Kathy Gilsinan, A Boom Time for U.S. Sanctions, ATLANTIC (May 3, 2019), https://www.theatlantic.com/politics/archive/2019/05/why-united-states-uses-sanctions-somuch/588625/. 3 Carol Morello, Trump administration’s use of sanctions draws concern, WASH. POST (Aug. 5, 2018), https://www.washingtonpost.com/world/national-security/trump-administrations-use-of-sanctionsdraws-concern/2018/08/05/36ec7dde-9402-11e8-a679-b09212fb69c2_story.html. 4 Id. 5 U.S. DEP’T OF TREASURY, Act of Congress Establishing the Treasury Department, https://www.treasury.gov/about/history/Pages/act-congress.aspx; U.S. DEP’T OF TREASURY, Role of the Treasury, https://home.treasury.gov/about/general-information/role-of-the-treasury. 6 U.S. DEP’T OF TREASURY, Role of the Treasury, https://home.treasury.gov/about/generalinformation/role-of-the-treasury. 7 Id. 8 Id. 1 16 for enforcing economic sanctions as well as developing policy, strategies, and guidance to combat terrorist funding.9 The Office of Foreign Assets Control (“OFAC”), a division of TFI, reports directly to the Undersecretary for Terrorism and Financial Crimes.10 OFAC’s sanction authority stems from“[p]residential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets under U.S. jurisdiction.”11 Specific sanctions authorities include the Trading with the Enemy Act (“TWEA”), the International Emergency Economic Powers Act (“IEEPA”), and the Global Magnitsky Human Rights Accountability Act (“Magnitsky Act”) as described below. OFAC is the office specifically tasked with the administration and enforcement of economic and trade sanctions developed by the President.12 The sanction authority tied to presidential emergency power dates back to the TWEA, which prohibits transactions with enemy persons and powers.13 During the Cold War, TWEA was used “to block international financial transactions, seize U.S.-based assets held by foreign nationals, restrict exports, modify regulations to deter the hoarding of gold, limit foreign direct investment in U.S. companies, and impose tariffs on all imports into the United States.”14 Since its enactment in 1977, IEEPA has also served as an important sanction authority that the president may exercise “to deal with an unusual and extraordinary threat with respect to . . . a national emergency” that “has its source in whole or substantial part outside the United States.”15 IEEPA has been amended several times since its enactment, but the change most relevant to the art market is the “Berman Amendment” passed in 1988.16 This amendment exempted 31 U.S.C. § 312. Id.; U.S. DEP’T OF TREASURY, About: Terrorism and Financial Intelligence, https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-Terrorism-andFinancial-Intelligence.aspx. 11 Id. 12 U.S. DEP’T OF TREASURY, Terrorism and Financial Intelligence: Office of Foreign Assets Control (OFAC), https://www.treasury.gov/about/organizational-structure/offices/Pages/Office-of-ForeignAssets-Control.aspx. 13 Trading with the Enemy Act of 1917, Pub. L. No. 65-61, 40 Stat. 411, codified as amended at 50 U.S.C. § 4303 (2018). 14 CHRISTOPHER A. CASEY ET AL., CONG. RESEARCH SERV., R45618, THE INTERNATIONAL EMERGENCY ECONOMIC POWERS ACT: ORIGINS, EVOLUTION, AND USE SUMMARY (2019), https://www.crs.gov/reports/pdf/R45618. 15 International Emergency Economic Powers Act of 1977, Pub. L. No. 95-459, 91 Stat. 1626, codified as amended at 50 U.S.C. § 1701 (2018). 16 Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, 102 Stat. 1107, codified at 50 U.S.C. § 1702 (2001); See Bruce Craig, Sleeping with the Enemy? OFAC Rules and First Amendment Freedoms, PERSPECTIVES ON HISTORY (May 1, 2004), https://www.historians.org/publications-and-directories/perspectives-on-history/may-2004/sleepingwith-the-enemy-ofac-rules-and-first-amendment-freedoms. 9 10 17 information and informational materials from presidential sanction authority under IEEPA and TWEA.17 The Berman amendment specifically exempted the authority to regulate or prohibit “publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and new wire feeds.”18 Additional sanctions authority available to the President is found in the Magnitsky Act.19 Passed in 2016, the law authorizes the President to impose sanctions on any foreign person “who is responsible for extrajudicial killings, torture, or other gross violations of internationally recognized human rights” committed against individuals seeking to expose corruption or promote human rights.20 President Trump has used this authority to designate individuals for offenses including wrongful detention, the denial of medical treatment for detainees, and the expropriation of businesses for personal gain.21 OFAC implements its sanction authorities in ways “expected to generate the most impact in achieving [U.S.] national security and foreign policy goals.”22 In a 2017 hearing before the House Subcommittee on Monetary Policy, then-OFAC Director John Smith explained that “[w]hen deployed strategically and with precision, sanctions are a highly effective way of pressuring regimes and malign actors to change their behavior.”23 Director Smith further asserted: [B]y freezing the assets of illicit actors, cutting them off from the U.S. financial system, and restricting their ability to interface with the international financial system, the choice to them becomes clear: either modify your behavior or accept the isolation and negative economic effects of remaining on our financial blacklist.24 In addition to sanctions, OFAC also designates individuals or entities as Specially Designated Nationals (“SDN”).25 The SDN list contains the names of “individuals and companies owned or controlled by, or acting on behalf of, targeted Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, 102 Stat. 1107, codified at 50 U.S.C. § 1702 (2001). 18 Id. 19 National Defense Authorization Act of 2017, Pub. L. No. 114-328, 130 Stat. 2000, codified at 22 U.S.C. § 2656. 20 Id. 21 DIANNE E. RENNACK, CONG. RESEARCH SERV., IF10576, THE GLOBAL MAGNITSKY HUMAN RIGHTS ACCOUNTABILITY ACT (2018), https://www.crs.gov/reports/pdf/IF10576. 22 Press Release, U.S. Dep’t of Treasury, Testimony of John E. Smith, Director of the Office of Foreign Assets Control, (Nov. 30, 2017), https://www.treasury.gov/press-center/pressreleases/Pages/sm0226.aspx. 23 Id. 24 Id. 25 James Kostiw, OFAC Launches New SDN Search Tool, U.S.DEP’T OF TREASURY, (Mar. 13, 2013), https://www.treasury.gov/connect/blog/Pages/OFAC-Launches-New-SDN-Search-Tool.aspx. 17 18 countries.”26 The list is not limited to state actors and contains non-country specific individuals, groups, and entities.27 Currently, the list contains approximately 6,400 companies and individuals.28 Persons can be added to the SDN list in several ways. In some cases, the President issues an executive order directing the Secretary of the Treasury, in consultation with the Secretary of State, to identify individuals or entities that should be added to the list.29 In other cases, the President directly identifies individuals or entities to designate as SDNs.30 Once on the list, U.S. persons and businesses are prohibited from obtaining goods, services, or technology from SDNs, or otherwise transacting with them.31 This prohibition extends to business conducted through third-party intermediaries.32 Indeed, “[i]nclusion on the SDN List generally prohibits U.S. banks from maintaining accounts for those listed and U.S persons could face civil or criminal penalties for engaging in business dealing with them.”33 Under Treasury Department guidance, a sanctioned individual may own a minority interest in a company and still access the U.S. financial system. OFAC’s “50 percent rule,” states that “any entity owned in the aggregate, directly or indirectly, 50 percent or more by one or more blocked persons is itself considered to be a blocked person.”34 This is significant because an entity meeting this standard incurs SDN restrictions even if the entity itself is not named on the SDN list.35 U.S. DEP’T OF TREASURY, Specially Designated Nationals and Blocked Persons List (SDN) Human Readable Lists, (Jan. 21, 2020), https://www.treasury.gov/resource-center/sanctions/SDNList/Pages/default.aspx. 27 Id. 28 U.S. DEP’T OF TREASURY, Basic Information on OFAC and Sanctions, https://www.treasury.gov/resource-center/faqs/Sanctions/Documents/faq_all.html. 29 Exec. Order No. 13,685, 79 Fed. Reg. 77,357 (Dec. 19, 2014); See also Exec. Order No. 13,662 31 C.F.R. § 589 (2014). 30 Exec. Order No. 13,661 31 C.F.R. § 589 (2014). 31 U.S. person means “any United States citizen or alien admitted for permanent residence in the United States, and any corporation, partnership, or other organization organized under the law of the United States.” 22 U.S.C. § 6010; U.S. DEP’T OF TREASURY, REVISED GUIDANCE ON ENTITIES OWNED BY PERSONS WHOSE PROPERTY AND INTERESTS IN PROPERTY ARE BLOCKED (2014), https://www.treasury.gov/resource-center/sanctions/Documents/licensing_guidance.pdf. 32 U.S. DEP’T OF TREASURY, REVISED GUIDANCE ON ENTITIES OWNED BY PERSONS WHOSE PROPERTY AND INTERESTS IN PROPERTY ARE BLOCKED (2014), https://www.treasury.gov/resourcecenter/sanctions/Documents/licensing_guidance.pdf. 33 James Kostiw, OFAC Launches New SDN Search Tool, U.S. DEP’T OF TREASURY, (Mar. 13, 2013), https://www.treasury.gov/connect/blog/Pages/OFAC-Launches-New-SDN-Search-Tool.aspx. 34 U.S. DEP’T OF TREASURY, REVISED GUIDANCE ON ENTITIES OWNED BY PERSONS WHOSE PROPERTY AND INTERESTS IN PROPERTY ARE BLOCKED (2014), https://www.treasury.gov/resourcecenter/sanctions/Documents/licensing_guidance.pdf. 35 Id. 26 19 2. Sanctions Following the Russian Federation’s Invasion of Crimea In 2014, President Obama issued a series of Executive Orders (“EO”) that authorized Treasury to sanction individuals, assets, and companies in the Russian Federation (“Russia”) following Russia’s annexation of Crimea. On March 6, 2014, President Obama issued EO 13660 instructing Treasury to sanction any individual who “[undermined] democratic processes and institutions in Ukraine.”36 On March 16, 2014, President Obama authorized additional sanctions on “persons contributing to the situation in Ukraine” through EO 13661.37 Under the authority of EO 13661, on March 20, 2014, Treasury designated 16 Russian government officials and four members of President Putin’s inner circle, which included Arkady and Boris Rotenberg.38 The European Union imposed similar restrictions in response to what it perceived as Russia’s “deliberate destabilization of Ukraine.”39 a. The Russian Invasion of Crimea In early 2014, Russia invaded Crimea following a period of political turmoil in Ukraine.40 This turmoil stemmed from Ukrainian President Viktor Yanukovych’s November 2013 refusal to sign a “political association and free trade agreement with the European Union.”41 By February 22, 2014, the Ukrainian parliament voted unanimously to remove President Yanukovych.42 After his removal, Yanukovych fled to Russia.43 Shortly thereafter, Moscow deployed forces to Crimea and declared the region as part of the Russian Federation.44 This invasion was significant not only because of Crimea’s Exec. Order No. 13,660 31 C.F.R. § 589 (2014). Exec. Order No. 13,661 31 C.F.R. § 589 (2014). 38 Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Russian Officials, Members Of The Russian Leadership’s Inner Circle, And An Entity For Involvement In The Situation In Ukraine, (Mar. 20, 2014), https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx. 38 Id. 39 EU restrictive measures in response to the crisis in Ukraine, COUNCIL OF THE EUROPEAN UNION (Dec. 19, 2019), https://www.consilium.europa.eu/en/policies/sanctions/ukraine-crisis/. 40 Steven Lee Myers & Ellen Barry, Putin Reclaims Crimea for Russia and Bitterly Denounces the West, N.Y. TIMES (Mar. 18, 2014), https://www.nytimes.com/2014/03/19/world/europe/ukraine.html. 41 Vladimir Isachenkov and Maria Danilova, Roots and Consequences of Ukraine’s Violence, ASSOCIATED PRESS (Feb. 20, 2013), https://web.archive.org/web/20140221000303/http://hosted.ap.org/dynamic/stories/E/EU_UKRAINE_ NEWS_GUIDE?SITE=AP&SECTION=HOME&TEMPLATE=DEFAULT. 42 William Booth, Ukraine’s parliament votes to oust president; former prime minister is freed from prison, WASH. POST (Feb. 22, 2014), https://www.washingtonpost.com/world/europe/ukrainesyanukovych-missing-as-protesters-take-control-of-presidential-residence-inkiev/2014/02/22/802f7c6c-9bd2-11e3-ad71-e03637a299c0_story.html?utm_term=.af74a8230f13. 43 Andrew E. Kramer, Ukraine’s Ex-President Is Convicted of Treason, N.Y. TIMES (Jan. 24, 2019), https://www.nytimes.com/2019/01/24/world/europe/viktor-yanukovych-russia-ukraine-treason.html. 44 CORY WELT, CONG. RESEARCH SERV., R45008, UKRAINE: BACKGROUND, CONFLICT WITH RUSSIA, AND U.S. POLICY, 9 (2019), https://www.crs.gov/reports/pdf/R45008. 36 37 20 strategically important geographic location, but also because it “violated the terms of a diplomatic agreement to respect Ukraine’s borders, and placed Russia on a war footing with one of the few states in the post-Soviet world that has managed to hold free elections.”45 The Crimean parliament then voted to secede from Ukraine and join Russia, scheduling a referendum for ten days later.46 When the referendum was held, 97 percent voted in favor of secession.47 Two days later, Russian President Vladimir Putin signed a treaty of accession with the new leaders of Crimea.48 Putin delivered an address in conjunction with the signing, asserting that Crimea was a part of Russia and confirming his disregard for an international border that was recognized for 23 years.49 The United States, European Union, and Ukraine refused to recognize the annexation.50 While maintaining that the annexation was illegal, the Ukrainian government withdrew military personnel and their families from Crimea.51 Since that time, Russia “has significantly increased its military presence in Crimea and suppressed local dissent.”52 Ukrainian officials now estimate 30,000 Russian troops are stationed in the region.53 During the Russian occupation, the Office of the United Nations High Commissioner for Human Rights “documented ‘multiple and grave’ human rights violations in Crimea and said that minority Crimean Tatars, who are generally opposed to Russia’s occupation, have been ‘particularly targeted.’”54 Catherine Boyle, Crimea referendum: Why it’s so important, CNBC (Mar. 14, 2014), https://www.cnbc.com/2014/03/14/crimea-referendum-why-its-so-important.html; Charles King, Crimea, the Tinderbox, N.Y. TIMES (Mar. 1, 2014), https://www.nytimes.com/2014/03/03/opinion/crimea-the-tinderbox.html?searchResultPosition=4. 46 Alissa de Carbonnel & Luke Baker, Crimea votes to join Russia, Obama orders sanctions, REUTERS (Mar. 5, 2014), https://www.reuters.com/article/us-ukraine-crisis/crimea-votes-to-join-russia-obamaorders-sanctions-idUSBREA1Q1E820140306. 47 Steven Lee Myers & Ellen Barry, Putin Reclaims Crimea for Russia and Bitterly Denounces the West, N.Y. TIMES (Mar. 18, 2014), https://www.nytimes.com/2014/03/19/world/europe/ukraine.html?module=inline. 48 Id. 49 Id. 50 Id. 51 David Herszenhorn & Andrew Kramer, Ukraine Plans to Withdraw Troops From Russia-Occupied Crimea, N.Y. TIMES (Mar. 19, 2014), https://www.nytimes.com/2014/03/20/world/europe/crimea.html. 52 CORY WELT, CONG. RESEARCH SERV., R45008, UKRAINE: BACKGROUND, CONFLICT WITH RUSSIA, AND U.S. POLICY, 9 (2019), https://www.crs.gov/reports/pdf/R45008. 53 Id. 54 Id. at 9−10. 45 21 b. U.S. and E.U. Sanctions Following the Invasion of Crimea In response to Russia’s invasion of Crimea, both the United States and the European Union imposed sanctions against several key Russian individuals.55 Since these Crimea-related sanctions, the United States has imposed additional sanctions on Russia for a range of offenses, including human rights abuses, election interference, cyberattacks, weapons proliferation, trade with North Korea, support for the Syrian government, and use of a chemical weapon.56 As of July 2020, the list of individuals and entities sanctioned by the U.S. government related to Russia’s annexation of Crimea stood at 701.57 On March 6, 2014, the United States imposed sanctions on Russia, when President Obama issued an executive order under IEEPA and announced coordinated sanctions with the United Kingdom in response to Russia’s “violation of Ukraine’s sovereignty and territorial integrity.”58 That EO 13660 did not specifically reference Russia by name, but it did target those whose “actions or policies…undermine democratic processes or institutions in Ukraine.”59 President Obama further noted that the planned referendum would violate the Ukrainian constitution, as well as international law, and noted that the Ukrainian government must be included in any discussion of Crimea’s future.60 Following Crimea’s referendum, the White House issued a statement saying, “the international community will not recognize the results of a poll administered under threats of violence and intimidation from a Russian military intervention that violates international law.”61 President Obama then signed EO 13661 on March 16, 2014, finding that Russia’s deployment of military forces to Crimea undermined the “democratic processes and institutions in Ukraine; threaten its peace, security, stability, sovereignty, and territorial integrity; and contribute to the Aleksandar Vasovic & Adrian Croft, U.S., EU set sanctions as Putin recognizes Crimea “sovereignty”, Reuters (Mar. 16, 2014), https://www.reuters.com/article/us-ukraine-crisis/u-s-eu-setsanctions-as-putin-recognizes-crimea-sovereignty-idUSBREA1Q1E820140317. 56 CORY WELT ET. AL, CONG. RESEARCH SERV., R45415, U.S. SANCTIONS ON RUSSIA, 7 (2020), https://www.crs.gov/reports/pdf/R45415. 57 U.S. DEP’T OF TREASURY, Sanctions List Search, https://sanctionssearch.ofac.treas.gov/. 58 Dan Roberts & Ian Traynor, US and EU impose sanctions and warn Russia to relent in Ukraine standoff, THE GUARDIAN (Mar. 6, 2014), https://www.theguardian.com/world/2014/mar/06/us-eusanctions-obama-russia-ukraine-crimea; See also U.S. DEP’T OF TREASURY, Ukraine/Russia-Related Sanctions Program 3 (2016), https://www.treasury.gov/resourcecenter/sanctions/Programs/Documents/ukraine.pdf. 59 Exec. Order No. 13,660 31 C.F.R. § 589 (2014). 60 Alissa de Carbonnel and Luke Baker, Crimea votes to join Russia, Obama orders sanctions, REUTERS (Mar. 5, 2014), https://www.reuters.com/article/us-ukraine-crisis/crimea-votes-to-joinrussia-obama-orders-sanctions-idUSBREA1Q1E820140306. 61 Press Release, The White House, Statement by the Press Secretary on Ukraine, (March 16, 2014), https://obamawhitehouse.archives.gov/the-press-office/2014/03/16/statement-press-secretary-ukraine. 55 22 misappropriation of its assets, and thereby constitute an unusual and extraordinary threat to the national security and foreign policy of the United States.”62 EO 13661 authorized sanctions against several specifically listed Russian government officials and instructed OFAC to identify additional individuals who “have materially assisted, sponsored, or provided financial, material, or technological support for, or goods or services to or in support of a senior official of the Government of the Russian Federation.”63 Pursuant to the order, on March 20, 2014, OFAC designated 16 Russian government officials and 4 members of President Putin’s inner circle, including Arkady and Boris Rotenberg.64 President Obama later issued additional executive orders on March 20, 2014 and December 19, 2014, expanding the scope of the sanctions.65 In addition to executive branch actions, Congress passed two laws sanctioning Russian individuals and entities in 2014: (1) Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act and (2) Ukraine Freedom Support Act.66 These laws permitted sanctions against any person “the President determines has perpetrated, or is responsible for ordering, controlling, or otherwise directing, significant acts of violence or gross human rights abuses in Ukraine.”67 They also included “potentially wide-reaching secondary sanctions against foreign individuals and entities that facilitate significant transactions for Russia sanctions designees, help them to evade sanctions, or make significant investments in certain oil projects in Russia.”68 Like the United States, the European Union also issued economic sanctions against Russia for its invasion of Ukraine.69 These restrictions included bans on “goods originating in Crimea . . . unless they have Ukrainian certificates,” and export prohibitions on “[g]oods and technology for the transport, Exec. Order No. 13,661 31 C.F.R. § 589 (2014). Id. 64 Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Russian Officials, Members Of The Russian Leadership’s Inner Circle, And An Entity For Involvement In The Situation In Ukraine, (Mar. 20, 2014), https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx. 65 Exec. Order No. 13,662, 31 C.F.R. § 589 (2014); Exec. Order No. 13,685, 79 Fed. Reg. 77,357 (Dec. 19, 2014). 66 Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014, Pub. L. No. 113-95, 22 U.S.C. §8901; Ukraine Freedom Support Act of 2014, Pub. L. No. 113-272, 22 U.S.C. § 8921. 67 Support for the Sovereignty, Integrity, Democracy, and Economic Stability of Ukraine Act of 2014, Pub. L. No. 113-95, 22 U.S.C. §8901; CORY WELT ET. AL, CONG. RESEARCH SERV., R45415, U.S. SANCTIONS ON RUSSIA, 13 (2020), https://www.crs.gov/reports/pdf/R45415. 68 CORY WELT ET. AL, CONG. RESEARCH SERV., R45415, U.S. SANCTIONS ON RUSSIA, 13 (2020), https://www.crs.gov/reports/pdf/R45415. 69 EU restrictive measures in response to the crisis in Ukraine, COUNCIL OF THE EUROPEAN UNION (Dec. 19, 2019), https://www.consilium.europa.eu/en/policies/sanctions/ukraine-crisis/. 62 63 23 telecommunications and energy sectors.”70 The European Union’s sanctions also froze the assets and imposed travel restrictions against persons who “undermined Ukraine’s territorial integrity, sovereignty, and independence.”71 c. U.S. Sanctions Targeting Russian Oligarchs The U.S. and E.U. sanction regimes did not target the entire Russian economy.72 Instead, the sanctions designated key individuals, including several Russian oligarchs, and entities associated with important Russian policymakers.73 The term “oligarch” was popularized during the privatization of the Russian economy following the collapse of the Soviet Union.74 Oligarchs are individuals who used political power to obtain control over former state assets in industries like oil, gas, timber, aluminum, and other natural resources.75 Oligarchs formally assumed control over former state-owned companies through government auctions and “loans for shares” schemes.76 Russians reportedly began referring to privatization as “prikhvatizatsiya” or “grabification,” to describe a process whereby state authorities handed well-connected businesspersons and bankers control of previously government-controlled assets.77 The EU non-recognition policy for Crimea and Sevastopol: Fact Sheet, EUROPEAN UNION EXTERNAL ACTION (Dec. 12, 2017), https://eeas.europa.eu/headquarters/headquarters-Homepage/37464/eu-nonrecognition-policy-crimea-and-sevastopol-fact-sheet_en. 71 EU restrictive measures in response to the crisis in Ukraine, COUNCIL OF THE EUROPEAN UNION (Dec. 19, 2019), https://www.consilium.europa.eu/en/policies/sanctions/ukraine-crisis/. 72 CORY WELT, CONG. RESEARCH SERV., R45008, UKRAINE: BACKGROUND, CONFLICT WITH RUSSIA, AND U.S. POLICY, 36 (2019), https://www.crs.gov/reports/pdf/R45008. 73 Id.; Andrew Higgins, Oleg Matsnev, & Ivan Nechepurenko, Meet the 7 Russian Oligarchs Hit by the New U.S. Sanctions, N.Y. TIMES (Apr. 6, 2018), https://www.nytimes.com/2018/04/06/world/europe/russian-oligarchs-sanctions.html. 74 Z. Byron Wolf, Russia’s oligarchs are different from other billionaires, CNN (Apr. 6, 2018), https://www.cnn.com/2018/04/06/politics/oligarch-russia-billionaires-government-putinsanctions/index.html. 75 Id. 76 Adam Taylor, How the 2003 Arrest of the Richest Man in Russia Changed Everything—And What Happens Next, BUSINESS INSIDER (Oct. 24, 2013), https://www.businessinsider.com/ten-years-aftermikhail-khodorkovskys-arrest-2013-10. Under the “loans for shares” plan, Kremlin-favored banks would lend the government money in exchange for the opportunity to buy cheap shares in government assets. The banks would hold the shares in trust, giving the government the opportunity to repay the loan. In most cases, the banks would sell the shares within two years on the open market, creating windfall profits. Alessandra Stanley, Russian Banking Scandal Poses Threat to Future of Privatization, N.Y. TIMES (Jan. 28, 1996), https://www.nytimes.com/1996/01/28/world/russian-banking-scandal-poses-threat-to-future-ofprivatization.html?pagewanted=all&src=pm. 77 Alessandra Stanley, Russian Banking Scandal Poses Threat to Future of Privatization, N.Y TIMES (Jan. 28, 1996), https://www.nytimes.com/1996/01/28/world/russian-banking-scandal-poses-threat-tofuture-of-privatization.html?pagewanted=all&src=pm. 70 24 Following Vladimir Putin’s election to the Russian presidency in 2000, existing power structures began to shift, facilitating the rise of a new generation of oligarchs.78 Prior to becoming president, Putin promised to dismantle the existing class of oligarchs who prospered under his predecessor Boris Yeltsin.79 In 2003, under Putin’s direction, the government began to acquire some of Russia’s wealthiest companies.80 True to his word, Putin replaced the older generation of oligarchs with men from his inner circle and offered them valuable government contracts.81 Loopholes in Russian law used to limit competition enabled these oligarchs to “build themselves into the state system,” as they continued to gain access to state contracts.82 d. Arkady and Boris Rotenberg are Sanctioned by the United States Brothers Arkady and Boris Rotenberg are among the oligarchs who have received billions of dollars from Putin-enabled government contracts.83 Four days after President Obama’s March 16, 2014 EO 13661 sanctioning “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,” OFAC officially designated Arkady and Boris Rotenberg.84 OFAC described Arkady and Boris Rotenberg as “members of the Russian leadership’s inner circle.”85 This position made them both beneficiaries of a Russian economy that frequently enriched Putin loyalists.86 That designation highlighted their close personal ties to President Putin. The Treasury announcement specifically stated: Andrew Meier, Who Fears a Free Mikhail Khodorkovsky?, N.Y. TIMES (Nov. 18, 2009), https://www.nytimes.com/2009/11/22/magazine/22khodorkovsky-t.html. 79 Steven Meyers, Jo Becker & Jim Yardley, Private Bank Fuels Fortunes of Putin’s Inner Circle, N. Y. TIMES (Sept. 27, 2014), https://www.nytimes.com/2014/09/28/world/europe/it-pays-to-be-putinsfriend-.html?module=inline. 80 Andrew Meier, Who Fears a Free Mikhail Khodorkovsky?, N.Y. Times (Nov. 18, 2009), https://www.nytimes.com/2009/11/22/magazine/22khodorkovsky-t.html. 81 Steven Meyers, Jo Becker & Jim Yardley, Private Bank Fuels Fortunes of Putin’s Inner Circle, N. Y. TIMES (Sept. 27, 2014), https://www.nytimes.com/2014/09/28/world/europe/it-pays-to-be-putinsfriend-.html?module=inline. 82 Joshua Yaffa, Putin’s Shadow Cabinet and The Bridge to Crimea, NEW YORKER (May 22, 2017), https://www.newyorker.com/magazine/2017/05/29/putins-shadow-cabinet-and-the-bridge-to-crimea. 83 Id. 84 Id.; See also Exec. Order No. 13,661 31 C.F.R. § 589 (2014). 85 Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Russian Officials, Members Of The Russian Leadership’s Inner Circle, And An Entity For Involvement In The Situation In Ukraine, (Mar. 20, 2014), https://www.treasury.gov/press-center/press-releases/pages/jl23331.aspx. 86 Steven Meyers, Jo Becker & Jim Yardley, Private Bank Fuels Fortunes of Putin’s Inner Circle, N. Y. TIMES (Sept. 27, 2014), https://www.nytimes.com/2014/09/28/world/europe/it-pays-to-be-putinsfriend-.html?module=inline. 78 25 Arkady Rotenberg and Boris Rotenberg have provided support to Putin’s pet projects by receiving and executing high price contracts for the Sochi Olympic Games and state-controlled Gazprom. They have made billions of dollars in contracts for Gazprom and the Sochi Olympic Winter Olympics awarded to them by Putin. Both brothers have amassed enormous amounts of wealth during the years of Putin’s rule in Russia. The Rotenberg brothers received approximately $7 billion in contracts for the Sochi Olympic Games and their personal wealth has increased by $2.5 billion the last two years alone.87 Arkady Rotenberg directly benefited from the annexation of Crimea, including through his companies receiving multi-million dollar contracts to build the Kerch Bridge and a railway linking Russia to the annexed region of Ukraine.88 The Treasury Department imposed additional sanctions on Rotenberg-related entities under EO 13661 on April 28, 2014.89 These sanctions included the following entities: InvestCapitalBank and SMP Bank [which] are controlled by Arkady and Boris Rotenberg who were designated on March 20, 2014 pursuant to E.O. 13661 for acting for or on behalf of or materially assisting, sponsoring, or providing financial, material or technological support for, or goods and services to or in support of, a senior official of the Government of the Russian Federation. Stroygazmontazh (SGM Group) [which] is a gas pipeline construction company owned or controlled by Arkady Rotenberg. Rotenberg created SGM Group in 2008 after acquiring multiple Gazprom contractors.90 U.S. Department of the Treasury Press Center, Treasury Sanctions Russian Officials, Members of the Russian Leadership’s Inner Circle, and An Entity for Involvement in the Situation in Ukraine, March 20, 2104, https://www.treasury.gov/press-center/press-releases/pages/jl23331.aspx. 88 Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Russian Officials, Members Of The Russian Leadership’s Inner Circle, And An Entity For Involvement In The Situation In Ukraine, (Mar. 20, 2014), https://www.treasury.gov/press-center/press-releases/pages/jl23331.aspx; See Christopher Harress, Moscow to Build Bridge From Russian Mainland to Crimea Across Kerch Strait, INT’L BUS. TIMES (Jun. 30, 2015), https://www.ibtimes.com/moscow-build-bridge-russianmainland-crimea-across-kerch-strait-1990907. 89 Press Release, U.S. Dep’t of the Treasury, Announcement of Additional Treasury Sanctions on Russian Government Officials and Entities (Apr. 28, 2014), https://www.treasury.gov/presscenter/press-releases/Pages/. 90 U.S. Department of the Treasury Press Center, Announcement of Additional Treasury Sanctions on Russian Government Officials and Entities, April 28, 2104, https://www.treasury.gov/presscenter/press-releases/Pages/jl2369.aspx. 87 26 On July 30, 2014, the European Union added Arkady Rotenberg to the E.U. sanctions list.91 In September 2014, Italy’s financial law enforcement agency seized almost $40 million of Arkady Rotenberg’s assets, “including a luxury hotel in Rome and two villas in Sardinia.”92 Following the seizure, the Russian government endorsed legislation that would reimburse those whose overseas assets were seized by foreign authorities.93 However, that legislation, known as “the Rotenberg law,” never became law.94 i. Arkady Rotenberg Arkady Rotenberg first met Vladimir Putin at the age of twelve, when they joined the same judo club.95 After Arkady Rotenberg finished college, he worked as a judo trainer and continued to practice judo with Putin and others from the class.96 Arkady Rotenberg then started a cooperative that organized sporting competitions and later became the general director of a professional judo club in St. Petersburg, where Putin served as vice-mayor of the city.97 After Putin became President of Russia, Arkady and Boris Rotenberg invested in companies that serviced Gazprom, the major Russian gas company which is majority-owned by the Russian government.98 The Rotenberg brothers also founded SMP Bank, which they used “to acquire stakes in construction, gas, and pipe companies.”99 In 2008, Gazprom sold Arkady Rotenberg five construction and maintenance companies, which he merged into one company he named Stroigazmontazh (“SGM”). SGM became the chief contractor for Gazprom.100 The company earned more than 2014 O.J. (L 226) 17, https://eur-lex.europa.eu/legalcontent/EN/TXT/PDF/?uri=OJ:L:2014:226:FULL&from=EN#page25. As a Finnish citizen, Boris Rotenberg avoided inclusion on the European list. Anne Kauranen & Jussi Rosendahl, Russian oligarch under U.S. sanctions files suit against Nordic banks, REUTERS (Oct. 22, 2018), https://www.reuters.com/article/us-finland-russia-sanctions/russian-oligarch-under-u-s-sanctionsfiles-suit-against-nordic-banks-idUSKCN1MW1AJ. 92 James Politi & Courtney Weaver, Italy seizes Putin ally Arkady Rotenberg’s property assets, FIN. TIMES (Sept. 23, 2014), https://www.ft.com/content/f1293172-4340-11e4-be3f-00144feabdc0; See also Italy Freezes Assets of Sanctioned Russian Billionaire Arkady Rotenberg, MOSCOW TIMES (Sept. 23, 2014), https://themoscowtimes.com/articles/italy-freezes-assets-of-sanctioned-russian-billionairearkady-rotenberg-39683. 93 Italy Freezes Assets of Sanctioned Russian Billionaire Arkady Rotenberg, MOSCOW TIMES (Sept. 23, 2014), https://themoscowtimes.com/articles/cabinet-wants-to-compensate-russian-victims-of-illegalasset-seizures-abroad-40020. 94 Joshua Yaffa, Putin’s Shadow Cabinet and The Bridge to Crimea, NEW YORKER (May 22, 2017), https://www.newyorker.com/magazine/2017/05/29/putins-shadow-cabinet-and-the-bridge-to-crimea. 95 Id. 96 Id. 97 Id. 98 Id. 99 Id. 100 Id. 91 27 $2 billion in revenue during its first year of operations.101 It handled construction work for the oil and gas industry, including onshore and offshore pipeline construction.102 Three years later, in March 2011, Gazprom sold Gazprom Burenie to Milasi Engineering Limited (“Milasi Engineering”), a Cypriot company owned by Arkady Rotenberg.103 Gazprom Burenie subsequently became Gazprom’s main drilling contractor and is currently one of the largest drilling contractors in Russia. 104 Gazprom Burenie’s operations focus on oil and gas wells construction, including drilling, geological exploration, well construction, well overhaul, and inactive well recovery services.105 The Russian government awarded Gazprom Burenie and SGM several highprofile projects in Russia. For example, it contracted with SGM to build portions of the $12 billion Nord Stream undersea gas pipeline; the Russian government paid the Arkady Rotenberg-controlled company a profit margin of 30 percent for its work on the project.106 The Russian government also awarded SGM a contract to build a 110-mile gas pipeline around the Russian city of Sochi, as part of the Russian government’s 2014 Winter Olympics construction program.107 The gas pipeline cost five times its original budget.108 One estimate stated that 15 percent of the total Olympics budget went to Rotenberg-led projects.109 In defending his personal relationship with President Putin, Arkady Rotenberg has argued “unlike a lot of other people, I don’t have the right to make a mistake.”110 He has also asserted, “I have great respect for Putin and I consider him sent to our country from God.”111 Id. SMG Group of Companies, STROYGAZMONTAZH, http://www.ooosgm.com/company/structure/. 103 GAZPROM, FINANCIAL REPORT 2011: REACHING NEW HORIZONS 58 (2011), https://www.gazprom.com/f/posts/43/588793/financial-report-2011-eng.pdf. 104 Company Profile: Gazprom Bureniye, Russian Drilling Company, GAZPROM BURENIYE, https://www.burgaz.ru/landing/. 105 Id. 106 Gleb Bryanski, Putin’s judo partner jumps in Russia’s rich list, REUTERS (Feb. 13, 2011), https://www.reuters.com/article/russia-rich/putins-judo-partner-jumps-in-russias-rich-listidUSLDE71C02X20110214; Aviezer Tucker, The New Power Map, FOREIGN AFFAIRS (Dec. 19, 2012), https://www.foreignaffairs.com/articles/north-america/2012-12-19/new-power-map. 107 Thomas Grove, Special Report: Russia’s $50 billion Olympic gamble, REUTERS (Feb. 21, 2013), https://www.reuters.com/article/us-russia-sochi/special-report-russias-50-billion-olympic-gambleidUSBRE91K04M20130221; Dzhubga−Lazarevskoe−Sochi gas pipeline, STROYGAZMONTAZH, http://www.ooosgm.com/projects/construction/gazoprovod-dzhubga-lazarevskoe-sochi/. 108 Anna Pukas, Sochi: Is it Russia’s disaster Winter Olympics?, EXPRESS (Feb. 3, 2014), https://www.express.co.uk/news/world/457632/Sochi-Is-it-Russia-s-disaster-Winter-Olympics. 109 Neil MacFarquhar & Ivan Nechepurenko, Putin’s Bridge to Crimea May Carry More Symbolism Than Traffic, N.Y. TIMES (Nov. 11, 2017), https://www.nytimes.com/2017/11/11/world/europe/vladimir-putin-russia-crimea-bridge.html. 110 Joshua Yaffa, Putin’s Shadow Cabinet and the Bridge to Crimea, NEW YORKER (May 22, 2017), https://www.newyorker.com/magazine/2017/05/29/putins-shadow-cabinet-and-the-bridge-to-crimea. 111 Id. 101 102 28 Gazprom Burenie has also played an important role in the Russian energy industry. Between 1997 and 2013, Gazprom Burenie completed the construction of 3,669 wells, drilling through more than 7 million meters of rock.112 In January 2015, the Russian government announced that Arkady Rotenberg, through SGM, would build the bridge connecting the Russian-annexed Crimean Peninsula to the Russian mainland.113 In May 2018, the 12-mile bridge opened for traffic at a final cost of $3.7 billion.114 According to news reports, the bridge opened six months ahead of schedule. The bridge reportedly can “carry up to 40,000 cars per day [and] its span is greater than that of Vasco da Gama in Portugal, previously the longest in Europe.”115 President Putin was on site to open the bridge to traffic.116 In September 2019, a news article stated that Gazprom had purchased 100 percent of SGM for 70 billion to 95 billion rubles, the equivalent of $1.1 billion to $1.5 billion.117 Forbes has estimated that Arkady Rotenberg is worth $2.8 billion.118 ii. Boris Rotenberg Boris Rotenberg is also a childhood friend of Vladimir Putin.119 Along with his brother Arkady, Boris Rotenberg and Putin have “sparred and trained in the same gym since they were teenagers in the 1960s.”120 Their former judo coach, Anatoly Rakhin, commented on the friendship between the brothers and Putin saying, “[Putin] didn’t take the Petersburg boys to work with him because of their pretty eyes, but because he trusts people who are tried and true.”121 History of the Company, GAZPROM BURENIE, http://www.burgaz.ru/company/about/history/. Joshua Yaffa, Putin’s Shadow Cabinet and the Bridge to Crimea, NEW YORKER (May 22, 2017), https://www.newyorker.com/magazine/2017/05/29/putins-shadow-cabinet-and-the-bridge-to-crimea. 114 Andre Roth, Putin opens 12-mile bridge between Crimea and Russian mainland, GUARDIAN (May 15, 2018), https://www.theguardian.com/world/2018/may/15/putin-opens-bridge-between-crimea-andrussian-mainland. 115 Id. 116 Id. 117 Bne IntelliNews, Russia’s Gazprom Buys Out its Biggest Subcontractor, THE MOSCOW TIMES (Sept. 27, 2019), https://www.themoscowtimes.com/2019/09/27/russias-gazprom-buys-out-its-biggestsubcontractor-a67475. 118 Real Time Net Worth, No. 877, Arkady Rotenberg, FORBES, https://www.forbes.com/profile/arkadyrotenberg/#671573b62baa. 119 Simon Shuster, Putin’s Powerful Friends Rally Around Russian President Despite Sanctions, TIME (Mar. 27, 2014), https://time.com/38632/putin-friends-rally-around-him/. 120 Id. 121 Id. 112 113 29 In 2001, Boris and Arkady Rotenberg founded SMP Bank. 122 The brothers then used the bank to acquire interests in important industries such as construction, gas, and gas pipelines.123 By the mid-2000s, these acquisitions allowed them to become one of Russia’s “main suppliers of large-diameter gas pipes.”124 When Boris Rotenberg’s ex-wife, Irene Lamber, was asked to comment on the business impact of Putin’s friendship with the Rotenberg brothers, she remarked, “[t]hey were friendly in childhood, and those relationships were never broken, so logically you can presume some sort of advice was given, at a minimum, and perhaps help here and there.”125 Boris Rotenberg holds a Finnish passport and therefore “is not subject to European sanctions over Russia’s role in Ukraine.”126 Boris Rotenberg secured Finnish citizenship after moving to the country with his ex-wife Irene in the late 1990s.127 Although he is not directly subjected to the E.U’s sanctions, several Nordic banks refused to process his payments because “European banks must comply with . . . U.S. sanctions in order to do business with American banks.”128 In response, Boris Rotenberg filed a discrimination suit against Nordea, Danske Bank, Handelsbanken, and OP Bank for violation of “his right to equal treatment as an EU citizen.”129 A Finnish court rejected the suit on January 13, 2020.130 Forbes estimates that Boris Rotenberg’s net worth is $1.2 billion.131 Joshua Yaffa, Putin’s Shadow Cabinet and the Bridge to Crimea, NEW YORKER (May 22, 2017), https://www.newyorker.com/magazine/2017/05/29/putins-shadow-cabinet-and-the-bridge-to-crimea. 123 Id. 124 Id. 125 Id. 126 Anne Kauranen & Jussi Rosendahl, Russian oligarch under U.S. sanctions files suit against Nordic banks, REUTERS (Oct. 22, 2018), https://www.reuters.com/article/us-finland-russiasanctions/russian-oligarch-under-u-s-sanctions-files-suit-against-nordic-banks-idUSKCN1MW1AJ. 127 Joshua Yaffa, Putin’s Shadow Cabinet and the Bridge to Crimea, NEW YORKER (May 22, 2017), https://www.newyorker.com/magazine/2017/05/29/putins-shadow-cabinet-and-the-bridge-to-crimea. 128 Anne Kauranen & Jussi Rosendahl, Russian oligarch under U.S. sanctions files suit against Nordic banks, REUTERS (Oct. 22, 2018), https://www.reuters.com/article/us-finland-russiasanctions/russian-oligarch-under-u-s-sanctions-files-suit-against-nordic-banks-idUSKCN1MW1AJ. 129 Anne Kauranen & Tarmo Virki, Finnish court rejects Rotenberg’s suit against Nordic banks, REUTERS (Jan. 13, 2020), https://www.reuters.com/article/finland-russia-sanctions/finnish-courtrejects-rotenbergs-suit-against-nordic-banks-idUSL8N29I260. 130 Id. 131 Real Time Net Worth, No. 1941, Boris Rotenberg, FORBES (Feb. 26, 2020), https://www.forbes.com/profile/boris-rotenberg/#49cf806c126a. 122 30 e. Roman and Igor Rotenberg are Sanctioned by the United States On February 12, 2015, the Wall Street Journal reported that Arkady and Boris Rotenberg sold lucrative assets to their children in an apparent effort to avoid sanctions by the United States.132 The sales included Arkady selling his 79 percent stake in Gazprom Drilling LLC to his son Igor, and Boris’s sale of the Finnish Langvik Congress Wellness Hotel to his son Roman.133 The Rotenbergs described the sales as nothing more than a long-planned “generational change.”134 i. Roman Rotenberg In response to the transfers described above, on July 30, 2015, under EO 13661, OFAC added Roman Rotenberg to the list of sanctioned individuals.135 A Treasury press release noted Roman Rotenberg was “linked to the provision of material support” to Boris Rotenberg.136 ii. Igor Rotenberg On April 6, 2018, three years after sanctioning Arkady and Boris Rotenberg, OFAC also sanctioned Arkady’s son Igor.137 This round of sanctions targeted Russia’s so-called “golden youth” and also included sanctions against Putin’s son-inlaw Kirill Shamalov.138 Just prior to OFAC’s imposition of sanctions, Forbes Rachel Ensign, Russian Asset Sales Muddy Sanction Compliance, WALL ST. J. (Feb. 12, 2015), https://www.wsj.com/articles/russian-asset-sales-muddy-sanction-compliance-1423784903. 133 Rachel Ensign, Russian Asset Sales Muddy Sanction Compliance, WALL ST. J. (Feb. 12, 2015), https://www.wsj.com/articles/russian-asset-sales-muddy-sanction-compliance-1423784903; See also Bill Chappel, U.S. Hits Russian Oligarchs And Officials With Sanctions Over Election Interference, NPR (Apr. 6, 2018), https://www.npr.org/sections/thetwo-way/2018/04/06/600083466/u-s-hits-russianoligarchs-and-officials-with-sanctions-over-election-interferen. 134 Rachel Ensign, Russian Asset Sales Muddy Sanction Compliance, WALL ST. J. (Feb. 12, 2015), https://www.wsj.com/articles/russian-asset-sales-muddy-sanction-compliance-1423784903. 135 Press Release, U.S. Dep’t of Treasury, Ukraine-related Designations; Sectoral Sanctions Identifications; Dote d’Ivoire Designation Removals; Issuance of an Important Crimea Sanctions Advisory, (Jul. 30, 2015), https://www.treasury.gov/resource-center/sanctions/OFACEnforcement/Pages/20150730.aspx. 136 Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Individuals and Entities Involved in Sanctions Evasion Related To Russia and Ukraine, (Jul. 30, 2015), https://www.treasury.gov/presscenter/press-releases/Pages/jl0133.aspx. 137 Press Release, U.S. Dep’t of Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity, (Apr. 6, 2018), https://home.treasury.gov/news/press-releases/sm0338. 138 Anders Aslund, With New Sanctions the US Treasury Goes after Putin’s Inner Circle, ATLANTIC COUNCIL, (Apr. 6, 2018), https://www.atlanticcouncil.org/blogs/new-atlanticist/with-new-sanctionsthe-us-treasury-goes-after-putin-s-inner-circle/. 132 31 included Igor Rotenberg on its list of 259 new billionaires.139 OFAC’s announcement of the new sanctions credited Igor’s designation to his activities in the Russian energy sector, noting that Igor had acquired significant assets from his father post-sanctions.140 From 2002 to 2003, Igor Rotenberg served as the deputy head “of the Property Department of the fuel and energy complex of the Ministry of Property and Land Relations” in Russia.141 In 2003, Igor Rotenberg was named head of property management and transportation at the Russian Ministry of State Property.142 In 2004, Igor Rotenberg was named vice-president of JSC Russian Railways, Russia’s state-owned railroad company.143 Since 2006, Igor Rotenberg has served as Chairman of the Board of Directors for NPV Engineering.144 NPV Engineering provides management and consulting services in Russia.145 In 2010, Igor Rotenberg was named Chairman of Mosenergo, “the largest regional power generating company in the Russian Federation.”146 He was also named chairman of Gazprom Burenie, the key construction company beneficially owned by his father.147 After his placement on the U.S. sanctions list in 2014, Arkady Rotenberg reportedly transferred certain assets to his son Igor.148 According to reports, Igor Rotenberg now owns “79 percent of drilling company Gazprom Burenie; 28 percent Chase Peterson-Withorn, Meet the World’s 259 Newest Billionaires, FORBES (Mar. 6, 2018), https://www.forbes.com/sites/chasewithorn/2018/03/06/meet-the-worlds-259-newest-billionairesfrancois-bettencourt-meyers-lynsi-snyder/#502c52683ee9. 140 Press Release, U.S. Dep’t of Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity, (Apr. 6, 2018), https://home.treasury.gov/news/press-releases/sm0338. 141 Yevgeny Gusev, The Kings of State Procurement, HENRY JACKSON SOC. 8 (May 2017), http://henryjacksonsociety.org/wp-content/uploads/2018/06/1705-The-Kings-of-StateProcurement.pdf. 142 Id. 143 Id. 144 Id. at 8−9. 145 Press Release, U.S. Dep’t of Treasury, Treasury Designates Russian Oligarchs, Officials, and Entities in Response to Worldwide Malign Activity, (Apr. 6, 2018), https://home.treasury.gov/news/press-releases/sm0338. 146 Arkady Rotenberg: We live in conditions of tough competition, but it doesn’t scare us, INTERFAX (Oct. 30, 2014), http://www.interfax.com/interview.asp?id=547794; About the Company, MOSENERGO, https://mosenergo.gazprom.com/about/. 147 2018 Billionares Net Worth, No. 1999, Igor Rotenberg, Forbes (Mar. 6, 2018), https://www.forbes.com/profile/igor-rotenberg/#393b87e51ef8. 148 Rachel Louise Ensign, Russian Asset Sales Muddy Sanction Compliance, WALL ST. J. (Feb. 12, 2015), https://www.wsj.com/articles/russian-asset-sales-muddy-sanction-compliance-1423784903. 139 32 of road construction company Mostotrest; and 33 percent of TPS Real Estate Holding.”149 Forbes estimates that Igor Rotenberg’s net worth is $1.1 billion.150 As explained below, despite the imposition of U.S. sanctions on Arkady and Boris Rotenberg in March 2014, Roman Rotenberg in July 2015, and Igor Rotenberg in April 2018, evidence suggests that the Rotenbergs continued to do business with some U.S. parties. B. The Art Market This section describes the global and U.S. art industry; the U.S. art industry’s current exemption from legal safeguards aimed at stopping money laundering and corruption; and the role of shell companies in purchasing high-value art. The modern global art market—and its U.S. component—has been enjoying a boom. However, critics assert the secrecy found in the art market attracts illicit activity and suspect funds.151 In 2019, global art sales reached $64.1 billion.152 In addition, the art market has become a source of reliable return on investment.153 One report found that since 2000, art has delivered average annual returns of 8.9 percent.154 In 2019, 86 percent of surveyed wealth managers asserted that “they thought there was a convincing argument for including art in their wealth management service offering.”155 Investors also purchase art to diversify portfolios, and some view individual pieces as financial instruments to be traded like stock.156 Stephen Grey & Elizabeth Piper, Rising stars among children of Russia’s elite, REUTERS (Nov. 10, 2015), https://www.reuters.com/article/us-russia-capitalism-sons/rising-stars-among-children-ofrussias-elite-idUSKCN0SZ1DP20151110. 150 2018 Billionares Net Worth, No. 1999 Igor Rotenberg, FORBES (Mar. 6, 2018), https://www.forbes.com/profile/igor-rotenberg/#393b87e51ef8. 151 Samuel Rubenfeld, Art World’s Response to Money-Laundering Concerns Draws Critics, WALL ST. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-moneylaundering-concerns-draws-critics/. 152 ART BASEL & UBS, The Art Market 2020 17 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf; See also Daniel Grant, As Art Collections Grow, So Do the Places That Stash Them, N.Y. TIMES (Nov. 13, 2018), https://www.nytimes.com/2018/11/13/business/art-storage.html. 153 Frederik Balfour, Billionaire’s Secrets on How to Make a Bundle in Art, BLOOMBERG (May 7, 2018), https://www.bloomberg.com/news/features/2018-05-07/top-collectors-reveal-the-secrets-of-howto-invest-in-art. 154 Id. 155 DELOITTE, Art and Finance Report 84 (6th ED. 2019), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/luart-and-finance-report-2019.pdf. 156 Cynthia O’Murchu, Art: A market laid bare, FIN. TIMES (Apr. 7, 2015), https://www.ft.com/content/a91a1608-d887-11e4-8a23-00144feab7de#axzz3WpTPQ6X2; Michel 149 33 Over the last several years, growth was most pronounced at the top end of the market, with works priced above $10 million outperforming other parts of the market.157 The art market is also now more accessible due to globalization and the internet.158 These two factors have transformed the art market into an international industry with a customer base located around the world.159 The United States continued to lead the market in 2019 with 44 percent of all sales by value, with the United Kingdom in second place with 20 percent.160 International art fairs gather dealers, artists, and collectors to display art from different regions around the world.161 For those unable to travel, the internet enables collectors from Europe, the Middle East, and Asia to easily bid on the same pieces of art.162 The art market has attracted criticism because of its lack of transparency. Current rules allow sellers to remain anonymous, and purchasers can use offshore shell companies to conceal ownership and sources of funds.163 Sellers of artwork at auction are often not required to disclose their identity to the buyer; in some cases, the auction house does not know the name of the original owner or buyer.164 Anonymity in the market can make it difficult to track sales transactions, art ownership, and determinations regarding authenticity.165 Concealment of buyer and seller identity also makes art “an attractive instrument to hide illicit assets . . . because the transactions are often private, prices are speculative and an item can easily be smuggled to evade authorities.”166 Martin, New Documentary Paints a Picture of the Contemporary Art Market Run Amok, NPR (Nov. 4, 2018), https://www.npr.org/2018/11/04/658920684/new-documentary-paints-a-picture-of-thecontemporary-art-market-run-amok. 157 Jeni Fulton, Economist Dr. Clare McAndrew explains why the art market is rebounding, ART BASEL, https://www.artbasel.com/news/economist-dr-clare-mcandrew-explains-why-the-art-marketis-rebounding. 158 ART BASEL & UBS, The Art Market 2020 48 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf. 159 Id. at 262. 160 Id. at 37. 161 Y-Jean Mun-Delsalle, The Art Fair Boom Is Forever Changing the Way the Art Market Does Business, FORBES (Apr. 7, 2016), https://www.forbes.com/sites/yjeanmundelsalle/2016/04/07/the-artfair-boom-is-forever-changing-the-way-the-art-market-does-business/#52d8f7af6c64. 162 Frederik Balfour, Billionaire’s Secrets on How to Make a Bundle in Art, BLOOMBERG (May 7, 2018), https://www.bloomberg.com/news/features/2018-05-07/top-collectors-reveal-the-secrets-of-howto-invest-in-art. 163 Graham Bowley & William Rashbaum, Has the Art Market Become an Unwitting Partner in Crime, N.Y. TIMES (Feb. 19, 2017), https://www.nytimes.com/2017/02/19/arts/design/has-the-artmarket-become-an-unwitting-partner-in-crime.html. 164 Id. 165 Id. 166 Samuel Rubenfeld, Art World’s Response to Money-Laundering Concerns Draws Critics, WALL ST. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-moneylaundering-concerns-draws-critics/. 34 Deloitte and ArTactic’s Art & Finance Report 2019 found that 77 percent of wealth managers and 75 percent of collectors cite the art market’s lack of transparency as one of the industry’s key challenges.167 Moreover, 75 percent of art professionals identified the market’s lack of transparency as a major concern, marking a six percent increase from 2016.168 1. Money Laundering in the Art Market A large part of the art market operates in secrecy, allowing participants to conduct transactions anonymously.169 According to an article quoting Sharon Cohen Levin, who previously led the money laundering unit of the U.S. Attorney’s office for the Southern District of New York, “the art market has become a magnet for laundering crime proceeds.”170 Michael Martin, head of the forensic and antimoney laundering services at Deloitte Luxembourg acknowledged this, saying, “art is one of the asset classes that obviously lends itself to money laundering.”171 Smugglers, drug traffickers, arms dealers, and others have turned to the art market as a means to obscure profits and transfer assets outside the reach of financial regulators.172 In recent years, “[p]art of the reason art has become an attractive vehicle for money laundering is that other channels have been narrowed by tighter regulation,” particularly in the financial sector.173 For example, mortgage brokers, stockbrokers, casinos, banks, and Western Union are subject to federal money laundering statutes requiring them to report suspicious financial activity and perform due diligence to DELOITTE, Art and Finance Report 16, 171 (6th ED. 2019), https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/artandfinance/luart-and-finance-report-2019.pdf. 168 Id. at 207. 169 Samuel Rubenfeld, Art World’s Response to Money-Laundering Concerns Draws Critics, WALL ST. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-moneylaundering-concerns-draws-critics/. 170 Id. 171 Eric Reguly, The link between art and money laundering, GLOBE AND MAIL (May 15, 2018), https://www.theglobeandmail.com/report-on-business/international-business/europeanbusiness/economists-urge-tighter-regulations-to-curb-money-laundering-in-artmarket/article26217852/. 172 Patricia Cohen, Valuable as Art, but Priceless as a Tool to Launder Money, N.Y. TIMES (May 12, 2013), https://www.nytimes.com/2013/05/13/arts/design/art-proves-attractive-refuge-for-moneylaunderers.html. 173 Samuel Rubenfeld, Art World’s Response to Money-Laundering Concerns Draws Critics, WALL ST. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-moneylaundering-concerns-draws-critics/. 167 35 deter money laundering activities and “combat the financing of terrorism.”174 The same requirements do not apply to buyers and sellers of art.175 To provide greater transparency and prevent money laundering activities, the European Union adopted its fifth Anti-Money Laundering directive on April 19, 2018.176 This directive compels businesses selling art to verify the identity of customers before completing transactions of €10,000 or more.177 Under the directive, European Union member states were required to implement this new requirement by January 10, 2020.178 The United Kingdom adopted similar rules in the weeks before its exit from the European Union on January 31, 2020.179 The United States has yet to follow suit.180 2. The Art Industry is the Largest Legal, Unregulated Market in the United States Today, the art industry is considered the largest legal unregulated industries in the United States, permitting purchasers to buy pieces without any record of the transactions, even when large amounts of cash are involved.181 In effect, buyers and sellers can remain anonymous raising the concern that corporate veils are being used “to manipulate markets, evade taxes, [and] launder money.”182 Patricia Cohen, Valuable as Art, but Priceless as a Tool to Launder Money, N.Y. TIMES (May 12, 2013), https://www.nytimes.com/2013/05/13/arts/design/art-proves-attractive-refuge-for-moneylaunderers.html; RENA S. MILLER & LIANA W. ROSEN, CONG. RESEARCH SERV., R44776, ANTI-MONEY LAUNDERING: AN OVERVIEW FOR CONGRESS, SUMMARY (2017), https://www.crs.gov/reports/pdf/R44776. 175 Kris Hollington, After Drugs and Guns, Art Theft Is The Biggest Criminal Enterprise in the World, NEWSWEEK (Jul. 22, 2014), https://www.newsweek.com/2014/07/18/after-drugs-and-guns-art-theftbiggest-criminal-enterprise-world-260386.html. 176 Anna Brady, European Union tightens anti-money-laundering rules in the art market, ART NEWSPAPER (Apr. 30, 2018), https://www.theartnewspaper.com/news/eu-extends-anti-moneylaundering-rules. 177 Id. 178 Vera Jourova, Strengthened EU rules to prevent money laundering and terrorism financing, EUROPEAN COMMISSION (2018), http://ec.europa.eu/newsroom/just/document.cfm?action=display&doc_id=48935. 179 Scott Reyburn, Britain Moves to Regulate Its Art Trade. Bring Your ID., N.Y. TIMES (Jan. 10, 2020), https://www.nytimes.com/2020/01/10/arts/design/uk-art-money-laundering.html. 180 Lawrence Kaye & Howard Spiegler, The Art Market: Would More Regulation Spoil All the Fun, ART & ADVOCACY, (Vol. 23 2016), http://www.herrick.com/publications/the-art-market-would-moreregulation-spoil-all-the-fun/. 181 Kris Hollington, After Drugs and Guns, Art Theft Is The Biggest Criminal Enterprise in the World, NEWSWEEK (Jul. 22, 2014), https://www.newsweek.com/2014/07/18/after-drugs-and-guns-art-theftbiggest-criminal-enterprise-world-260386.html. 182 Scott Reyburn, What the Panama Papers Reveal About the Art Market, N.Y. TIMES (Apr. 11, 2016), https://www.nytimes.com/2016/04/12/arts/design/what-the-panama-papers-reveal-about-theart-market.html. 174 36 Illegal activity, including money laundering, in the art market is made possible, in part, because the art market is generally not subject to the transparency requirements of the Bank Secrecy Act (“BSA”).183 The BSA was enacted by Congress in the 1970s to protect the United States from money laundering and corruption by imposing transparency requirements on many types of cash transactions.184 It includes “requirements for reporting, customer identification and due diligence, recordkeeping, and the establishment and maintenance of BSA/AML compliance programs.”185 The BSA’s reporting requirements mandate, for example, that financial institutions file suspicious activity reports (“SARs”) regarding “any suspicious transaction relevant to a possible violation of law or regulation.”186 In addition to SARs, Currency Transaction Reports (“CTRs”) must be submitted for “individuals transporting large amounts of cash internationally, persons with large foreign financial interests, and nonfinancial entities conducting large cash transactions.”187 The art industry in the United States is not required to comply with the requirements of the BSA.188 Art dealers in the United States continue to operate without any regulated or structured mechanisms for transparently buying or selling art, including mandatory systems for the declaration or transfer of ownership.189 Moreover, insider-trading rules applicable to the commodities market do not apply to art, allowing collectors to buy works of art based on privileged information.190 In addition, “there is currently no regulation that specifically targets money laundering in the art market, nor does the art market itself subject professional art intermediaries to any standards of professionalism that directly address money laundering.”191 The lack of regulatory requirements or voluntary industry-wide standards in the United States means “art dealers have little incentive other than good faith to flag possible money laundering schemes involving artwork for law enforcement.”192 Bank Secrecy Act of 1982, Pub. L. No. 97-258, codified at 31 U.S.C. § 5304. Id. 185 RENA S. MILLER & LIANA W. ROSEN, CONG. RESEARCH SERV., R44776, ANTI-MONEY LAUNDERING: AN OVERVIEW FOR CONGRESS, 5 (2017), https://www.crs.gov/reports/pdf/R44776. 186 Id. at 6. 187 Id. 188 Lawrence Kaye & Howard Spiegler, The Art Market: Would More Regulation Spoil All the Fun, ART & ADVOCACY, (Vol. 23 2016), http://www.herrick.com/publications/the-art-market-would-moreregulation-spoil-all-the-fun/. 189 DELOITTE, Art and Finance Report 170 (5th ED. 2017), https://www2.deloitte.com/content/dam/Deloitte/at/Documents/finance/art-and-finance-report2017.pdf. 190 Marc Speigler, Time To Reform the Art Market?, FORBES (May 30, 2005), https://www.forbes.com/2005/05/30/cx_0530conn_ls.html#69dcd7715f0a. 191 Alessandra Dagirmanjian, Laundering the Art Market: A Proposal for Regulating Money Laundering Through Art in the United States, 29 FORDHAM INTELL. PROP. MEDIA & ENT. L.J. 687, 695 (2019). 192 Id. at 696. 183 184 37 Despite the weaknesses in U.S. AML safeguards for the art market, participants in the art industry may be subject to other restrictions including: import and export regulations; cultural property regulations; data protection and privacy laws; state anti-money laundering laws; tax regulations; and local auction regulations.193 If they buy or sell art outside of the United States, they may also be subject to non-U.S. anti-money laundering controls.194 While members of Congress have introduced legislation to add art and antiquities to the list of industries that must comply with the BSA,195 Congress has not required comprehensive transparency in the art market.196 3. The Applicability of the Berman Amendment to High-value Art Questions have arisen about whether U.S. sanctions policy could help address at least some aspects of the art industry’s problems by requiring artists and dealers to ensure they are not engaging in transactions with sanctioned individuals or entities.197 To gauge the feasibility of that approach, the Subcommittee inquired whether the U.S. sanctions regime applies to high-value art. As described above, IEEPA allows the President to issue sanctions against specific categories of individuals and entities during a national emergency.198 IEEPA authority does not, however, allow the President “to regulate or prohibit, directly or indirectly” “the importation from any country, or the exportation to any country … of any information or informational materials, including but not limited to, publications, films, posters, phonograph records, photographs, microfilms, microfiche, tapes, compact disks, CD ROMs, artworks, and news wire feeds.”199 SOTHEBY’S, 2019 Annual Report 56 (2019), https://www.sothebys.com/content/dam/sothebys/PDFs/Sothebys-Annual-Report12.31.2019.pdf?locale=en. 194 Vera Jourova, Strengthened EU rules to prevent money laundering and terrorism financing, EUROPEAN COMMISSION (2018), http://ec.europa.eu/newsroom/just/document.cfm?action=display&doc_id=48935; Scott Reyburn, Britain Moves to Regulate Its Art Trade. Bring Your ID., N.Y. TIMES (Jan. 10, 2020), https://www.nytimes.com/2020/01/10/arts/design/uk-art-money-laundering.html. 195 See, e.g., Coordinating Oversight, Upgrading & Innovating Technology, & Examiner Reform Act, H.R. 2514, 116th Cong. (2019); Wallace Ludel & Margaret Carrigan, US House of Representatives passes an anti-money laundering bill that could affect art and antiquities dealers, THE ART NEWSPAPER (Oct. 25, 2019), https://www.theartnewspaper.com/news/us-house-of-representativespasses-an-anti-money-laundering-bill-that-could-affect-art-and-antiquities-dealers. 196 Barden Prisant, The FBI Thinks You’re a Money Launderer, And Other Perils of Art Collecting, FORBES (Jan. 10, 2020), https://www.forbes.com/sites/bardenprisant/2020/01/10/the-fbi-thinks-yourea-money-launderer-and-other-perils-of-art-collecting/#589067023957. 197 Alice McCool, Could Trump put an end to the Iranian art boom?, CNN (Sept. 25, 2018), https://www.cnn.com/style/article/is-the-iran-art-boom-under-threat/index.html. 198 50 U.S.C. § 1703(b)(2). 199 50 U.S.C. § 1702(b)(3). 193 38 The Subcommittee asked the Treasury Department how high-value art is treated under IEEPA, including whether it is exempt from IEEPA controls under the informational materials exception in the Berman Amendment. In response, on October 3, 2019, the Treasury Department stated: Earlier [in 2019], Treasury undertook a review of the issues related to your inquiry. That review is ongoing and may result in the issuance of new or further pertinent guidance. Accordingly, it would be premature to provide the Subcommittee a formal position on how the Berman Amendment to the International Emergency Economic Powers Act may apply in the context of the matters you raise, particularly since any new or further guidance could have broader implications. Nevertheless, we are taking the concerns you have expressed seriously in the context of that review. We will update you as soon as we are in a position to do so.200 On July 22, 2020, the Treasury Department provided the update and stated: Our review confirmed that Treasury does not believe the Berman Amendment is a categorical bar to the application of IEEPA-based sanctions to transactions involving artwork. Evaluation of a specific license application relating to designated persons—including one that implicates Berman Amendment materials—must depend on the particular facts and circumstances presented. OFAC intends to issue additional public guidance on this issue in the near term.201 The Subcommittee has continued to examine money laundering vulnerabilities in the U.S. art market in order to gauge the extent of the problem, how sanctioned individuals may be exploiting the market’s vulnerabilities to launder suspect funds, and what action should be taken to detect, stop, and prevent ongoing misuse of the U.S. art market. 4. Shell Companies Shell companies play a significant role in contributing to anti-money laundering vulnerabilities in the U.S. art industry. Treasury’s Financial Crimes Enforcement Network (“FinCEN”) defines shell companies as “typically non-publicly traded corporations or limited liability companies (“LLCs”) that have no physical Letter from Brian T. McGuire, U.S. Dep’t of Treasury, Assistant Secretary Office of Legislative Affairs to Chairman Rob Portman (Oct. 3, 2019). 201 Letter from Frederick W. Vaughan, U.S. Dep’t of Treasury, Principal Deputy Assistant Secretary Office of Legislative Affairs to Chairman Rob Portman (Jul. 22, 2020). 200 39 presence beyond a mailing address and generate little-to-no independent economic value.”202 Shell companies are generally straightforward and inexpensive to create in all 50 states and offshore jurisdictions.203 This process involves completing online forms and making an online payment, functions that can be executed by individuals, lawyers, or third parties.204 Despite a shell company’s lack of employees and office space, “formation agents” or “company service providers” can provide packages and operational services including mail forwarding, business licenses, local street addresses, telephone listings, and assistance with opening local and foreign bank accounts.205 Individuals and companies can use shell companies for legitimate purposes, such as holding assets, making pooled investments, executing reverse mergers or facilitating transfers.206 They can also be misused to hide the identities of criminals, move illicit proceeds of crime, and commit a wide range of misconduct, including money laundering, human or drug trafficking, fraud, tax evasion, and corruption.207 In the art world, shell companies are frequently used when buying or selling valuable pieces of art.208 For example, shell companies can serve as an intermediary allowing buyers and sellers to shift funds from one jurisdiction to another.209 But shell companies can also be used to conceal the identity of the buyers and sellers, the source and control of assets, and move suspect funds. In this U.S. Dep’t of Treasury, Advisory on the Iranian Regime’s Illicit and Malign Activities and Attempts to Exploit the Financial System, 5 n.12 (Oct. 11, 2018), https://www.fincen.gov/sites/default/files/advisory/2018-1011/Iran%20Advisory%20FINAL%20508.pdf. 203 Joe Pinsker, Are Shell Companies Useful for the People Who Aren’t Ludicrously Rich?, ATLANTIC, (Apr. 8, 2016), https://www.theatlantic.com/business/archive/2016/04/how-rich-do-you-have-to-be-fora-shell-company-to-be-useful/477384/. 204 Malia Wollan, How to Set Up a Shell Company, N.Y. TIMES (Nov. 7, 2019), https://www.nytimes.com/2019/11/07/magazine/how-to-set-up-a-shell-company.html. 205 U.S. Dep’t of Treasury, The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies, 5−6 (Nov. 2006), https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf. 206 Drake Forester, The Truth About Shell Companies: The Good. The Bad, and the Ugly, ALL BUSINESS, https://www.allbusiness.com/shell-companies-legitimate-uses-corruption-105041-1.html. 207 Combatting Illicit Financing by Anonymous Shell Companies: Hearing Before the S. Comm. on Banking, Housing, & Urban Affairs, 116th. Cong. (2019) (statement of Steven M. D’Antuono, Act. Dep. Assist. Director, Fed. Bureau of Investigation), https://www.fbi.gov/news/testimony/combatingillicit-financing-by-anonymous-shell-companies. 208 Scott Reyburn, What the Panama Papers Reveal About the Art Market, N.Y. TIMES¸ (Apr. 11, 2016), https://www.nytimes.com/2016/04/12/arts/design/what-the-panama-papers-reveal-about-theart-market.html. 209 Casey Michel, The U.S. Is a Good Place for Bad People to Stash Their Money, THE ATLANTIC, (Jul. 13, 2017), https://www.theatlantic.com/business/archive/2017/07/us-anonymous-shellcompanies/531996/. 202 40 way, shell companies can be used as financial conduits for the transfer of funds and assets, at times without alerting financial institutions or law enforcement to the parties behind the transactions.210 Shell companies can provide this anonymity because there is no requirement that beneficial owners be identified during the entity’s formation, opening of financial accounts, or transfer of funds.211 Tom Cardamone, managing director of the nonprofit research group Global Financial Integrity, illustrated the efforts some parties make to conceal the individuals behind a shell company stating, “you can create an anonymous shell in one jurisdiction that controls an anonymous trust in a completely different country that also controls a bank account in a third country.”212 C. The Four Major Auction Houses High-value art sales generally occur through a private sale or a public auction.213 Sotheby’s, Christie’s, Phillips, and Bonhams are among the most wellknown auction houses in the world, each dating back to the 1700s.214 In addition to the largest auction houses, there are over 500 second-tier auction houses that play a significant role in national and international markets, and numerous small auction houses that provide services to domestic markets.215 Since the highest value transactions are generally processed by the most well-known auction houses, this report concentrates on their role within the U.S. art market. 1. Sotheby’s In 1744, Samuel Baker established Sotheby’s in London.216 At the outset, the company became successful by auctioning books, and later expanded its business to prints, coins, medals, and antiquities.217 After World War I, Sotheby’s began to STAFF OF S. PERMANENT SUBCOMM. ON INVESTIGATIONS, 111TH CONG., REP. ON KEEPING FOREIGN CORRUPTION OUT OF THE UNITED STATES: FOUR CASE HISTORIES 2, 72 (Comm. Print 2010). 211 Id. at 72. 212 All Things Considered: Want To Set Up a Shell Corporation To Hide Your Millions? No Problem, NPR (Apr. 13, 2016), https://www.npr.org/2016/04/13/474101127/want-to-set-up-a-shell-corporationto-hide-your-millions-no-problem. 213 Samuel Rubenfeld, Art World’s Response to Money-Laundering Concerns Draws Critics, WALL ST. J. (Feb. 27, 2017), https://blogs.wsj.com/riskandcompliance/2017/02/27/art-worlds-response-to-moneylaundering-concerns-draws-critics/. 214 Charlotte Zajicek, The history of auctions: from ancient Greece to online houses, THE TELEGRAPH (Oct. 7, 2016), https://www.telegraph.co.uk/art/online-auctions/history-of-auctions/; Top 5 Auction Houses Around World, AC. COOPER (Jun. 26, 2019), http://www.ac-cooper.com/top-5-auction-housesaround-world/. 215 ART BASEL & UBS, The Art Market 2020 131 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf. 216 About Us: The History of Sotheby’s Auction House, SOTHEBY’S https://www.sothebys.com/en/about/our-history?locale=en. 217 Id. 210 41 focus on “the sale of pictures and decorative works of art.”218 In 1964, Sotheby’s started a period of global expansion after its purchase of Parke-Bernet, the largest fine art auction house in the United States at the time.219 Headquartered in New York, Sotheby’s currently has ten salesrooms around the world, including in London, Hong Kong, and Paris.220 Beyond those salesrooms, Sotheby’s BidNow program permits remote clients to participate in online auctions around the world.221 Notable Sotheby’s auctions include the 2012 sale of Edvard Munch’s The Scream, as well as the collections of Jacqueline Kennedy Onassis and Andy Warhol.222 As of 2018, Sotheby’s employed 1,713 people.223 In 2019, Sotheby’s produced total revenues of $991,660,000.224 Sotheby’s business is divided into two parts—an agency segment and a finance segment.225 The agency segment operates Sotheby’s auction and private sale business.226 The finance segment “earns interest income and associated fees through art-related financing activities by making loans that are secured by works of art.”227 In January 2016, Sotheby’s acquired Art Agency Partners which provides art advisory services and strategic guidance to art collectors, artists, and artists’ estates.228 In June 2019, Sotheby’s announced a $3.7 billion merger agreement with BidFair USA, a company owned by the French telecom mogul and art collector Patrick Drahi.229 Prior to the merger, Sotheby’s was the oldest publicly traded company on the New York Stock Exchange (“NYSE”), “predating the [exchange] itself by 48 years.”230 After the deal with BidFair closed, however, Sotheby’s Id. Id. 220 SOTHEBY’S, 2019 Annual Report 13, 57 (2019), https://www.sothebys.com/content/dam/sothebys/PDFs/Sothebys-Annual-Report12.31.2019.pdf?locale=en. 221 Id. at 13. 222 About Us: The History of Sotheby’s Auction House, SOTHEBY’S https://www.sothebys.com/en/about/our-history?locale=en. 223 SOTHEBY’S, 2018 Annual Report 8 (2018), http://www.sothebys.com/content/dam/sothebys/PDFs/2018-annual-report.pdf?locale=en. 224 SOTHEBY’S, 2019 Annual Report 8 (2019), https://www.sothebys.com/content/dam/sothebys/PDFs/Sothebys-Annual-Report12.31.2019.pdf?locale=en. 225 Id. at 3. 226 Id. 227 Id. 228 Id. 229 Diana Wierbicki et al, Sotheby’s Goes Private: What It Means for the Art Market, WEALTH MGMT. (Jun. 25, 2019), https://www.wealthmanagement.com/high-net-worth/sothebys-goes-private-what-itmeans-art-market. 230 Sotheby’s Celebrates Its 275th Year With Ringing of the Opening Bell at the New York Stock Exchange, SOTHEBY’S (Mar. 11, 2019), https://www.sothebys.com/en/articles/sothebys-celebrates-its275th-year-by-ringing-in-the-new-york-stock-exchange. 218 219 42 returned “to private ownership after 31 years of trading publicly on the NYSE.”231 Sotheby’s CEO, Tad Smith, stated the acquisition “will provide Sotheby’s with the opportunity to accelerate the successful program of growth initiatives of the past several years in a more flexible private environment.”232 After Sotheby’s announced the merger, two Sotheby’s shareholders filed suit against the auction house alleging failure to disclose in Sotheby’s proxy statement complete and accurate information regarding the company’s valuation and background of the company’s proposed sale to affiliates of Mr. Drahi.233 In that suit, the shareholders claimed Sotheby’s filed materially misleading disclosures with the SEC.234 Sotheby’s stated in response that, “the vast majority of all public company mergers over $100 million are the subject of shareholder litigation [and] the lawsuits filed were expected and routine.”235 These cases were subsequently dismissed or settled around 2019. 2. Christie’s Christie’s was founded by James Christie in London in 1766.236 Early in the company’s history, Christie’s benefited from the instability caused by the French Revolution as many French pieces of art made their way to the British market.237 In 1824, Christie’s gained additional notoriety with the opening of the National Gallery in London, which featured numerous pieces purchased from Christie’s.238 In 1977, Christie’s entered the U.S. market, opening a salesroom in New York.239 Today, Christie’s has salerooms in London, New York, Paris, Geneva, Milan, Amsterdam, Dubai, Zurich, Hong Kong, and Shanghai.240 Each year, the company holds roughly 350 auctions in over 80 categories, including jewelry, fine arts, photographs, and wine.241 Notable Christie’s auctions include Elizabeth Taylor’s Margaret Carrigan, Sotheby’s ceases publicly trading on the New York Stock Exchange as its $3.7bn sale to Patrick Drahi closes, ART NEWSPAPER (Oct. 3, 2019), https://www.theartnewspaper.com/news/sotheby-s-ceases-publicly-trading-on-the-new-york-stockexchange-as-its-usd3-7bn-sale-to-patrick-drahi-closes. 232 Diana Wierbicki et al, Sotheby’s Goes Private: What It Means for the Art Market, WEALTH MGMT. (Jun. 25, 2019), https://www.wealthmanagement.com/high-net-worth/sothebys-goes-private-what-itmeans-art-market. 233 Bob Van Voris & Katya Kazakina, Sotheby’s Investors Sue to Block $2.7 Billion BidFair Offer, BLOOMBERG (Jul. 19, 2019), https://www.bloomberg.com/news/articles/2019-07-19/sotheby-s-holderssue-over-2-7-billion-bidfair-acquisition. 234 Id. 235 Id. 236 About Christie’s, CHRISTIE’S, https://www.christies.com/about-us/welcome-to-christies. 237 The History of Christie’s Auction House, CHRISTIE’S, https://www.christies.com/auctions/thehistory-of-christies-auction-house. 238 Id. 239 Id. 240 About Us: The History of Sotheby’s Auction House, SOTHEBY’S https://www.sothebys.com/en/about/our-history?locale=en. 241 Id. 231 43 jewelry collection, George Washington’s personal copy of the U.S. Constitution and Bill of Rights, and the $450 million sale of Leonardo da Vinci’s Salvator Mundi.242 In addition to public auctions, Christie’s represents clients in private sales.243 In 2005, Christie’s entered the digital market allowing potential buyers to bid online through Christie’s Live.244 The company is now owned by French billionaire François Pinault through his holding company Groupe Artémis.245 In 2018, Christie’s led the global art market, generating $7 billion in total sales, “the highest ever in the history of the auction house.”246 In 2019, the company generated $5 billion in auction sales alone.247 In recent years, Christie’s started its own art storage business through its subsidiary Christie’s Fine Art Storage Services with facilities in Singapore and Brooklyn.248 The company also recalibrated its business model to better accommodate Asian buyers’ increased participation in the art market.249 In 2017, Christie’s sales in Asia increased 39 percent, which ultimately represented 31 percent of the global market.250 In part due to these increases and the expansion of its online activities, Christie’s closed its South Kensington branch in London and scaled back activities in Amsterdam.251 Beyond its substantial presence in Asia, Christie’s has a longstanding relationship with the Russian market that dates back to the 1770s. In 1778, for example, James Christie sold Sir Robert Walpole’s art collection to Empress The History of Christie’s Auction House, CHRISTIE’S, https://www.christies.com/auctions/thehistory-of-christies-auction-house. 243 About Christie’s, CHRISTIE’S, https://www.christies.com/about-us/welcome-to-christies. 244 The History of Christie’s Auction House, CHRISTIE’S, https://www.christies.com/auctions/thehistory-of-christies-auction-house. 245 Ted Loos, Auction Houses Find New Ways to Survive, N.Y. TIMES (Oct. 12, 2017), https://www.nytimes.com/2017/10/12/arts/christies-sothebys-auctions.html. 246 Christie’s continues to lead the global art market, CHRISTIE’S (Feb. 7, 2019), https://www.christies.com/features/Christies-continues-to-lead-the-global-art-market-9681-1.aspx. 247 Nicky Eaton, Christie’s Global Auction Channel Sales Total £3.9 Billion/US $5.0 Billion in 2019, ASSOC. PRESS (Dec. 20, 2019), https://apnews.com/Business%20Wire/afa3d55c49974af6ac2a34f377da8c6a. 248 Kelly Crow, The Ultimate Walk-In Closet, WALL ST. J. (Apr. 26, 2010), https://www.wsj.com/articles/SB10001424052748703709804575202083586359768#. 249 Christie’s sales in 2017 total $6.6 billion, CHRISTIE’S (Feb. 2, 2018), https://www.christies.com/features/Christies-2017-results-8870-1.aspx. 250 Id. 251 Scott Reyburn, Christie’s to Close a London Salesroom and Scale Back in Amsterdam, N.Y. TIMES (Mar. 8, 2017), https://www.nytimes.com/2017/03/08/arts/design/christies-to-close-a-londonsalesroom-and-scale-back-in-amsterdam.html. 242 44 Catherine the Great, and this collection remains in the Hermitage to this day.252 The strength of this relationship has endured and in 2016, Christie’s had a 62 percent share “of the global market for Russian works of art.”253 The company also holds the record for “the highest price ever paid for a Russian painting at public auction – Kazimir Malevich’s Suprematist Composition, which sold for $85,812,500 in 2018.”254 3. Phillips Harry Phillips founded Phillips Auction House (“Phillips”) in 1796.255 Phillips first achieved “international recognition by selling paintings from the estate of Queen Marie Antoinette and household items from Napoleon Bonaparte.”256 The company was eventually passed to Harry’s son and remained with the family through the 1880s and into the early 1900s.257 By the 1970s, Phillips expanded its catalogue to include “fine art, furniture, and estate collections.”258 In 1999, Phillips was purchased by Bernard Arnualt, chairman of Louis Vuitton Moet Hennessey, who subsequently merged the company with the auction house of private art dealers Simon de Pury and Daniela Luxembourg.259 In 2001, Phillips and Bonhams & Brooks confirmed they would merge all operations in Great Britain to trade under the name Bonhams.260 This restructuring allowed Phillips, de Pury & Luxembourg to concentrate on the high end market and transfer their lower-end art sales to Bonhams.261 In 2002, Simon de Pury took majority control of the company.262 Six years later, Mercury Group, a luxury retail company, acquired a majority share in the company, and later obtained full control in 2013.263 Phillips is headquartered in London, where it conducts sales in a limited number of categories—contemporary art, photographs, furniture, watches, and jewelry—and advertises itself as “the most dynamic and forward-thinking auction The History of Christie’s Auction House, CHRISTIE’S, https://www.christies.com/auctions/thehistory-of-christies-auction-house. 253 CHRISTIE’S, Russian Art 1 (2016), https://www.christies.com/media-library/pdfs/2017/russian-artmarket-report-2016-rev.pdf. 254 50 years of Russian Art masterpieces at Christie’s, CHRISTIE’S (Dec. 11, 2019), https://www.christies.com/features/50-years-of-Russian-art-at-Christies-9747-3.aspx. 255 About Us, PHILLIPS, https://www.phillips.com/about. 256 Id. 257 Id. 258 Id. 259 Id. 260 Julia Finch, Bonhams and Phillips confirm merger, THE GUARDIAN (Jul. 13, 2001), https://www.theguardian.com/business/2001/jul/14/6. 261 Id; Phillips, de Pury & Luxembourg- Company Profile, Information, Business Description, History, Background Information on Phillips, de Pury & Luxembourg, REFERENCE FOR BUSINESS, https://www.referenceforbusiness.com/history2/31/Phillips-de-Pury-Luxembourg.html. 262 About Us, PHILLIPS, https://www.phillips.com/about. 263 Id. 252 45 house.”264 The company’s business also includes special exhibitions, private sales, and advisory and consulting services for private estates, corporate clients, and museums.265 Phillips has ten locations around the globe, including New York, Hong Kong, Geneva, Moscow, Paris, and Seoul.266 In 2019, Phillips had total sales revenue of $908 million, “with private sales ending the year at $171.8 million and marking a 34 percent gain from the previous year.”267 4. Bonhams Thomas Dodd established Bonhams in London in 1793.268 In the 1850s, George Bonham formed a partnership with Dodd’s successor George Jones, calling the company Jones & Bonham.269 In 2000, after five generations, the company was re-named Bonhams & Brooks following its acquisition by Brooks auction house.270 Shortly thereafter in 2001, Brooks acquired the British operations of its rival company Phillips.271 A year later, Bonhams acquired the American auction house Butterfields, further expanding its global reach.272 In September 2018, the private equity firm Epiris purchased Bonhams for an undisclosed amount.273 Bonhams “sells more jewelry lots per year than any other international house,” making up more than 40 percent of the company’s sales.274 Outside of jewelry, Bonhams specializes in low to mid-range art and antiquities as well as classic cars.275 The company holds more than 250 sales each year at auction venues around the world including Edinburgh, Hong Kong, London, New York, and Sydney.276 Id. Id. 266 Locations, PHILLIPS, https://www.phillips.com/locations. 267 Phillips’ Overall Sales Total $908 Million in 2019, PHILLIPS (Feb. 4, 2020), https://www.phillips.com/press/release/phillips-overall-sales-total-908-million-in-2019. 268 About Us, BONHAMS, https://www.bonhams.com/about_us/. 269 Id. 270 Id.; Chris Maxwell, Bonhams auction house, DIRECTOR UK (Apr. 1, 2014), https://www.director.co.uk/bonhams-auction-house-company-profile-1-april-2014/. 271 About Us, BONHAMS, https://www.bonhams.com/about_us/. 272 The Art Newspaper, Bonhams Buys Butterfields, FORBES (Aug. 6, 2002), https://www.forbes.com/2002/08/06/0806conn.html#493a313732d8. 273 Anthony DeMarco, Bonhams Sold To Private Equity Firm, FORBES (Sept. 4, 2018), https://www.forbes.com/sites/anthonydemarco/2018/09/04/bonhams-sold-to-private-equityfirm/#5318c8261f4b. 274 Id. 275 Scott Reyburn, The Art World’s Elephant in the Room, N.Y. TIMES (Sept. 21, 2018), https://www.nytimes.com/2018/09/21/arts/design/elephant-graph-income-inequality.html. 276 Javier Espinoza & James Pickford, Bonhams snapped up by private equity group Epiris, FIN. TIMES (Sept. 4, 2018), https://www.ft.com/content/9052fcee-b064-11e8-8d14-6f049d06439c; Locations, BONHAMS, https://www.bonhams.com/locations/. 264 265 46 5. Online Auctions during the COVID-19 Pandemic In March 2020, the United States took steps to respond to the COVID-19 pandemic with a number of jurisdictions issuing stay-at-home orders to prevent the spread of the virus. Sotheby’s, Christie’s, and Phillips shifted to online auction formats as in-person events were cancelled.277 To simulate an in-person auction experience, Sotheby’s filmed their auctioneer “facing a fleet of television screens so viewers could watch as he [fielded] collectors’ phone bids placed via colleagues.”278 The auctioneer also considered real-time bids placed on the Sotheby’s website.279 These online auctions were profitable for all three houses.280 Some 80,000 people joined Christie’s July 10, 2020 auction, which sold 79 paintings and brought in $421 million in overall sales.281 This includes Roy Lichtenstein’s Nude with Joyous Painting that sold for $46.2 million to an anonymous bidder, roughly $16 million more than its expected sale price.282 Sotheby’s auction on June 29, 2020 brought in $234.9 million in total sales, including $85 million for a trio of Francis Bacon works, Triptych Inspired by the Oresteia of Aeschylus.283 The three Bacon paintings also sold to an anonymous telephone bidder.284 Phillips held their own hybrid in-person and online auction on July 2, 2020 bringing $41 million.285 Phillips CEO Ed Dolman remarked that the “sale was a resounding statement about the strength of our market, . . . as there’s a certain amount of huge pent-up demand if you think about the amount of money that would Kelly Crow, Sotheby’s to Offer $60 Million Painting Online in New Format, WALL ST. J. (May 29, 2020), https://www.wsj.com/articles/sotheby-s-to-offer-60-million-painting-online-in-new-format11590769933; Scott Reyburn, Christie’s New Auction Technique: The Global Gavel, N.Y. TIMES (Jul. 10, 2020), https://www.nytimes.com/2020/07/10/arts/design/christies-auction.html. 278 Kelly Crow, Sotheby’s to Offer $60 Million Painting Online in New Format, WALL ST. J. (May 29, 2020), https://www.wsj.com/articles/sotheby-s-to-offer-60-million-painting-online-in-new-format11590769933 279 Id. 280 Kelly Crow, Roy Lichtenstein’s Nude Buoys Christie’s $421 Million Live-Stream Sale, WALL ST. J. (Jul. 10, 2020), https://www.wsj.com/articles/roy-lichtensteins-nude-buoys-christie-s-421-million-livestream-sale-11594419000; Contemporary Art Evening Auction, Sotheby’s (Jun. 29, 2020), https://www.sothebys.com/en/buy/auction/2020/contemporary-art-evening-auction?locale=en; Nate Freeman, Phillips Scored $41 Million in a White-Glove Contemporary Evening Sale as the Auction House Got Hip to New Online Landscape, ArtNet News (Jul. 2, 2020), https://news.artnet.com/market/phillips-evening-july-2020-1892250. 281 Kelly Crow, Roy Lichtenstein’s Nude Buoys Christie’s $421 Million Live-Stream Sale, WALL ST. J. (Jul. 10, 2020), https://www.wsj.com/articles/roy-lichtensteins-nude-buoys-christie-s-421-million-livestream-sale-11594419000. 282 Id. 283 Kelly Crow, Sotheby’s Brings Home the Bacon, WALL ST. J. (Jun. 29, 2020), https://www.wsj.com/articles/sothebys-brings-home-the-bacon-11593489255. 284 Id. 285 Nate Freeman, Phillips Scored $41 Million in a White-Glove Contemporary Evening Sale as the Auction House Got Hip to New Online Landscape, ArtNet News (Jul. 2, 2020), https://news.artnet.com/market/phillips-evening-july-2020-1892250. 277 47 have been spent in the global art market.”286 Dolman added further, “it’s quite obvious to us there’s a significant amount of money on the sidelines waiting to get a chance to get back in the art market.”287 D. Art Dealers, Art Galleries, and Art Fairs Auction houses are not the exclusive means by which collectors purchase high-value works of art. Buyers also rely on art dealers to build their collections through private sales.288 In 2019, aggregate dealer sales accounted for 58 percent of the art market by value, in contrast with auction sales, which claimed only 42 percent.289 In private sales, art dealers serve as a liaison between artists or current owners and potential purchasers.290 In this role, and in exchange for a percentage of each artwork sold, dealers often “manage an artist’s sales, network with collectors and curators, and seek to ensure the longevity of an artist’s career by mounting exhibitions” on behalf of their artists.291 Traditionally, art dealers conduct private sales through art galleries.292 In 2019 for example, 50 percent of dealer sales were made in galleries; the remaining 50 percent were divided between art fairs (45 percent) and online purchases (5 percent).293 Galleries represent artists through promotional activities, hosting exhibitions, and ultimately selling their work.294 Primary market dealers sell works by living artists while secondary-market dealers re-sell works “on behalf of collectors, institutions, and estates.”295 Because auction houses tend to focus on the secondary market, galleries execute many first-time sales and as a result play an influential role in determining the value of individual pieces.296 Id. Id. 288 ART BASEL & UBS, The Art Market 2018 30 (2018), https://www.artbasel.com/about/initiatives/theart-market. 289 ART BASEL & UBS, The Art Market 2020 32 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf. 290 Amy Zipkin, A Lifetime of Making Art, but New to Selling It Online, N.Y. TIMES (Feb. 9, 2018), https://www.nytimes.com/2018/02/09/business/lifetime-making-art-new-to-selling-online.html. 291 Zoe Goetzmann, These Artists Jump-Started Their Careers by Selling Directly to Collectors on Instagram, Artsy (Nov. 26, 2018), https://www.artsy.net/article/artsy-editorial-artists-jump-startedcareers-selling-directly-collectors-instagram. 292 ART BASEL & UBS, The Art Market 2018 178 (2018), https://www.artbasel.com/about/initiatives/the-art-market. 293 ART BASEL & UBS, The Art Market 2020 193 (2020), https://d2u3kfwd92fzu7.cloudfront.net/The_Art_Market_2020-1.pdf. 294 Anna Louie Sussman, How Galleries Support Their Artists, ARTSY (Apr. 18, 2017), https://www.artsy.net/article/artsy-editorial-galleries-support-artists. 295 ART DEALERS ASSOCIATION OF AMERICA, COLLECTOR’S GUIDE 15 (45th ed. 2007), https://web.archive.org/web/20131008045449/http://www.artdealers.org/dnloads/adaa_guide.pdf. 296 Allison Schrager, High-end art is one of the most manipulated markets in the world, QUARTZ (Jul. 11, 2013), https://qz.com/103091/high-end-art-is-one-of-the-most-manipulated-markets-in-the-world/. 286 287 48 Nevertheless, the historical dominance of art galleries has declined with the increasing popularity of art fairs. Unlike the traditional gallery, which operates from a fixed location, art fairs allow for collaboration between dealers and gallery owners who come together for a limited time to show a wide range of pieces at different price points.297 Art fairs provide valuable networking opportunities, increased exposure for artists, and a bolstered image for host cities, which benefit from increased tourism.298 Fairs also expose current collectors to many different galleries and artists in one location, therefore avoiding the inconvenience of traveling between different locations.299 The 2019 Art Basel Miami Beach art fair, for example, hosted 269 galleries from 33 countries in the Miami Beach Convention Center.300 E. Voluntary Anti-Money Laundering and Sanctions Programs in the Art Industry As explained earlier, under current U.S. law, the art industry is not legally required to comply with the same anti-money laundering requirements as certain financial institutions listed in the BSA.301 The BSA authorizes the Treasury Secretary to require those financial institutions to file “certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings, or in the conduct of intelligence or counterintelligence activities, including analysis, to protect against international terrorism.”302 In addition, the BSA states that “in order to guard against money laundering through financial institutions, each financial institution shall establish anti-money laundering programs, including, at a minimum – (A) the development of internal policies procedures, and controls; (B) the designation of a compliance officer; (C) an ongoing employee training program; and (D) an independent audit function to test programs.”303 ART BASEL & UBS, The Art Market 2018 190−191 (2018), https://www.artbasel.com/about/initiatives/the-art-market. 298 Y-Jean Mun-Delsalle, The Art Fair Boom Is Forever Changing the Way the Art Market Does Business, FORBES (Apr. 7, 2016), https://www.forbes.com/sites/yjeanmundelsalle/2016/04/07/the-artfair-boom-is-forever-changing-the-way-the-art-market-does-business/#3589bb5d6c64. 299 James Tarmy, Art Fairs Are Popping Up Everywhere. Do They Make Any Money?, BLOOMBERG (Mar. 6, 2018), https://www.bloomberg.com/news/articles/2018-03-06/art-fairs-are-popping-upeverywhere-who-profits. 300 Annie Armstrong, Art Basel Miami Beach Will Feature 269 Exhibitors in December, ART NEWS (Sept. 11, 2019), https://www.artnews.com/art-news/news/art-basel-miami-exhibitor-list-13211/. 301 For the complete list of entities that fall under the definition of a “financial institution” and therefore must comply with the Bank Secrecy Act, see 31 U.S.C. § 5312 (a)(2). 302 31 U.S.C. § 5311. 303 31 U.S.C. § 5318(h)(1)(A)−(D). 297 49 Although the provisions of the BSA do not apply to the art industry, all U.S. citizens and companies must comply with U.S. sanctions programs.304 Under IEEPA for example, any U.S. citizen or entity that conducts business with a person on the SDN list is subject to criminal and civil liability.305 Despite not having a legal obligation to implement AML programs under the BSA, the Subcommittee found that the four biggest art auction houses described above all have voluntary AML programs in place. In addition, all four have sanctions compliance programs. This section details the voluntary AML and sanctions programs in place at: (1) Sotheby’s; (2) Christie’s; (3) Phillips; and (4) Bonhams. The Subcommittee also interviewed one private art dealer who admitted they operated with no AML or sanctions compliance programs in effect. 1. Sotheby’s Sotheby’s informed the Subcommittee that it has a compliance department that oversees all issues relating to money laundering, terrorist financing, tax evasion, sanctions policies, and related litigation.306 Worldwide Policy on Money Laundering, Terrorist Financing and Tax Evasion. Sotheby’s has a detailed, written set of rules to combat money laundering, terrorist financing, and tax evasion. The current policy document (the “2018 AML Policy”) “applies to all members of the Board of Directors, employees, consultants, independent contractors, and others providing services to Sotheby’s.”307 The document also states that “Sotheby’s is committed to strict compliance with all applicable laws regarding anti-money laundering, combatting terrorist financing, and tax evasion.”308 It further states that “if you have any concerns about the activity of a client or legality of a transaction in which Sotheby’s is involved you must raise those concerns with the Compliance Department immediately.”309 The 2018 AML Policy explains that “the single most effective tool in combatting money laundering or terrorist financing is to have adequate knowledge about our clients. We must know who our clients are regardless of whether they are new or existing clients, occasional or regular purchasers or consignors and the volume or value of the transaction activity.”310 The 2018 AML Policy explains that “for all clients, new or existing, we must: (a) know the true identity of the person 50 U.S.C. § 1705(a). 50 U.S.C. § 1705(b)−(c). 306 Subcommittee Briefing with Sotheby’s Employees (Oct. 25, 2018). 307 SOT-000054−78. 308 Id. 309 Id. 310 Id. 304 305 50 or entity who owns the property or funds in question; and (b) understand the source of the client’s funds.”311 The 2018 AML Policy also outlines how to deal with an agent acting on behalf of an undisclosed principal. The document states, in pertinent part: In the context of ordinary auction and private sale transactions with an agent who you know or believe is acting on behalf of a principal whose identity is not disclosed, we must treat the agent as our client for the purposes of customer due diligence and verification of identification. Before you engage in transactions with agents for undisclosed owners, (e.g., dealers who wish to keep the names of their clients confidential from us), you must ensure that we know and trust the agent concerned . . . In addition, you should confirm that the agent knows personally and/or has conducted appropriate due diligence on its clients’ identities and activities.312 The 2018 AML Policy also notes “certain clients and transactions by their nature pose a higher risk of money laundering/terrorist financing or tax evasion. You must consider the below risk factors in connection with every transaction, and if you believe that your client falls within any of the following categories you must notify the Compliance Department immediately.”313 The “higher risk indicators” include: “clients residing in or with property/funds sourced from high-risk jurisdictions, which are those jurisdictions listed in Annex B.”314 Annex B lists 38 countries, including Russia.315 Sotheby’s added Russia to the list of high-risk jurisdictions in 2018; Russia was not included as a high-risk jurisdiction in its prior AML policy.316 The 2018 AML Policy also requires enhanced due diligence for transactions involving a politically exposed person or “PEP.”317 A PEP is defined in the 2018 AML Policy as “an individual that is, or has, at any time in the preceding year been entrusted with a prominent public function by any state, a European Community institution (such as the European Commission) or an international body….”318 The definition of PEP also includes immediate family members and any “person known to be a close associate of the PEP (such as a person who is in a close business relationship with a PEP or a trust or company formed for the benefit of a PEP).”319 Id. (emphasis in original). Id. 313 Id. 314 Id. 315 Id. 316 SOT-000419−43. 317 SOT-000054−78. 318 Id. 319 Id. 311 312 51 The 2018 AML Policy explains that for PEPs “the risk of money laundering is legally presumed to be higher based on his/her position and the greater likelihood that he/she will be exposed to corruption.”320 The Sotheby’s 2018 AML Policy also lists various types of “activity which may cause concern,” which it refers to as “red-flags.”321 The 2018 AML Policy states that “Sotheby’s may not establish or maintain a business relationship or conclude a transaction with a client if at the time we are suspicious about money laundering, terrorist funding, the client, the source of funds or the property or that the transaction is part of tax evasion.”322 The 2018 AML Policy lists a number of different types of “red-flags,” including, but not limited to the following: Client is unwilling to present requested identification documents, even after we have given the client reasonable explanations as to why we have asked for this information. Client refuses to provide complete and accurate contact information or business affiliations. Client gives evasive or incomplete answers to basic, routine questions.323 The 2018 AML Policy states that “all employees are required to report any suspicious transactions or suspected fraud to the Compliance Department.”324 Worldwide Policy on Compliance with Economic Sanctions Programs. Sotheby’s 2016 Worldwide Policy Regarding Compliance with Economic Sanctions Programs (the “2016 Sanctions Policy”) establishes that “no Sotheby’s employee, wherever located, may transact with any blocked party.”325 The 2016 Sanctions Policy explains that OFAC: administers and enforces U.S. economic and trade sanctions against targeted foreign countries, terrorists and terrorism-sponsoring organizations, international narcotics traffickers, and others. The regulations and executive orders administered and enforced by OFAC prohibit, among other things, the engagement by U.S. persons in transactions with, or the provision by U.S. persons of services to, certain entities and individuals on the Specifically Designated Nationals and other Blocked Persons List and other OFAC lists (collectively, the “OFAC Lists”).326 Id. Id. 322 Id. 323 Id. 324 Id. (emphasis in original). 325 SOT-000104−114. 326 Id. 320 321 52 The 2016 Sanctions Policy also states, “Sotheby’s must ensure that no actual or potential client, no agent or intermediary, no beneficiary or principal whose name it acquires in the ordinary course of business . . . are named on the OFAC Lists, are owned 50 percent or more by one or more persons on the OFAC Lists, or any other relevant Blocked Parties list.”327 The document instructs Sotheby’s employees to contact the Compliance Department if they “believe that an active Sotheby’s client is listed on any relevant Blocked Parties lists.”328 Sotheby’s also “conducts regular screening through an automated tool to ensure that no counterparty is on any relevant Blocked parties list. Sotheby’s also reruns the filter against its counterparties following the release of updates to the OFAC Lists and other relevant lists.”329 This process is monitored by the Compliance Department.330 Sotheby’s Compliance Department also conducts due diligence on individual transactions and requires contractual clauses and representations from consignors and purchasers to ensure that such purchases are consistent with Sotheby’s compliance requirements and that the real party in interest is not subject to U.S. prohibitions. Sotheby’s Briefing. On October 25, 2018, senior employees from the Sotheby’s Compliance Department briefed Subcommittee staff on the company’s policies and practices. The briefing was led by Sotheby’s former Chief Global Compliance Counsel, Head of Regulatory Affairs (“Chief Compliance Counsel”).331 She explained to the Subcommittee that while the art industry is not technically regulated, many regulatory environments apply to the art business.332 She continued that Sotheby’s has a “mature and well-developed” AML and sanctions compliance program, in which employees use a risk-based approach.333 She said the higher the value of the art transaction, the more Sotheby’s needs to understand about the background of the client or the ability of the client to purchase the item.334 The Chief Compliance Counsel explained that, in some cases, dealers will purchase a work of art and may subsequently sell it to another person.335 In those instances, she stated that Sotheby’s “doesn’t have a way to get that information” about the person to whom the dealer may subsequently sell the artwork.336 She stated that, at times, Sotheby’s has asked dealers on whose behalf they are Id. Id. 329 Id. 330 Id. 331 Subcommittee Briefing with Sotheby’s Employees (Oct. 25, 2018). 332 Id. 333 Id. 334 Id. 335 Id. 336 Id. 327 328 53 purchasing an item, but there is an economic disincentive for dealers to provide that information to Sotheby’s.337 The dealers believe that if Sotheby’s knew the identity of their clients, Sotheby’s would go straight to their client and cut out the dealer.338 The art dealer’s livelihood depends on protecting client information.339 Should Sotheby’s ask a dealer to whom they may intend to resell the artwork following the dealer’s transaction with Sotheby’s, according to the Chief Compliance Counsel, the dealer would respond, “Are you kidding me? I’m not telling you.”340 Ultimately, according to the Chief Compliance Counsel, whether to continue and execute a transaction with a dealer who may sell to a subsequent buyer was a judgment call.341 If the dealer is someone Sotheby’s knows; established in the art world; someone Sotheby’s has transacted with many times in the past; and is not under investigation, she said Sotheby’s is likely to complete the transaction.342 If the dealer does not meet those criteria, she said Sotheby’s would refuse to move forward: “we’ll say there’s too much smoke here, and we’ve done that.”343 The Chief Compliance Counsel stated that in some instances, the Compliance Department offers its counterparties the option of telling Sotheby’s Compliance personnel who their principal is, which enhances Sotheby’s ability to perform its due diligence and allows counterparties to protect their commercially proprietary information. Sotheby’s has been successful in this way in encouraging intermediaries to divulge their clients’ identities without risk of losing their business portfolio.344 She said that Sotheby’s “has a lot of success with that,” yet some intermediaries still refuse to disclose their principal due to a lack of trust.345 Sometimes intermediaries request before disclosing the identity of their principal a non-disclosure agreement (“NDA”) to provide comfort that Sotheby’s would not share the information outside of its Compliance Department.346 The Chief Compliance Counsel also discussed Sotheby’s sanctions compliance policies.347 She explained that Sotheby’s runs its client list through World-Check on a daily basis to identify possible sanctions violations.348 This check includes “all the major sanctions from around the world.”349 Any hits on sanctioned entities get Id. Id. 339 Id. 340 Id. 341 Id. 342 Id. 343 Id. 344 Id. 345 Id. 346 Id. 347 Id. 348 Id. 349 Id. 337 338 54 flagged to the Compliance Department.350 For private sales, Sotheby’s runs the names for both the buyer and the seller through World Check to determine if either are sanctioned.351 World-Check is a database used by financial institutions to identify PEPs, SDNs, and other high-risk individuals and organizations.352 She told the Subcommittee that Sotheby’s “has never transacted with an SDN or blocked person.”353 She asserted the company has “never had a hit and never inadvertently transacted with one.”354 The Chief Compliance Counsel also explained that Sotheby’s due diligence at the time associated with the Subcommittee’s review into a new client or transaction involved a risk-based analysis, which factored in the value of the transaction, the profile on the person, and the legitimacy of why the person has the artwork or the funds to purchase the artwork.355 At the time, Sotheby’s was aware of the risk that the buyer may not be the UBO and dealt with that risk by reviewing the information to which it had access and kept an eye out for red flags.356 She noted there is a significant competitive advantage in the art world to having information about who owns what art, and intermediaries in the art world frequently do not want to disclose who their clients are because they do not want to be cut out of the deal.357 At the relevant time, Sotheby’s trusted some clients to do their own KYC of their transactions parties. And Sotheby’s will walk away from a deal if it was not comfortable with the responses it received.358 2. Christie’s Global Anti-Money Laundering and Anti-Terrorist Financing Policy. Christie’s first established an AML policy in December 2008,359 and updated it in 2014 and 2015.360 The current AML policy was updated and finalized in March 2018 (the “2018 AML Policy”).361 Christie’s former Global Head of Compliance in London explained that the AML policy matured over the years.362 Id. Id. 352 See Refinitiv World-Check Risk Intelligence, REFINITIV, https://www.refinitiv.com/en/products/world-check-kyc-screening. 353 Subcommittee Briefing with Sotheby’s Employees (Oct. 25, 2018). 354 Id. 355 Id. 356 Id. 357 Id. 358 Id. 359 Christies-PSI-00000286−89. 360 Christies-PSI-00000294−99 (2014); Christies-PSI-00000300−05 (2015). 361 Christies-PSI-00000001−006. 362 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019) (also referred to below as Christie’s “Compliance Counsel”). 350 351 55 The 2018 AML Policy established know your client (or “KYC”) procedures as a “key component of Christie’s AML Policy. This involves collecting, verifying and keeping records of the identity of all clients.”363 The document states that “Christie’s will request sufficient identification documentation from clients to verify their identity using a risk-based approach. Where there is a greater perceived risk of money laundering or terrorist financing, enhanced due diligence, client risk reviews and KYC checks may be required.”364 The 2018 AML Policy poses two questions for Christie’s employees to consider regarding KYC procedures: Am I satisfied that the person/entity I am dealing with is the person/entity they claim to be? Do the circumstances of the proposed transaction give rise to a suspicion that the property being sold or funds used for payment are derived from criminal activity or may be used to fund terrorism?365 The 2018 AML Policy also states “for clients who are legal entities, Christie’s must also identify the natural persons in control (e.g., directors and beneficial owners).”366 Christie’s requires certain forms of identification for individuals making purchases or the beneficial owner of a private company, including offshore entities.367 Christie’s also notes circumstances that are considered “red flags.”368 The document explains that red flags “are indicators of circumstances where [Christie’s] may require further information from or about the client” and provides specific examples.369 Sanctions Policy. The current Christie’s sanctions policy was issued on May 1, 2018.370 It states that “Christie’s is committed to complying with all Sanctions that may apply to its business at any given time.”371 As such, employees and representatives must not “enter into or facilitate any business, dealings, or other activities, directly or indirectly, involving or for the benefit of Sanctioned Parties, except where expressly approved in writing by Compliance.”372 The Christie’s Sanctions Policy delineates certain countries as high risk countries and requires “all potential business and relationships with clients, suppliers and other third parties in High Risk Countries [to] be referred to Christies-PSI-00000001−006. Id. 365 Id. 366 Id. 367 Christies-PSI-00000009−13. 368 Christies-PSI-00000324−26. 369 Id. 370 Christies-PSI-00000014−19. 371 Id. 372 Id. 363 364 56 Compliance prior to any business being conducted or any business relationship being established.”373 The policy also states that “Christie’s will ensure that employees in specific regions and departments exposed to dealings with High Risk Countries received appropriate training on Christie’s Sanctions obligations.”374 Christie’s Briefing. Employees from Christie’s U.S.-based legal department in New York briefed Subcommittee staff on Christie’s anti-money laundering policies and sanctions compliance, led by Christie’s General Counsel for Dispute Resolution and Legal Public Affairs (“Christie’s General Counsel”).375 According to her, the Legal Department acts as a “helicopter parent,” serving as an independent check on Christie’s business activities.376 She noted that the AML policy applies to all employees, including client-facing employees, because Christie’s “wants [all employees] to know they are responsible for [compliance] issues.”377 The Legal function serves as “an independent check away from the business to look at all decision being made” to ensure appropriate compliance.378 The Compliance Manager for the Americas added that there are “conversations between [clientfacing] front line staff to alert [Legal] to red flags.”379 He continued that “if a client gives [client-facing staff] pushback it would be an immediate escalation to Legal.”380 Regarding Christie’s AML policies, Christie’s General Counsel noted that they are applicable to all Christie’s employees globally.381 Additionally, all Christie’s employees receive training on the policies.382 Christie’s General Counsel noted that the Legal Department has the ability to “restrict” clients – such as sanctioned individuals.383 Restricting a client “blocks” them globally from transacting with Christie’s.384 Only the Legal Department is able to place or remove these restrictions.385 The decision to restrict someone with derogatory information is simple; the Legal Department can simply say “no” and restrict that individual from transacting with Christie’s.386 If information is less clear, the decision is escalated to the head of the compliance department through a Id. Id. 375 Subcommittee Briefing with Christie’s Employees (Feb. 8, 2019). 376 Id. 377 Id. 378 Id. 379 Id. 380 Id. 381 Id. 382 Id. 383 Id. 384 Id. 385 Id. 386 Id. 373 374 57 report.387 If necessary, the issue can subsequently be escalated to the General Counsel in London or further to the Deputy CEO for a decision.388 3. Phillips Worldwide Anti-Money Laundering Policy. Phillips provided the Subcommittee with its AML policy (the “Phillips Policy”), which stated that Phillips employees “must report any knowledge or suspicion to the appropriate Phillips Anti-Money Laundering Officer, who then decides whether to make a report to the relevant authority.”389 The Phillips Policy first asks employees to require new clients to submit certain forms of government-issued identification.390 The Phillips Policy also notes that “key questions to ask include: Is the consignor or buyer reluctant to provide personal information? Is there any suggestion that the client is evading, has evaded or will evade taxes? Who is the beneficial owner of the property if it is consigned by an off-shore company?”391 The Phillips Policy also includes a section entitled “Red Flags,” which explains “if any of the following ‘Red Flags’ appear and there is no reasonable explanation for the particular Red Flag such that the employee is concerned about the client or transaction, the matter MUST be referred immediately in writing and by telephone to the appropriate Anti-Money Laundering Officer.”392 The Phillips Policy continues with a list of “what to look for,” such as: Client provides unusual, inconsistent, or suspicious identification; and Clients from certain high risk jurisdictions, particularly if wanting to pay from a local bank (e.g., Iran, North Korea, Algeria, Myanmar, Syria, Indonesia, Yemen).393 While the Phillips Policy did not include instructions regarding compliance with sanctions, Counsel for Phillips explained that sanctions compliance was considered a component of Phillips anti-money laundering compliance program, noting Phillips’ compliance training from as early as 2011 covered risks and compliance protocols related to sanctions.394 Id. Id. 389 PHILLIPS-00401−04. 390 Id. 391 Id. 392 Id. (emphasis in original). 393 Id. 394 See Letter from Counsel for Phillips to Subcommittee staff (July 22, 2020). 387 388 58 Phillips Briefing. Subcommittee staff received a briefing from Phillips General Counsel based in London.395 He explained that the company’s policies have developed over time.396 He stated that Phillips generally followed what the rest of the art industry was doing with regard to AML policy.397 Looking forward, he noted that Phillips was working on incremental steps towards a better policy—based on some of the same obligations imposed on banks regarding enhanced customer due diligence.398 He said he believes this will lead to increased transparency from clients.399 As such, Phillips’ General Counsel stated he believed clients will not be surprised when Phillips begins asking for additional due diligence information, including ultimate beneficial owner information.400 Anti-Money Laundering, Sanctions & Counter-terrorism Financing Policy. Phillips’ General Counsel also explained to the Subcommittee that in late 2018, Phillips was preparing to update its AML policy.401 The current policy was issued on November 6, 2018 and included instructions on: Money Laundering; Sanctions; Due Diligence Process; Frequently Asked Questions; and Client Identification Checklist and Screening Requirements.402 Counsel for Phillips stated “the issuance of the policy was then followed by mandatory training in all sale sites in 2018 for all staff.”403 Phillips’ counsel continued: Phillips currently screens all sellers and buyers—whether existing or new—against sanctions databases. In addition, [art] agents are required to identify their principal and provide Phillips with KYC documentation in relation to themselves and their principal. Phillips insists upon ultimate beneficial ownership (UBO) information for all companies and does not rely upon third parties to carry out KYC—it is all handled in house. Phillips does not pay out to sellers and does not issue invoices to buyers without having full KYC documentation.404 4. Bonhams Summary Controls & Procedures Manual. In April 2018, Bonhams U.S. issued its Bonhams U.S. Group Summary Controls & Procedures Manual (the “2018 Bonhams Manual”) to ensure “that Bonhams and our stakeholders reduce the risk Subcommittee Briefing with General Counsel for Phillips (Dec. 11, 2018). Id. 397 Id. 398 Id. 399 Id. 400 Id. 401 Id. 402 Draft Phillips Anti-money Laundering, Sanctions & Counter-terrorism Financing Policy provided to the Subcommittee; Email from Counsel for Phillips to Subcommittee staff (Mar. 19, 2020). 403 Email from Counsel for Phillips to Subcommittee staff (Mar. 19, 2020). 404 Id. 395 396 59 of fraudulent transactions and are compliant with all appropriate regulatory and taxation requirements.”405 The 2018 Bonhams Manual explained that the company would employ “a risk-based approach to AML [that] involves assigning different categories of risk (e.g. low, medium, high) to various types of client[s]. We have adopted such an approach, giving particular regard to our circumstances, such as our commercial activity, our range of clients and the registration process.”406 The 2018 Bonhams Manual identifies the following risk areas: Type of client – Is the client a private individual or corporate entity? Is the client acting as a principal or agent? Are they an existing or new client? Are you visiting the client in their home or are you seeing them for the first time when they have walked in off the street? Type of customer – Is the customer present at the sale? Does the customer mix business and private transactions? Geographical – Where is the client situated? Transaction/Payment type – How does the buyer settle his/her invoices? How is the vendor paid? Ongoing monitoring (Behavior) & other risk factors Is the transaction consistent with the client’s payment history? Is there any unusual or erratic behavior displayed by the client? Are there any indicators that raise concerns that the transaction is suspicious? A combination of the various criteria should help determine the client’s risk category?407 The 2018 Bonhams Manual continues: However, it is ultimately the member of staff’s professional judgment that will determine whether a client or particular transaction requires further examination. The higher the risk level of the client, the more scrutiny should be applied before entering into business relations with a client. If it doesn’t “Smell” right, tell us!408 BON004674−4700. Id. 407 Id. 408 Id. 405 406 60 The 2018 Bonhams Manual also requires that a vendor provide identification. Further, an “agent as consignor…should disclose to [Bonhams] who their ‘principal’ is (especially if that person is not signing the contract) in…the Master Consignment Agreement (MCA) before the agent signs.”409 The document continues: “Bonhams should request or seek confirmation of agency or representation relationship (as between the agent and principal) either by confirming with the principal or requesting documentary support thereof from the agent.”410 Bonhams Briefing. In a briefing with Subcommittee staff, Bonhams U.S. Counsel, along with outside counsel, explained that prior to the 2018 Bonhams Manual, Bonhams U.S. counsel communicated AML policies to staff during briefings and trainings.411 Bonhams U.S. Counsel noted that until 2016, most of the Bonhams U.S. staff was based in San Francisco, which made communication much easier.412 She said there was not a need for PowerPoint presentations on AML compliance because “everyone was sitting around the same desk.413” Bonhams U.S. Counsel told the Subcommittee that, historically, Bonhams U.S. did not check its clients against OFAC’s SDN list or any other sanctions lists.414 Rather, Bonhams U.S. relied on AML and sanctions checks that its financial institutions perform.415 According to Bonhams U.S. Counsel, the company would not knowingly engage in transactions with family members of sanctioned individuals.416 Additionally, she represented that Bonhams U.S. would not conduct business with art agents or advisors who were known to represent sanctioned individuals.417 5. Private Art Dealer The Subcommittee also investigated private art sales, as further explained below. In reviewing those transactions, the Subcommittee interviewed a private art dealer based in New York (the “Private Dealer”).418 The Private Dealer has thirty years of experience in the art market, having studied at major universities and worked at many art galleries and major art auction houses Id. Id. 411 Subcommittee Briefing with Bonhams U.S Counsel (Feb. 22, 2019). 412 Id. 413 Id. 414 Id. Bonhams reported that it now routinely screens all clients against the SDN and other sanctions list via a third party screening provider. 415 Id. 416 Id. 417 Id. 418 Subcommittee interview of Private Dealer (Sept. 7, 2018). 409 410 61 The Private Dealer explained that, at the time the transaction described below took place, she had no written AML or sanctions policies.419 The Private Dealer explained that she had not received any AML or sanctions-related training at any of the galleries or art auction houses at which she previously worked.420 When asked whether she had a legal obligation to question the origin of the funds used to purchase a piece of art, the Private Dealer responded that she did not.421 She explained that in the art industry, questioning the source of funds would be considered contrary to industry standards and norms at the time—although she has done it on occasion—and that art agents and intermediaries would not want to provide that information because of confidentiality and privacy concerns of both the art agents and intermediaries and their clients.422 She noted, however, that most of her clients are American and that she knows the identity of the ultimate buyer in the “majority” of her transactions.423 The Private Dealer explained that over the years, her practices regarding AML have significantly changed, but since the art industry is not regulated in the United States, she has had to self-regulate, rely on the advice of lawyers with expertise in AML and other related areas, and look for potential red flags in transactions, including with respect to the provenance of art pieces, in addition to relying on her gut.424 To that end, she said that if something does not feel right, or she does not know someone personally or through their reputation, she will not do business with them.425 Id. Id. 421 Id. 422 Id. 423 Id. 424 Id. 425 Id. 419 420 62 III. ROTENBERG CASE STUDY: USING OFFSHORE COMPANIES, LAWYERS, AND ART ADVISORS TO MASK OWNERSHIP Evidence examined by the Subcommittee suggests that the Rotenbergs used shell companies to mask their identities in transactions for high-value art both before and after being sanctioned by the United States. To form and manage those shell companies, the Rotenbergs appear to have used the services of attorney Mark Omelnitski and his company, the Markom Group. In addition, they also appear to have relied on art advisor and dealer Gregory Baltser, a U.S. citizen, to act as their representative in the art world to conceal their identities and involvement in particular art transactions, especially after becoming subject to U.S. sanctions. Due to the lack of transparency in the art industry and in the formation and operation of shell companies, the evidence demonstrating the links between the Rotenbergs, their shell companies, Mr. Omelnitski, the Markom Group, and Mr. Baltser is not completely certain. Throughout the Subcommittee’s investigation, witnesses interviewed by the Subcommittee claimed uncertainty and ignorance. One Sotheby’s employee even told the Subcommittee she was untruthful to her employer when she previously stated that Mr. Baltser told her he represented Arkady and Boris Rotenberg. Regardless, the transactions outlined below represent the movement of millions of suspect U.S. dollars across international borders to purchase art, the investment of funds in U.S. assets with substantial rates of return, and a successful weakening of the impact of U.S. sanctions. A. Attorney Mark Omelnitski and the Markom Group Evidence suggests that the Rotenbergs were assisted in their efforts to evade U.S. sanctions by Mark Omelnitski, one of the founders of the Markom Group. Mark Omelnitski is a British citizen who was born in Moscow, Russia.426 The Rotenbergs reportedly used Mr. Omelnitski’s services to set up a number of offshore shell companies.427 In 2019, a Markom Group website identified Mr. Omelnitski as the Head of Compliance and Client Relations and a member of the Management Committee of the Markom Group.428 That website is no longer active and is only available through internet archives. On the archived website, Mr. Omelnitski was described as “a co-founder of Markom Group, Mark is Managing Director of Markom Management Limited, a founding company of the group. Mark is a member of a SOT-000353. Sean O’Neil & Tom Parfitt, LONDON TIMES, How Putin’s cronies moved millions around the world, (Apr. 5, 2016), https://www.thetimes.co.uk/article/how-putins-cronies-moved-millions-around-theworld-jbcgjh9vr. 428 Markom Group, Key Staff, (May 17, 2019), https://web.archive.org/web/20160807231415/http://www.markomgroup.com/key-staff/. 426 427 63 number of professional bodies and has over 20 years’ experience in fiduciary services, corporate management, project administration, real estate, investment, and finance.”429 The archived Markom Group website also stated that the organization was “a group of companies established in 2004, which provides global fiduciary, trust, corporate business management, project administration and real estate investment services.”430 According to the archived website, the Markom Group included Markom Management Limited, described as: [T]he founding company of Markom Group. It provides fiduciary, management, administration, bookkeeping, and accounting services relating to the UK, Malta, Hong Kong, Luxembourg, the Isle of Man, British Virgin Islands, and St. Lucia registered companies, partnerships and private equity funds. Markom Management Limited is authorized by [Her Majesty’s Revenue and Customs] of the United Kingdom to provide trust and corporate administration services under AML Regulations Act.431   In addition to reviewing the archived Markom Group website, during the course of its investigation, the Subcommittee also obtained a copy of the Markom Group of Companies Staff Handbook (5th Edition). That document stated: Markom Group is a group of six companies registered in different jurisdictions providing fiduciary, trust, corporate business management, corporate business administration, and real estate services. With headquarters based in Tortola on the British Virgin Islands, we also have offices in the United Kingdom, Cyprus, Spain, and New Zealand, and provide extensive services in more than 30 countries around the world. At Markom Group, we provide a variety of services that go beyond the common concept of corporate and fiduciary services. We bring business services together with the latest financial, corporate, and investment expertise.432 The Markom Group handbook includes a Company Price List for the creation of companies in the following jurisdictions: United Kingdom; British Virgin Islands; Marshall Islands; Seychelles; Republic of Panama, and Cyprus.433 The specific Id. Markom Group, (Jul. 26, 2019), https://web.archive.org/web/20160811024803/http://www.markomgroup.com/. 431 Markom Group, Markom Companies (Jun. 11, 2018), https://web.archive.org/web/20160808093702/http://www.markomgroup.com/markom-companies/. 432 SOT-172224−356. 433 Id. 429 430 64 prices for services provided in the United Kingdom and British Virgin Islands are as follows:434 Description United Kingdom Incorporation of a company in the United Kingdom with standard Memorandum and Articles of Incorporation and standard Share Capital Annual Management of Company in the United Kingdom and provision of Registered Address Annual Management of Company in the United Kingdom and provision of Registered Address and Company Officers Annual Management of Company in the United Kingdom and provision of Registered Address and Company Officers with full admin, invoicing, cash management, and annual filing Incorporation of a Limited Liability Partnership in the United Kingdom with standard Limited Liability Partnership Agreement Annual management of Limited Liability Partnership in the United Kingdom and provision of Registered Address Annual management of Limited Liability Partnership in the United Kingdom and provision of Registered Address and Nominee Members Annual management of Limited Liability Partnership in the United Kingdom and provision of Registered Address and Nominee Members including full admin, invoicing, cash management, and annual filing Description British Virgin Islands Incorporation of a Company in the British Virgin Islands with standard Memorandum and Articles of Incorporation and standard Share Capital Annual Management of the Company in the British Virgin Islands and provision of Registered Address Annual Management of Company in the United Kingdom and provision of Registered Address and Company Officers Cost (in Euros) 1000 2200 3500 From 31,200 1200 2500 3750 From 31,200 Cost (in Euros) 1000 1200 2500 The Markom Group Handbook also listed prices for creating documents within the United Kingdom, British Virgin Islands, Marshall Islands, and Seychelles.435 The 434 435 Id. Id. 65 specific prices for creating documents in the United Kingdom and the British Virgin Islands are as follows:436 Document Price by Jurisdiction United Kingdom Certificate of Incorporation Memorandum and Articles of Incorporation Certificate of Good Standing Nominee Shareholders Declaration Nominee Directors Declaration Share Certificate Contract Creation Contract Review Document Creation Document/Contract/Instruction Signing Legalization of Documents Power of Attorney British Virgin Islands Certificate of Incorporation Memorandum and Articles of Incorporation Certificate of Tax Exemption Certificate of Good Standing Certificate of Incumbency Nominee Shareholders Declaration Nominee Directors Declaration Share Certificate Contract Creation Contract Review Document Creation Document/Contract/Instruction Signing Legalization of Documents Power of Attorney Certificate of Legal Validity Cost (in Euros) 273.00 273.00 78.00 296.00 296.00 296.00 From 1200 From 150 75.00 15.00 191.00 345.00 340.00 340.00 440.00 446.00 446.00 296.00 296.00 296.00 From 1200 From 150 75.00 15.00 300.00 345.00 1,155.00 In April 2016, The London Times reported that, according to the Panama Papers, Arkady and Boris Rotenberg used the Markom Group to set up a number offshore companies.437 The news article included a quote from Mr. Omelnitski who Id. Sean O’Neil & Tom Parfitt, How Putin’s cronies moved millions around the world, LONDON TIMES (Apr. 5, 2016), https://www.thetimes.co.uk/article/how-putins-cronies-moved-millions-around-theworld-jbcgjh9vr. 436 437 66 told the publication: “All our clients’ dealings are bona fide transactions in accordance with the law.”438 1. The Markom Group Established Rotenberg-linked Shell Companies In spring 2016, the International Consortium of Investigative Journalists (“ICIJ”) published information related to a collection of over 11.5 million documents originating from the Panama-based law firm of Mossack Fonseca & Co. (“Mossack”).439 The documents spanned a more than thirty-year period from 1977 to 2015.440 ICIJ disclosed that Mossack was “one of the world’s top creators of shell companies, [which are] corporate structures that can be used to hide ownership of assets.”441 ICIJ explained that the Mossack documents consisted of files that “contained information on 214,488 offshore entities connected to people in more than 200 countries and territories.”442 ICIJ also disclosed that the documents included “emails, financial spreadsheets, passports and corporate records revealing the secret owners of bank accounts and companies in 21 offshore jurisdictions, from Nevada to Singapore to the British Virgin Islands.”443 Those Mossack documents became known as the “Panama Papers.”444 Rotenberg-related BVI companies. The Panama Papers included an email chain made public by ICIJ and dated August 27, 2010 from Helen Okell at Mossack to Dorota Skowronska at Mossack with a copy sent to Mark Omelnitski under the subject line “BVI companies – audit.”445 The email identified nine companies formed in the British Virgin Islands (“BVI”) for the Rotenbergs.446 For each Rotenbergrelated company, the email provided the company name, ultimate beneficial owner, a key contact, and company activities as follows:447 Id. The Panama Papers: Giant Leak of Offshore Financial Records Exposes Global Array of Crime and Corruption, INT’L CONSORTIUM OF INVESTIGATIVE JOURNALISTS (Apr. 3, 2016), https://www.icij.org/investigations/panama-papers/20160403-panama-papers-global-overview/. 440 Id. 441 Id. 442 Id. 443 Id. 444 Id. 445 SGA_PSI_00053−82. The same document is also publicly available and can be accessed through the ICIJ’s Organized Crime and Corruption Reporting Project website at: https://cdn.occrp.org/projects/panamapapers/putindeal/P4.1_Earliglow_benefic_owners_contact_perso n_Protsenko.pdf.pdf. 446 Id. 447 Id. 438 439 67 Company Beechwood Associates Inc. Breckenridge Global Management Limited Causeway Consulting Limited Culloden Properties Highland Business Group Limited Highland Ventures Group Limited Kendrick Overseas Ltd. Stormont Management Limited Stormont Systems Limited Ultimate Beneficial Owner (“UBO”) Arkady Rotenberg Arkady Romanovich Rotenberg Arkady Rotenberg Boris Rotenberg Igor Rotenberg Boris Rotenberg Rotenberg Igor Rotenberg Igor Rotenberg Contact Activities Dmitry Protsenko Dmitry Protsenko Dmitry Protsenko None Dmitry Protsenko Dmitry Protsenko Dmitry Protsenko Dmitry Protsenko Dmitry Protsenko Investments Investments Investments Investments Investments Investments Holding Investments Investments The email chain provides evidence that Mr. Omelnitski, through the Markom Group, had a business relationship with the Rotenbergs.448 It also provides evidence that Arkady, Boris, and Igor Rotenberg established at least eight BVI companies for use in activities related to “investments” and one holding company.449 Two of these companies, Highland Business Group Limited and Highland Ventures Group Limited, played key roles in their art investments as described further below. In addition to the Panama Papers, evidence of links among the Rotenbergs, Mr. Omelnitski, the Markom Group, and the listed shell companies were the subject of an internal investigation performed by Barclays Bank (“Barclays”) and provided to the Subcommittee. Following the release of the Panama Papers in 2016, Barclays reviewed the companies formed by Mr. Omelnitski and the Markom Group. A Barclays internal investigatory memorandum concluded: Omelnitski and his company, Markom Group, created shell companies for sanctioned individual [Arkady] Rotenberg, a Russian oligarch, who is a close friend of the President of the Russian Federation, Vladimir Putin. Omelnitski is listed as a beneficial owner for the three companies owned by [Arkady] Rotenberg. Omelnitski and his company are nominee directors of multiple unidentifiable shell companies formed in Panama by Mossack Fonseca and the majority of these shell companies are owned by Russian individuals. Markom Group had 448 449 Id. Id. 68 created multiple shell companies for… [the] majority shareholders of Idealbank, which was investigated due to its possible connections to terrorist financing and money laundering concerns and subsequently was stripped of its banking license in Russia.450 The same Barclays memorandum noted, “[T]he ownership of these shell companies appears to be intentionally structured to be opaque in order to hide the identity of the true beneficiaries.”451 Barclays closed all Markom Group and Gregory Baltser-related accounts. Following the investigation, in August 2017, Barclays worked to close all “198 accounts under the Markom relationship,” of which 59 were U.S. dollar accounts.452 Barclays also closed all accounts related to Mr. Baltser.453 Documents provided to the Subcommittee indicate that in 2018 Baltzer Limited subsequently began paying for art from an account at Ameriabank in Yerevan, Armenia.454 In 2018, the U.S. State Department listed Armenia as a “major money laundering jurisdiction” and noted that “money laundering crimes in Armenia [would] likely continue to go unreported and undetected.”455 2. Rotenberg-Linked Shell Companies were Used to Purchase Art The Subcommittee identified three shell companies connected to the Rotenbergs and used in the purchase of art both before and after the imposition of U.S. sanctions: (1) Highland Business Group Limited; (2) Highland Ventures Group Limited; and (3) Advantage Alliance. The known ties to the Rotenbergs are explained below. a. Highland Business Group Limited The Subcommittee traced certain art purchases to Highland Business Group Limited (“Highland Business”) prior to the imposition of U.S. sanctions on Arkady and Boris Rotenberg in March 2014. According to ICIJ, Highland Business was incorporated on January 14, 2010 and registered in the British Virgin Islands.456 BARC_006752−61. Id. 452 BARC_005547−51. 453 BARC_007036. 454 See, e.g., SOT_202090−95; Christies-PSI-00066049. 455 U.S. Dep’t of State, Bureau of Int’l Narcotics & Law Enforcement Affairs, International Narcotics Control Strategy Report, Vol. II, Money Laundering (Mar. 2019), https://www.state.gov/wpcontent/uploads/2019/03/INCSR-Vol-INCSR-Vol.-2-pdf.pdf. 456 Highland Business Group Limited, INT’L CONSORTIUM OF JOURNALISTS, https://offshoreleaks.icij.org/nodes/10139350. 450 451 69 Markom Nominees Limited is listed as a shareholder of Highland Business beginning on January 14, 2010.457 Mossack is listed as the company’s agent.458 The Panama Papers email chain described above listed Igor Rotenberg as the ultimate beneficial owner for Highland Business.459 But other evidence suggests that Highland Business Group received its funding from entities associated with Arkady Rotenberg. For example, $47,000 was transferred from Advantage Alliance Limited (“Advantage Alliance”) on March 27, 2012 with the payment details: “as per agency agreement.”460 As explained below, a Barclays’ internal investigation linked Advantage Alliance to Arkady Rotenberg. b. Highland Ventures Group Limited The Subcommittee traced funds for certain art purchases to Highland Ventures Group Limited (“Highland Ventures”) following the imposition of U.S. sanctions in March 2014 on Arkady and Boris Rotenberg. Conflicting evidence collected by the Subcommittee regarding the ownership of Highland Ventures places Arkady, Boris, and Igor Rotenberg as the owners of the company at various points in time. As explained below, the strongest evidence suggests that Arkady Rotenberg funded the shell company, which would make him the UBO. Evidence of Ownership by Arkady Rotenberg. Wire transfers in U.S. dollars sent by Milasi Engineering Limited (“Milasi Engineering”), a company owned by Arkady Rotenberg to Highland Ventures suggest that the true UBO of Highland Ventures was Arkady Rotenberg. Arkady Rotenberg owned Milasi Engineering. Documents produced to the Subcommittee as part of an investigation conducted by Barclays included a December 31, 2014 Milasi Engineering Report and Financial Statements.461 That document listed “Arkadiy Rotenberg” as the company’s UBO.462 That same document stated that Milasi Engineering was incorporated in Cyprus on September 6, 2007 and “the principal activities of the company…are the holding of investments and loan financing.”463 Milasi Engineering funded Highland Ventures.464 Wire transfers produced to the Subcommittee show that Milasi Engineering transferred millions of U.S. dollars Id. Id. 459 SGA_PSI_00053−82. 460 BARC_006752−61. 461 BARC_006014−43. 462 Id. 463 Id. 464 It should be noted that Barclays determined a minority portion of Milasi Engineering shares were held by Culloden Properties Limited (“Culloden”). See BARC_006068−69. Barclay’s investigation 457 458 70 to Highland Ventures. According to one wire transfer, on January 30, 2013, Milasi Engineering transferred $69,600,000 from its account at SMP Bank in Moscow to Highland Ventures’ account at The Pictet Group, a private bank with offices in Geneva, Switzerland.465 Payment details for the wire transfer described the funds as “dividends for 2011 year,” suggesting Highland Ventures– or its beneficial owner – was one of Milasi Engineering’s shareholders.466 A second wire transfer on December 18, 2013, shows Milasi Engineering transferred $54,451,493.49 from its account at Gazprombank in Moscow to the same Highland Ventures account at The Pictet Group.467 That wire transfer described the funds as “dividends for 2012 year.”468 Together, the two transfers to Highland Ventures from Milasi Engineering exceeded $124 million. Three months later, on March 18, 2014, two days after President Obama signed EO 13661, which authorized sanctions on individuals providing material support to the Russian government, Highland Ventures moved $39,588,000 from its account with The Pictet Group in Geneva, Switzerland to its account at Gazprombank in Moscow, Russia.469 Two days after that, on March 20, 2014, the U.S. Treasury Department designated Arkady and Boris Rotenberg as sanctioned determined that Culloden “has always been owned by Boris Rotenberg since it was incorporated” and following sanctions on Boris Rotenberg “Markom continued with the transfer of the company to Cyprus.” See BARC_006068−69. After the transfer of Arkady Rotenberg’s interests, Milasi Engineering was majority owned by Igor Rotenberg who, at the time, was not yet sanctioned by the United States. This was presumably purposeful to comply with the Treasury Department rule that a company is only considered blocked if it is majority owned by a sanctioned individual. See U.S. DEP’T OF TREASURY, REVISED GUIDANCE ON ENTITIES OWNED BY PERSONS WHOSE PROPERTY AND INTERESTS IN PROPERTY ARE BLOCKED (2014), https://www.treasury.gov/resourcecenter/sanctions/Documents/licensing_guidance.pdf. Therefore, the fact that sanctioned Boris Rotenberg owned a minority share did not affect Milasi Engineering’s status as a sanctioned entity. As with Highland Ventures, Milasi Engineering made U.S. dollar transfers labeled as dividends to Culloden. On January 30, 2013 Milasi Engineering transferred $63,880,000 from its SMP Bank account in Moscow to Culloden’s account at The Pictet Group with the wire instructions “Dividends for 2011 Year.” See JPMorgan Chase (Nov. 7, 2018), SB981623-FI US Wire Search, Milasi Engineering, line 5. On October 8, 2013, Milasi Engineering sent $15,000,000 from its SMP Bank account to Culloden’s Societe Generale account in New York with the same wire instructions. See JPMorgan Chase (Nov. 7, 2018), SB981623-FI US Wire Search, Milasi Engineering, line 9. Milasi made two large transfers from its Gazprombank account to Culloden’s accounts at The Pictet Group and Societe Generale in New York on January 9, 2014 for $41,711,697.34 and $19,999,963.34, respectively. Both payments included the wire instructions “Dividends for 2012 Year.” DBAG00000019, lines 34 & 35. Mr. Omelnitski admitted to Barclays during its investigation that Culloden was owned by Boris Rotenberg, and explained he was in the process of transferring Culloden to Cyprus in May 2016. See BARC_006811−17. 465 JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Highland Ventures Group, line 2. 466 Id. 467 DBAG0000013, line 10; DBAG00000019, line 32. 468 Id. 469 DBAG0000013, lines 17−18. 71 individuals or specifically designated nationals blocked from doing business with U.S. persons.470 The multi-million dollar transfers between Milasi Engineering and Highland Ventures are strong evidence of the shell company’s link to Arkady Rotenberg. A United Kingdom government agency determined Arkady Rotenberg owned Highland Ventures. In addition to the fund transfers described above, a 2018 letter by Barclays indicates that a UK government agency concluded that Highland Ventures was owned by Arkady Rotenberg.471 On May 18, 2018, the Head of Financial Crime Policy at Barclays Bank sent a letter to Alexandre Manfull, the Assistant Director of Sanctions Compliance & Evaluation at OFAC, stating “in August 2017, Barclays was contacted by [a UK government agency] who provided Barclays with a list of entities that [it] believed to be owned or controlled by Arkady Rotenberg, including…Highland Ventures.”472 A Societe Generale investigation linked Highland Ventures to Arkady Rotenberg. An investigation by Societe Generale determined that an account at another financial institution owned by Highland Ventures was “utilized as a passthrough account for layering activities to channel and conceal a flow of funds….”473 Further, Societe Generale “was unable to rule out that the processed funds did not originate from a sanctioned individual, the father of Igor Rotenberg,” Arkady Rotenberg.474 An art purchase through an independent dealer linked Highland Ventures to Arkady Rotenberg. An invoice and transfer of funds associated with a private art purchase investigated by the Subcommittee provided another piece of evidence suggesting Arkady Rotenberg was the UBO of Highland Ventures. As further explained below, the private sale of a famous painting by René Magritte called La Poitrine listed Highland Ventures on the invoice as the buyer.475 The Markom Group assisted with the purchase of La Poitrine; Anna Wilkes (Finance Director and Managing Director for the Markom Worldwide Group) signed the invoice as the Director of Highland Ventures.476 The invoice listed Advantage Alliance as the entity that provided payment for La Poitrine, which totaled $7.5 million.477 As Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Russian Officials, Members of the Russian Leadership’s Inner Circle, and an Entity for Involvement in the Situation in Ukraine (Mar. 20, 2014), https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx. 471 BARC_005572−74. 472 Id. 473 SGA_PSI_01570. 474 Id. 475 Documents on file with the Subcommittee. 476 Id. 477 Id. 470 72 explained below, the Subcommittee traced that $7.5 million payment to another company owned by Arkady Rotenberg, Senton Holdings Ltd.478 Barclays also linked Advantage Alliance to Highland Ventures. An internal Barclays’ investigation linked Highland Ventures to Advantage Alliance through two wire transfers to Highland Ventures from Advantage Alliance between November 2015 and March 2016, which totaled $381,347.70.479 Details provided about the payments indicated: “as per agency agreement.”480 Together, the Milasi Engineering transfers, the UK government agency conclusion, and the facts surrounding the purchase of La Poitrine suggest Arkady Rotenberg is the UBO of Highland Ventures. Evidence of Ownership by Igor Rotenberg. There is also some evidence that the true UBO of Highland Ventures was Arkady’s son, Igor Rotenberg. First, a Barclays investigator summarized this finding in an April 6, 2017 email stating: Markom Management Ltd have confirmed that Highland Ventures Group Ltd was never owned by Boris Rotenberg. It has in fact always been owned by Igor Rotenberg since it was incorporated on [February 18, 2010] . . . Igor is not subject to the current US sanctions, however, as you are already aware he is the son of Arkady Rotenberg who is a sanctioned individual.481 The April 2017 email also pointed to evidence provided by Markom Management that Igor Rotenberg owned Highland Ventures.482 That evidence included a Trust Deed between Igor Rotenberg and Markom Nominees Ltd dated February 18, 2010 stating that Igor Rotenberg had granted 50,000 shares of Highland Ventures to Markom Nominees Ltd as trustee.483 Saffron Nominees Limited held Highland Ventures. In addition, Markom Management provided documents to Barclays that indicated that Igor Rotenberg owned Highland Ventures through another company named “Saffron Nominees Limited.”484 A document titled “Register of Shareholders” for Highland Ventures stated that Markom Nominees Ltd held 50,000 shares from February 18, 2010 to BARC_000002, lines 24 and 25; BARC_006912−15. BARC_006752−61. 480 Id. 481 BARC_006068−71. 482 Id. 483 BARC_006117−20. 484 BARC_006068−71. 478 479 73 March 5, 2016.485 On March 5, 2018, all 50,000 shares were transferred to Saffron Nominees Limited.486 Barclays also produced documents from Markom that provided additional information on share ownership. These documents included a “Nominee Declaration” dated August 5, 2016 stating that Saffron Nominees Limited held shares of Highland Ventures for Igor Rotenberg.487 In addition, Barclays produced a Certificate dated November 21, 2016 and filed with the Cyprus Ministry of Energy, Commerce, Industry, and Tourism Department of the Registrar of Companies and Official Receiver Nicosia that listed Saffron Nominees Limited as the owner of shares of Highland Ventures.488 Arkady Rotenberg transferred ownership of Milasi Engineering to Igor Rotenberg. Four months after the United States imposed sanctions on Arkady Rotenberg, Markom Group assisted in transferring Arkady Rotenberg’s interest in Milasi Engineering to his son Igor Rotenberg at a time before Igor was subject to U.S. sanctions. Markom Group executed this transfer by transferring shares in two holding companies that, together, owned the majority of shares in Milasi Engineering. The transfer of ownership of the two shell companies from Arkady Rotenberg to Igor Rotenberg amounted to also transferring the ownership of Milasi Engineering, since the two shell companies owned the company. According to documents provided by Mr. Omelnitski to Barclays, prior to July 2014, Milasi Engineering was owned by Beechwood Associates and Kendrick Overseas.489 Causeway Consulting owned Kendrick Overseas.490 Arkady Rotenberg owned both Beechwood Associates and Causeway Consulting.491 Arkady Rotenberg’s ownership of Beechwood Associates and Causeway Consulting was also suggested by information in the Panama Papers email chain cited above.492 In addition, as previously mentioned, the December 31, 2014 Milasi Engineering Report and Financial Statement listed Arkady Rotenberg as the company’s ultimate beneficial owner.493 Markom Group facilitated the transfer of ownership for Beechwood Associates and Causeway Consulting. Documents provided by Markom Group to Barclays documented the transfer of Beechwood Associates and Causeway Consulting. On July 28, 2014, Arkady Rotenberg transferred his shares in Beechwood Associates BARC_00221. Id. 487 BARC_06116. 488 BARC_006075−76. 489 BARC_006013. 490 Id. 491 BARC_006068−71; BARC_006013. 492 SGA_PSI_00053−82. 493 BARC-006014−43. 485 486 74 Ltd and Causeway Consulting Ltd to Highland Ventures.494 To document the transfers, Joseph Amin, Deputy Chairman of the Markom Group, sent letters on Markom Group letterhead to Arkady Rotenberg regarding both companies stating: “following the sale of this company to the third party we hereby inform you of the termination of our services to you in regard to the above mentioned company.”495 The Markom Group asserted the transfer of ownership of these two companies effectively transferred ownership of Milasi Engineering to Igor Rotenberg. The Markom Group provided to Barclays a Deed of Trust dated February 18, 2010, making Markom Nominees the trustee of 50,000 shares of Highland Ventures on behalf of Igor Rotenberg.496 The Barclays investigator requested information from Markom Group on the consideration Highland Ventures paid for the shares in Beechwood Associates and Causeway Consulting “to ensure that the companies were not merely being transferred by Arkady to his son Igor.”497 Markom Group responded to the request as follows: Both Beechwood Associates and Causeway Consulting had been advanced loans by Highland Ventures Group Ltd. As neither Beechwood nor Causeway were able to repay these loans, the loan liability was converted into Share Purchase Agreements (“SPAs”) through which Highland Ventures Group Ltd became the new shareholder of the companies. The overall consideration price for the shares of Beechwood that was paid amounts to 6 billion Rubles [approximately $99,889,020.00]; and the consideration price paid for Causeway was 3 billion Rubles [approximately $49,950,000.00].498 The Markom Group provided Barclays with the following chart to explain the ownership structure:499 BARC_000227; BARC_006122; BARC_006124 (Causeway Consulting) and BARC_000231; BARC_006126; BARC_006077 (Beechwood Associates). 495 BARC_006077 (Beechwood Associates); BARC_006124 (Causeway Consulting). 496 BARC_006046−49. 497 BARC_006068−71. 498 BARC_006068−71; BARC_006804−10. 499 BARC_006013. 494 75 The Barclays investigator determined the transfer to Igor Rotenberg was intended to evade U.S. sanctions on Arkady Rotenberg. The investigative report explained: It should be noted that A[rkady] Rotenberg was listed as an SDN on or about March 20, 2014, over four months before the ownership of Beechwood and Causeway was transferred to his son. Furthermore, such transfer to a non-SDN close relative taking place at the time of sanctions designation does not appear to be a proper transfer to a bona fide purchaser acting at arm’s length as defined by the Office of Foreign Asset Control (“OFAC”). Barclays NY believes the transfer of ownership to I[gor] Rotenberg was intended as circumvention of sanctions.500 Barclay’s investigation concluded with regard to Mr. Omelnitski and the Markom Group: 500 BARC_006804−10. 76 Companies organized by Omelnitski and his group suggest that Markom may potentially have created numerous companies for Russian oligarchs and close acquaintances of Russian President, Vladimir Putin, who have been previously implicated in questionable undertakings. Furthermore, the ownership of these shell companies appears to be intentionally structured to be opaque in order to hide the identities of true beneficiaries.501 Evidence of Ownership by Boris Rotenberg. Finally, evidence also exists that Highland Ventures was owned by Boris Rotenberg. The strongest evidence is the Mossack email chain cited above and released with the Panama Papers, which listed Boris Rotenberg as the UBO of Highland Ventures.502 According to ICIJ, Highland Ventures was incorporated on January 14, 2010 and registered in the British Virgin Islands using Mossack as an agent.503 As noted above in the chart, Mossack listed the activities of Highland Ventures as “investments.”504 Summary of Evidence on Ownership of Highland Ventures Group. The evidence is not conclusive as to whether Arkady, Boris, or Igor Rotenberg, or possibly some combination of the three, qualified as the UBO of Highland Ventures. But the evidence is clear that one or more of the Rotenbergs controlled the company. As a result, the clear implication is that the Rotenbergs directed and funded purchases of high-value art in the United States. c. Advantage Alliance In addition to Highland Business and Highland Ventures, the Subcommittee examined the ownership and activities of a third shell company, Advantage Alliance. The Subcommittee became interested in Advantage Alliance due to its role in the purchase of La Poitrine, as explained above.505 As mentioned above, evidence suggests that Advantage Alliance had ties to Arkady Rotenberg. A 2017 Barclays internal investigation observed that “Advantage Alliance…appears to have received payments from an entity which [the bank] has learned is owned by [Arkady Rotenberg].”506 Barclays identified the entity that made the payment to Advantage Alliance as Highland Ventures.507 Id. SGA_PSI_00053−82. 503 Highland Ventures Group Limited, INT’L CONSORTIUM OF JOURNALISTS, https://offshoreleaks.icij.org/nodes/10143427. 504 SGA_PSI_00053−82. 505 See infra. 506 BARC_005572−95. 507 Id. 501 502 77 Barclays also investigated Advantage Alliance’s links to the Markom Group and Mr. Omelnitski. A Barclays investigatory memorandum noted that Advantage Alliance’s account with the bank was opened in the name of MP Intermediary Services Limited in 2008.508 The memorandum continued: “The beneficial owner was listed as Alexander Druzhinin, a Russian national….The third party signatories were listed as [Anna] Wilkes, Joseph Amin, and [Mark] Omelnitski. Internet research identified Amin as the Managing Director of Markom Media and Druzhinin as a director of Markom Partners Plc.”509 Ms. Wilkes is identified in another related Barclays investigation as the Finance Director and Managing Director for the Markom Worldwide Corporation.510 In short, all three account signatories for Advantage Alliance were Markom Group employees. And other evidence previously described established that the Markom Group formed companies and performed related corporate services for the Rotenbergs. The Barclays investigation of Mr. Omelnitski also noted that when the Advantage Alliance account was opened at the bank, the expected annual turnover for the account was £3 million or about $3,746,670.511 Despite this expectation, the account was involved in 129 wire transfers from March 2012 to May 2016 totaling $60,972,491.89.512 The Barclays investigation found that Advantage Alliance engaged in transactions with a wide range of entities, including traders of cocoa products, a security firm, traders of metals, a sourcing company, a brokerage firm, a construction company in Russia, and a supplier of used cooking oil.513 The Advantage Alliance transactions also included a payment directly to an art dealer for the purchase of La Poitrine, which was sold to Highland Ventures, as further discussed below.514 Barclays determined that the wire activity “does not appear to be in line with [Advantage Alliance]’s expected line of business.”515 As such, “the account was closed on October 24, 2016 as Barclays Corporate identified spikes in activity seen during April and May, with large transfers in sent straight out in full as Int[ernational] Payments, which did not match expectations for the nature of the business.”516 Further, Barclays suspected that these funds may be the proceeds of a crime.517 BARC_006752−61. Id. 510 BARC_006762−65. 511 BARC_006752−61. 512 Id. 513 Id. 514 Id. 515 Id. 516 Id. 517 BARC_005514−21. 508 509 78 In the end, although the Subcommittee was unable to determine with absolute certainty the ultimate beneficial owners of Highland Business, Highland Ventures, or Advantage Alliance, the evidence is strong that all three companies were connected to and controlled by the Rotenbergs.  B. Art Advisor Gregory Baltser In addition to evidence that the Rotenbergs used multiple shell companies to mask involvement in high-value U.S. art transactions, the Subcommittee reviewed evidence that the Rotenbergs attempted to conceal their participation in the U.S. art market by hiding behind a Moscow-based art advisor and dealer, Gregory Baltser. Background. Gregory Baltser is a naturalized U.S. citizen who resides in Moscow.518 As a U.S. citizen, he is required to comply with U.S. laws, including U.S. sanctions laws. Mr. Baltser graduated from Moscow State Stroganov Academy of Industrial and Applied Arts.519 A press release dated March 19, 2019 described Mr. Baltser as “a reputable antique specialist and talented decorator whose reputation extends far beyond the borders of the Russian Federation.”520 One auction house described Mr. Baltser as “the only dealer who buys whole interiors and houses in Europe and brings them to Russia.”521 Mr. Baltser established the BALTZER Auction Agency and Services in 2014 and the website for the BALTZER Agency states: The BALTZER Agency is here to be your representative; whether at an auction house, gallery, art dealer, or private sale or purchase. Our specialists are professionals with experience of working in the world’s major auction houses, including Sotheby’s, Christie’s, and Phillips. Our job is to save you time and effort, and protect you from expensive mistakes.522 Mr. Baltser has also established the BALTZER CLUB, described in a press release as SOT-000350. Gregory Baltser – Antique Expert, Collector & Decorator, FINE ART SHIPPERS (Mar. 15, 2019), https://fineartshippers.com/gregory-baltser-antique-expert-collector-decorator/. 520 IIya Kushnirskiy, Introducing BALTZER – Your Personal Guide to Art Collecting, FINE ART SHIPPERS (Mar. 19, 2019), https://www.einpresswire.com/article/479578592/introducing-baltzer-yourpersonal-guide-to-art-collecting. 521 Christies-PSI-00000048−49. 522 Baltzer: Your Personal Guide to the World of Art & Collecting, BALTZER LLC (2020), https://baltzer.com/en/about. 518 519 79 a private club for art collectors, experts, and all those who are fascinated by beautiful things. This exclusive club is a kind of museum that allows the members to enjoy art and antiques in a comfortable and relaxing atmosphere. Besides, the BALTZER CLUB is known for its elegant educational and social events in one way or another related to culture, arts, and collectibles.523 The BALTZER Agency website states the BALTZER CLUB “includes events such as recitals, readings, discussion panels, exhibitions of private collections and lectures on various aspects of art and collecting lead by experts.”524 A prior version of the BALTZER website dated 2018 explained how the BALTZER Agency facilitated an individual’s “participation at an auction:” We organize your entire auction process, including registering you for a sale, attending an auction on your behalf and handling all of the subsequent stages of the transactions. Our aim is to save you from the red tape of auctions while protecting you from a false step.525 The 2018 website continued explaining how the BALTZER Agency assists a buyer in registering for an auction: An independent buyer at a sale must register for each new auction separately, going through the tedious verification process again and again. He or she must confirm not only their ability to pay, but also that their funds have not been acquired through unlawful means. Many auction houses have their own requirements regarding documentation, and oftentimes different departments of a single auction house in different cities may require different documents to be submitted. It can take several weeks for this process to be completed. Our clients, however, are freed from this pile of paperwork – our longstanding relationship with many auction houses means that we can simplify the registration process and make it the same for all auctions. By allowing us to handle all of your paperwork, you can even take part in any auction at the last minute.526 Notably, the 2018 website also addressed how an individual would participate in an auction, including efforts by BALTZER to provide an individual “complete anonymity:” IIya Kushnirskiy, Introducing BALTZER – Your Personal Guide to Art Collecting, FINE ART SHIPPERS (Mar. 19, 2019), https://www.einpresswire.com/article/479578592/introducing-baltzer-yourpersonal-guide-to-art-collecting. 524 Baltzer: Your Personal Guide to the World of Art & Collecting, BALTZER LLC (2020), https://baltzer.com/en/about. 525 BALTZER, Participation at an Auction (2018), document on file with the Subcommittee. 526 Id. 523 80 How, exactly, would you like to take part in an auction? The most enjoyable option is for us to bring you privately to the main hall of our Club, where you can settle yourself comfortably in front of a video screen and watch a live broadcast of the sales in the auction room. You can take part in the auction yourself, if you wish, by telephone. A personal manager from our agency will assist you. If a visit to our premise is not in your plans, the manager will simply ring you during the auction and tell you how things are progressing over the phone, and pass on your bid to the auction room. Finally, you can place an absentee bid. In this case, we will not bother you while the auction is taking place. Instead, a manager will bid for lots at your instruction, having established a maximum beforehand. This is convenient if the sale you wish to participate in takes place on the opposite side of the world. Working on your behalf, we act professionally and exclusively in your interests. If necessary, we can even give you complete anonymity. We remain level-headed and know the auction process inside out.527 1. The Auction Houses Viewed Mr. Baltser as the Principal Buyer A key issue related to Mr. Baltser and his business is whether he acts as a principal or an agent when buying and selling art. The cumulative evidence, as discussed in more detail below, suggests that Mr. Baltser bought art on multiple occasions on behalf of the Rotenbergs, but never disclosed their involvement. Nor did the auction houses ask for whom Mr. Baltser was purchasing art. Even after the imposition of U.S. sanctions, Mr. Baltser failed to disclose his representation of the Rotenbergs, who were prohibited as a result of those sanctions from doing business with U.S. persons and entities. Mr. Baltser took advantage of rules and practices that allowed him to present himself as the “principal” buyer and avoid naming any client that he might be representing in the purchase or sale. This allowed for Mr. Baltser to provide the “complete anonymity” that his 2018 website promised. Sotheby’s. Sotheby’s told the Subcommittee that since Mr. Baltser took title to the purchases he made in his name, Sotheby’s did not view Mr. Baltser as an agent; Sotheby’s viewed him as the principal buyer. The Chief Compliance Counsel explained to the Subcommittee during a briefing that Mr. Baltser is considered the principal when he makes a purchase: “He buys it and pays for it.”528 She continued, “There are no third party payments, 527 528 Id. Subcommittee Briefing with Sotheby’s Employees (Oct. 25, 2018). 81 the money comes from his account at a major bank.”529 She explained that there are some in the art business who Sotheby’s knows are buying for someone else or who actually disclose that they are acting as an agent or nominee on behalf of someone else.530 She contrasted that scenario with Mr. Baltser stating “he’s the principal; he’s purchasing the art in his own name with funds in his own bank account.”531 She explained that Sotheby’s “cannot ask clients to disclose the source of funds in their bank accounts. Sotheby’s has no legal authority to demand such information.”532 An agent, the Chief Compliance Counsel explained, will buy an item, but not take title.533 She explained to the Subcommittee that, under Sotheby’s policy, Mr. Baltser was not an agent, but instead purchased and took title of the artwork.534 She explained that “Sotheby’s does not know and has no legal right to know to whom he may resell the art once he takes title of the art.535 She also stated that “when Baltser transacts with Sotheby’s, he is the person who takes legal ownership and legal risk as the purchaser.”536 She further asserted that “Baltser is taking a risk because his client could turn around and say, ‘I don’t want to buy this thing anymore.’”537 The Chief Compliance Counsel also told the Subcommittee that Sotheby’s staff knew Mr. Baltser well and considered him to be a known-quantity and an important Sotheby’s client.538 She could not recall Sotheby’s having concerns about transacting with Mr. Baltser prior to the Subcommittee’s investigation and said that he transacted with Sotheby’s using accounts at major banks. Sotheby’s assigns “Tiers” or “Levels” to clients based upon the amount and frequency of purchases. The highest level is 1 and the lowest level is 9.539 She said that Mr. Baltser was a “Level 1” Sotheby’s client.540 She explained that these clients are the ones who are “wined and dined” and receive “special attention.”541 In some cases, she said an entire team of Sotheby’s employees can be assigned to them.542 The Chief Compliance Counsel stated that Sotheby’s was moving away from using client levels.543 Id. Id. 531 Id. 532 Id. 533 Id. 534 Id. 535 Id. 536 Id. 537 Id. 538 Id. 539 Id. 540 Id. 541 Id. 542 Id. 543 Id. 529 530 82 Christie’s. Christie’s General Counsel stated in a briefing that Mr. Baltser is known to Christie’s as an interior decorator who engaged with the auction house in low value, but high volume transactions.544 She said he would then sell the items purchased at Christie’s to his clients or via his membership club.545 When describing his purchasing history, Christie’s General Counsel stated it was apparent Mr. Baltser engaged in fairly low level purchases that fit within Christie’s understanding of his profile and operations.546 She noted that Mr. Baltser purchased wine, as well as interior decoration items and ceramics.547 Bonhams. Bonhams U.S. Counsel and outside Counsel for Bonhams stated in a briefing that Bonhams U.S. does not consider Gregory Baltser to be an agent, but rather a dealer given that he is transacting in his own name and with his own funds and thereby assumes all contractual risks.548 Bonhams U.S. also understood that Mr. Baltser often subsequently resells a purchased item to someone else.549 Bonhams U.S. outside counsel noted that it is common in the auction world to have counter-parties and that when Bonhams U.S. sells to a dealer, Bonhams knows that the item may be re-sold.550 While Bonhams U.S. requires bidders (including dealers) to disclose whether they are acting on behalf of a third-party, and to represent that the third-party is not on the SDN or other sanctions list, it does not require that a dealer disclose the identity of a third-party buyer. Bonhams U.S. views Mr. Baltser as the principal buyer.551 Bonhams U.S. Counsel said that Bonhams U.S was not aware of who Mr. Baltser represented, nor did it matter, since Bonhams U.S. viewed him as the buyer.552 Phillips. While Phillips’ General Counsel did not discuss Mr. Baltser directly, he explained during a briefing the legal issues surrounding agents in the art industry.553 According to him, agents often bid on their own behalf to buy items for stock.554 These dealers often have a shop and sell art privately.555 He said auction houses have no way of knowing whether dealers are bidding on behalf of themselves or someone else unless the dealer tells the auction house.556 Phillips’ General Counsel noted that sometimes after a successful bid at an auction, an agent will inform the auction house that they were actually acting on Subcommittee Briefing with Christie’s Employees (Feb. 8, 2019). Id. 546 Id. 547 Id. 548 Subcommittee Briefing with Bonhams U.S Counsel (Feb. 22, 2019). 549 Id. 550 Id. 551 Id. 552 Id. 553 Subcommittee Briefing with General Counsel for Phillips (Dec. 11, 2018). 554 Id. 555 Id. 556 Id. 544 545 83 behalf of someone else.557 At that point the agent will provide the details of the end purchaser so that Phillips can issue an invoice in the name of the purchaser.558 According to him this happens for several reasons, including: (1) the agent does not want to pay for the purchased item himself; and (2) agents want any legal liability for the purchase to transfer to the purchaser.559 Phillips then conducts “know your customer” checks on the actual purchaser.560 He acknowledged that there could be circumstances in which an agent may have a principal that pays the agent directly.561 This would result in what he termed a “back-to-back transaction” whereby the invoice would remain in the name of the agent, and in those instances the auction house would not be aware of the second transaction.562 He stated that Phillips’ preference is to have the person in the room bidding be the person invoiced and responsible for that sale, but sometimes it is not that simple.563 2. Mr. Baltser Purchased Art as an Agent for Steamort Mr. Baltser used a shell company to purchase art, which adds another layer of complexity to the connections between the Rotenbergs and the high-value art market. Prior to the imposition of U.S. sanctions against Arkady and Boris Rotenberg in March 2014, the majority of purchases Mr. Baltser made that the Subcommittee linked to the Rotenbergs were in the name of Steamort Limited (“Steamort”). Steamort was incorporated in Belize on August 28, 2008.564 Steamort’s principal place of business, however, was listed as 10 Great Russell Street; London, England.565 According to the company’s Certificate of Incumbency dated September 12, 2012, Steamort’s only director and shareholder is Jason Hughes, a British national residing in Cyprus.566 The Certificate of Incumbency states that Mr. Hughes holds the company’s 50,000 shares.567 That same Certificate lists ATM Secretaries Limited as the Secretary of Steamort.568 Steamort has maintained a bank account at Tallinn Business Bank in Estonia since at least April 30, 2009.569 Id. Id. 559 Id. 560 Id. 561 Id. 562 Id. 563 Id. 564 Christies-PSI-00005647. 565 Christies-PSI-00005647; Christies-PSI-00005637−46. 566 Christies-PSI-00083483−84; Christies-PSI-00083535−36. 567 Christies-PSI-00083483−84. 568 Id. 569 Christies-PSI-00020892. 557 558 84 Jason Hughes was associated with over 200 companies. According to public reporting, Mr. Hughes is associated with more than 200 companies. In 2012, an investigation by ICIJ and The Guardian uncovered “a network of individuals willing to appear on official records as directors of companies while acting only on the instructions of its real owners, who stay invisible and off-the-books.”570 The investigative report explained: The nominees play a key role in keeping secret hundreds of thousands of commercial transactions. They do so by selling their names for use of official company documents, using addresses in obscure locations all over the world.571 The ICIJ investigation identified Mr. Hughes as a nominee director linked to 210 companies, including 64 BVI companies, 144 UK companies, and 2 Irish companies.572 Mr. Baltser contracted with Steamort. According to a document produced by Christie’s to the Subcommittee, on October 27, 2008, Steamort entered into a services agreement (the “Steamort Agreement”) with Mr. Baltser.573 That agreement referred to Steamort as the “customer” and Mr. Baltser as the “consultant.”574 The Steamort Agreement called for Mr. Baltser to assist Steamort with the search, valuation, acquisition, shipping, and insurance for works of art and interior items.575 The Steamort Agreement allowed Mr. Baltser on behalf of Steamort to, in part: negotiate terms and conditions of acquisition of works of art and/or interior items; participate in auctions (including those of Sotheby’s and Christie’s), make bids at the auctions; and conclude sale and purchase, acquisition and ancillary agreements with sellers.576 The Steamort Agreement was signed by Mr. Hughes on behalf of Steamort; Mr. Baltser signed for himself.577 James Ball, Offshore secrets revealed: the shadowy side of a booming industry, GUARDIAN (Nov. 25, 2012), https://www.theguardian.com/uk/2012/nov/25/offshore-secrets-revealed-shadowy-side. 571 Id. 572 Id. 573 Christies-PSI-00005637−46. 574 Id. 575 Id. 576 Id. 577 Id. 570 85 According to the Steamort Agreement, Steamort would pay Mr. Baltser $9,500 a month for his services.578 A review of financial records confirmed that from March 25, 2010 to October 31, 2016, Steamort sent 96 wire transfers to Mr. Baltser’s account totaling $907,000.579 Most of these payments were in increments of $9,500.580 Almost all of the instructions located in the wire transfer information noted “payment for consulting services in antiques by invoice” followed by a date.581 Beginning in 2017, Mr. Baltser began receiving $9,500 payments from two companies other than Steamort, Aester Limited582 and Sinara Company LP.583 From March 2, 2017 to April 6, 2018, Aester Limited sent Baltser eight wire transfers in $9,500 increments totaling $76,000.584 From July 7, 2017 to June 18, 2018, Sinara Company sent Baltser 14 wire transfers in $9,500 increments totaling $133,000.585 In total, between March 2010 and October 2018, it appears Mr. Baltser Id. DBAG0000011; BOFA-40684 (wires from 2010 were not available). 580 Id. 581 Id. 582 Aester Limited was incorporated on December 7, 2016, in England and Wales, with a registered office address of 13 John Princes Street, Second Floor, London, England. See Certificate of Incorporation of a Private Limited Company, Company No. 10514112 (Dec. 7, 2016), https://beta.companieshouse.gov.uk/company/10514112. According to its filing history, on March 16, 2018, ATM Secretaries Limited, the same Secretary of Steamort, was appointed as the Secretary of the company. See Appointment of Corporate Secretary, Company No. 10514112 (Mar. 16, 2018), https://beta.companieshouse.gov.uk/company/10514112. On January 1, 2018, Oleksandr Baksaliar, a Ukrainian national, was listed as a “person with significant control” of the company. See Notice of Individual Person with Significant Control, Company No. 10514112 (Jul. 3, 2018), https://beta.companieshouse.gov.uk/company/10514112. According to the company’s confirmation statement filed on December 28, 2018, Aester Limited’s principal activity is the “wholesale of furniture, carpets and lighting equipment; wholesale of electronic and telecommunications equipment and parts; wholesale of wood, construction materials, and sanitary equipment; and wholesale of hardware, plumbing and heating equipment and supplies.” See Confirmation Statement, Company No. 10514112 (Dec. 28, 2018), https://beta.companieshouse.gov.uk/company/10514112. 583 Sinara Company LP was registered in the United Kingdom as limited partnership (“LP”) on January 16, 2017. Just like Aester Limited, the principal place of business was listed as 13 John Princes Street, 2nd Floor, London, England. See Application for Registration of a Limited Partnership, Company No. LP17803 (Jan. 16, 2017), https://beta.companieshouse.gov.uk/company/LP017803. The general nature of the business was listed as “tourism and ticketing services.” See Application for Registration of a Limited Partnership, Company No. LP17803 (Jan. 16, 2017), https://beta.companieshouse.gov.uk/company/LP017803. The partners of Sinara Company LP were listed as Portervale Trading Company and Reox Limited. See Application for Registration of a Limited Partnership, Company No. LP17803 (Jan. 16, 2017), https://beta.companieshouse.gov.uk/company/LP017803. On March 30, 2019, Sinara Company LP was dissolved; Portevale Trading Company signed the dissolution document. See Statement specifying the nature of a change in the limited partnership, Company No. LP17803 (Mar. 30, 2019), https://beta.companieshouse.gov.uk/company/LP017803. 584 BOFA-40684. 585 Id. 578 579 86 received $1,116,000 in fees for his consulting services under the Steamort Agreement.586 Christie’s questioned Steamort’s ownership. Prior to U.S. sanctions in March 2014, Mr. Baltser purchased art from the auction houses in Steamort’s name. The Christie’s client representative for Mr. Baltser (“Baltser Client Advisor”) told the Subcommittee that Mr. Baltser introduced himself as someone who purchased art on behalf of other people.587 The Baltser Client Advisor explained, “one thing’s for sure, he’s not buying it for himself.”588 Christie’s requested information on Steamort’s UBO from Mr. Baltser. On November 29, 2010, following the registration of Steamort’s account, Christie’s internally requested information regarding the “confirmation of the directors of the company” and “confirmation of who is the ultimate beneficial owner of the company.”589 The request went unanswered until February 7, 2012.590 On February 7, 2012, Christie’s compliance department emailed the Business Development Manager Business Development Manager about the documentation requested in 2010 for Steamort’s company directors and the ultimate beneficial owner.591 The email noted that Mr. Baltser was listed as Steamort’s owner in the client profile, but additional documentation was required.592 The Business Development Manager responded that she was unable to reach Mr. Baltser due to the time difference between London and Moscow, explaining: I have tried to get in touch with the client, but he is probably sleeping as he is supposed to bid very early in the morning our time. Steamort/Grigoriy [sic] Baltser have been regular client of Christies. Just today he participated in a sale in London and is bidding tomorrow as well. He is a very respected businessman and I personally know [him] very well. Is it possible for me to get this documentation to you after the sale. He is bidding on 19 lots!593 An AML Specialist also from Christie’s compliance department responded, “if you could follow up after the sale it would be greatly appreciated.”594 Id. Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). 588 Id. 589 Christies-PSI-00059124−27. 590 Id. 591 Id. 592 Id. 593 Id. 594 Id. 586 587 87 The next day, on February 8, 2012, the Business Development Manager informed the AML Specialist that she spoke to Mr. Baltser and explained to him that there were “some outstanding registration documents” required for Steamort.595 She told the AML Specialist that Mr. Baltser informed her that “he can get me a copy of the company’s registration card and the contract that he has with Steamort ltd. He cannot get us the name of the beneficial owner of the company as this information is unavailable to him.”596 In response, the AML Specialist asked to be put “in touch with the person who he has entered into agreement with.”597 He also reminded the Business Development Manager that “beneficial ownership is required for all business clients, and this information has been outstanding for nearly two years already.”598 The Business Development Manager forwarded the AML Specialist’s email to the Baltser Client Advisor requesting advice. The Business Development Manager stated that Mr. Baltser said he would “not bother the directors of the company with any questions and he cannot provide us with the information on who the beneficiaries are. I am stuck.”599 On February 21, 2012, the AML Specialist asked the Business Development Manager for an update regarding the required Steamort documentation.600 The following day, February 22, 2012, the Business Development Manager informed the AML Specialist that Mr. Baltser asserted he would provide everything the next week.601 A month later, on March 22, 2012, the Business Development Manager emailed the AML Specialist documents regarding Steamort, including the Baltser/Steamort 2008 Services Agreement and the Belize Certificate of Incorporation dated August 28, 2008.602 The AML Specialist replied stating that the documents confirmed the agreement between Baltser and Steamort, but did not “confirm ownership of the Belize Company.”603 The AML Specialist once again requested that the Business Development Manager confirm the owner of Steamort, stressing that “this inquiry has been open since the fall 2010 sales.”604 On March 26, 2012, the AML Specialist emailed “we will need to restrict the account from future bidding pending confirmation of beneficial ownership.”605 Id. Id. 597 Id. 598 Id. 599 Id. 600 Christies-PSI-00041928. 601 Id. 602 Christies-PSI-00041976−87. 603 Id. 604 Id. 605 Christies-PSI-00042009. 595 596 88 That same day, March 26, 2012, the Business Development Manager sought the Baltser Client Advisor’s advice; Mr. Baltser wanted to bid in an upcoming auction in New York.606 The Business Development Manager emailed: the “beneficiary” issue is still not resolved. [Mr. Baltser] says that even verbally he cannot confirm anything as he himself doesn’t know who the ultimate beneficiaries of Steamort are. He is asking if he can still bid in the sale without this document. What can we do?”607 The Baltser Client Advisor responded: “let me check, please. As soon as I have some info[rmation], I will let you know.”608 The Baltser Client Advisor responded to the AML Specialist: Christie’s London can accept the verbal confirmation of the beneficiary owner of the company (as an exception). This is a very important client of ours who actively buys in various Gold Sale categories. We worked very hard to encourage this client to participate in the sales and we feel it’s a shame to lose him now. The additional documents were requested in February 2012, the client provided them at his earliest convenience. Please advise if I should contact any other colleagues of ours to discuss this urgent matter.609 The Baltser Client Advisor confirmed to the Subcommittee that on certain occasions Christie’s would accept verbal confirmation of the beneficial owner.610 The AML Specialist emailed and requested that she “kindly disclose the beneficial owners, and Legal can conduct the checks.”611 On March 27, 2012, the Business Development Manager informed the Baltser Client Advisor that she would contact Baltser and “try to ask him to at least verbally confirm, the beneficiaries.”612 On March 28, 2012, the Business Development Manager emailed Christie’s compliance and stated that “the sole beneficiary of Steamort is Mrs. Luisa Brown.”613 The AML Specialist responded that same day: “Luisa Brown is clear, and the client is fine to bid in the upcoming sale on April 4th.”614 The AML Specialist continued: “Going forward, please note we require documentary confirmation of beneficial ownership in accordance with our Legal requirements Christies-PSI-00035437. Id. 608 Id. 609 Christies-PSI-00042041. 610 Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). 611 Christies-PSI-00099753. 612 Christies-PSI-00099719. 613 Christies-PSI-00099753. 614 Christies-PSI-00099787. 606 607 89 when opening new business accounts, and without it a risk review would have to be conducted.”615 When questioned by the Subcommittee, the Baltser Client Advisor stated that she had no knowledge of Mrs. Brown and did not know of any connection between Mrs. Brown and Mr. Baltser.616 Mr. Baltser never provided documentary evidence that Luisa Brown was the beneficial owner of Steamort.617 3. Mr. Baltser Established BALTZER Auction Agency and Club in Moscow The creation of Mr. Baltser’s art agency and private club, called BALTZER Auction Agency and Club, added another layer of complexity to the purchase of high-value art by shell companies linked to the Rotenbergs. The creation of BALTZER is further described below. Notably, Mr. Baltser’s last name is spelled with an “s” and his art agency with a “z.” In November 2012, prior to forming his agency and club, Mr. Baltser contacted Christie’s and Sotheby’s to discuss a business proposal with him through his new private club in Moscow.618 Mr. Baltser sent a letter to Christie’s explaining “we have conceived a definitive idea of creating a new company with transparent and clear ideology, which would be able to solve many problems of auction life, guaranteeing to the participants the clean title of transaction and services.”619 Mr. Baltser indicated his new company’s club would be used by “a whole class of contemporaneous collectors” that he had created and who were “the leading Moscow and Russian collectors – the active participants of auction biddings at many world marketplaces.”620 a. Christie’s Partnered with Mr. Baltser Beginning in late 2012, Christie’s and Mr. Baltser began discussing a potential partnership. On December 17, 2012, the Managing Director of Growth Markets for Christie’s in London (“Managing Director”), sent an email to Mr. Baltser to inform him that Christie’s has “all of the key people internally at Christi[e]’s together to discuss your interesting proposal. We are consolidating a list of questions which we will have with you by the close of business tomorrow evening and looking forward to continuing discussions with you.”621 The following Id. Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). 617 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 618 Christies-PSI-00016692−94; SOT-005728−30. 619 Christies-PSI-0016692−00016694. 620 Id. 621 Christies-PSI-00000649. 615 616 90 day, Mr. Baltser emailed the Managing Director that he was glad “we are moving forward with the proposal and I expect way more activity going with the auctions as soon as I get this new structure set….and I will be happy to answer and clarify all the questions in a timely manner. ”622 On December 18, 2012, the Managing Director provided Mr. Baltser with a list of questions raised by various members of the Christie’s team regarding his proposal, including: Do you intend to bid on behalf of [the art club] or on behalf of the third party? Will you be able to take on responsibility to obtain all necessary KYC/AML (Know your client and Anti money laundering) checks required? What structures are in place to ensure these protocols are met? Will we know the names of the clients or will all details be held by you and the company?623 Beginning in early 2013, representatives from Christie’s began traveling to Moscow to meet with Baltser and his team regarding the proposal.624 On January 22, 2013, Mr. Baltser sent the Baltser Client Advisor a reply to the Managing Director’s questions, stating: We are currently in the process of reviewing Russian laws and related legislation pertaining to KYC/AML. One of the key components of the KYC/AML process implies checking the identity of every client and collecting Personally Identifiable Information (PII). According to Russian legislation as well as the Confidentiality Agreement between Company and our clients, [Mr. Baltser’s agency] is obligated not to disclose [personally identifiable information] data to any third parties without the Client’s consent, except as may be required by law or court order. Considering this, we are ready to accept responsibility for such processes as KYC (know your customer) and AML (anti money laundering).625 On March 21, 2013, the Baltser Client Advisor emailed the Managing Director to inform him that she is “in regular contact with Mr. Gregory Baltser regarding various auctions and client purchases” and explained that he: keeps on asking if we are ready to proceed with our IT advice and further discussions of his proposed project. Unfortunately, Gregory cannot proceed with ordering any technical equipment and his whole Christies-PSI-00000651. Christies-PSI-00000653−54. 624 Christies-PSI-00000694. 625 Christies-PSI-00020853−56. 622 623 91 project is on hold now. Gregory is very much concerned that he is missing all major auctions in May, June and July (and is under impression we [are] no longer interested in cooperation).626 On March 22, 2013, the Managing Director replied that he needed “to get [the President of Christie’s Europe] to focus on this and will try and do so today and send an appropriate message to Mr. Baltser.”627 On March 27, 2013, the Baltser Client Advisor emailed the President of Christie’s Europe requesting his “thoughts on Gregory Baltser’s project discussed yesterday and if we could proceed with it on the IT front.”628 On April 12, 2013, the President of Christie’s Europe approved moving forward with the project with Baltser “as long as there is no corporate risk.”629 On April 24, 2013, Christie’s representatives met with Mr. Baltser in Moscow to discuss the partnership between Mr. Baltser’s art agency and Christie’s.630 Present at the meeting were Mr. Baltser, the Managing Director, the Business Development Manager, and the Baltser Client Advisor.631 The meeting resulted in a list of action items to move the partnership forward.632 i. Mr. Omelnitski Served as the Money Laundering Reporting Officer for BALTZER LLP The action items noted that Mr. Baltser “further explained that their Trustee in London was familiar with the [KYC] process and they have a system approved by the Russian government.”633 On June 5, 2013, Mr. Omelnitski emailed the Managing Director, stating that Mr. Baltser asked him “to contact [you] in regards to arranging a meeting for purposes of identifying of required [AML/KYC] compliance procedures and policies.”634 On August 12, 2013, Mr. Omelnitski emailed corporate documents regarding the “new Baltser structure” to Christie’s Senior Compliance Counsel (“Compliance Counsel”), including incorporation records pertaining to the newly created Baltzer entities – Baltzer Limited (Cyprus) and BALTZER LLP.635 The Shareholders Certificate for Baltzer Limited listed Markom Nominees LTD as shareholder.636 Christies-PSI-00036515−16. Id. 628 Christies-PSI-00036540. 629 Christies-PSI-00037583−85. 630 Christies-PSI-00000725−31. 631 Id. 632 Id. 633 Id. 634 Christies-PSI-00000764. 635 Christies-PSI-00005845−76. 636 Id. 626 627 92 Baltzer Limited also listed Markom Directors as its Director and Markom Secretaries Limited as its Secretary.637 The following day, Mr. Omelnitski emailed Christie’s in-house counsel in London a copy of BALTZER’s Compliance Procedures Manual.638 The manual stated: In addition to our existing money-laundering measures, BALTZER (“Agency”) has entered into an agreement with Markom Management Limited (“Markom”), whereby Markom will independently check, verify and handle information about the Agency’s clients.639 The manual further stated that BALTZER employees “unclear on the [customer due diligence] steps required when engaging a new client please contact Dr. Mark Omelnitski (the [Money Laundering Reporting Officer]), in the first instance for further advice.640 Christie’s compliance personnel reviewed the Manual, which identified compliance measures. The Manual indicated that BALTZER had entered into an agreement with Markom for Markom to independently check, verify, and handle information about BALTZER clients.641 The Manual states that BALTZER clients are required to comply with AML legislation, and identifies obligations arising under the UK’s 2007 Money Laundering Regulations.642 The Manual also included BALTZER’s customer due diligence measures, including customer identification procedures for individuals and entities, and provided for enhanced due diligence where the client is a politically exposed person.643 In addition, Christie’s compliance personnel noted that Markom was listed on the HMRC-Her Majesty’s Revenue & Customs-Supervised Businesses Register of companies that have registered with HRMC under the UK Money Laundering Regulations.644 ii. Christie’s Agreed to Allow Mr. Baltser to Conduct AntiMoney Laundering and Sanctions Checks on His Own Clients Mr. Omelnitski represented Mr. Baltser and BALTZER LLP in contract negotiations with Christie’s as Mr. Baltser and Christie’s exchanged drafts of the Id. Christies-PSI-00001179−1237. 639 Id. 640 Id. 641 See Christies-PSI-00001190. 642 See Christies-PSI-00001194. 643 See Christies-PSI-00001194−95. 644 See Letters from Counsel for Christie’s to Subcommittee staff (Mar. 5, 2019 and Jul. 22, 2020). 637 638 93 agreement.645 On February 4, 2014, Christie’s and BALTZER LLP entered into a letter agreement that established the terms of the two entities’ relationship.646 Mr. Baltser signed on behalf of BALTZER LLP; the Managing Director signed on behalf of Christie’s.647 As part of the agreement, Christie’s agreed to supply BALTZER LLP with a number of bidding paddles under one account.648 As stated in the contract, this enabled BALTZER LLP to “bid in Christie’s auctions simultaneously.”649 Regarding customer due diligence, the agreement established that: BALTZER LLP will conduct customer due diligence on its members to the standards required by the EU Money Laundering Directive, consents to Christie’s relying on such customer due diligence and will retain for a period of not less than 5 years, the documents and records evidencing the same. Where these documents or records are held outside the UK, copies will be made available to Christie’s or relevant enforcement agencies or regulators under court order or relevant mutual assistance procedure. BALTZER LLP will further certify to Christie’s, at the end of every trading year that it has conducted customer due diligence in accordance with these requirements and that it has no reason to suspect that any of its members are engaged in money laundering activities.650 Christie’s former Global Head of Compliance explained these provisions mirrored language she previously used as an attorney for a large U.S. financial institution in agreements between financial institutions.651 She also confirmed to the Subcommittee that this was the first time Christie’s allowed another entity to perform these types of customer due diligence checks.652 iii. BALTZER LLP Failed to Provide Anti-money Laundering and Sanctions Compliance Certifications Required by the Agreement with Christie’s As stated above, the agreement between BALTZER LLP and Christie’s required BALTZER LLP to certify annually that it conducted customer due Christies-PSI-00001516−21. Christies-PSI-00000032−34. 647 Id. 648 Id. 649 Id. 650 Id. 651 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 652 Id. 645 646 94 diligence and did not suspect its clients were engaged in money laundering.653 Obtaining that certification, as scheduled and with the proper assertions regarding anti-money laundering, became a challenge for Christie’s over the course of the relationship due to a lack of responsiveness by Mr. Omelnitski, despite numerous attempts by Christie’s to obtain the certification. As explained below, Christie’s later revised the agreement with BALTZER, in part because of Mr. Omelnitski’s failure to provide the required compliance certifications. The new agreement required Mr. Baltser to identify all winning bidders to the Christie’s Legal Department to perform KYC checks. 2014. Christie’s Compliance Counsel emailed Mr. Omelnitski on September 26, 2014 requesting “to refresh [Christie’s] due diligence in relation to the BALTZER arrangements, particularly around sanctions screening.”654 She confirmed to the Subcommittee she was referring to the increasing number of sanctions imposed by the United States and the European Union on Russian individuals and entities in response to the annexation of Crimea.655 On October 15, 2014, the Compliance Counsel emailed Mr. Omelnitski regarding the certification required in the February 2014 Letter Agreement.656 She explained that “[g]iven the rapidly evolving sanctions landscape in Russia, we are asking all our business partners to certify that they have complied and will continue to comply with relevant AML regulations including ongoing sanctions screening against…EU, UN, OFAC, etc. lists.”657 The Compliance Counsel emailed Mr. Omelnitski on October 31, 2014 to again request the report.658 Mr. Omelnitski responded and assured her that “we are preparing the report…I shall have it for you within a week.”659 On November 22, 2014, Mr. Omelnitski emailed the Compliance Counsel stating, “I am really sorry for [the] delay with the report. I am traveling extensively over the last two months. I shall be ready with it next week. Once again apologies for [the] delay.”660 Mr. Omelnitski provided the certification to the Compliance Counsel on December 2, 2014 titled, “AML Report on behalf of ‘Baltzer’ for period October 2013 through November 2014.”661 The document stated: I can confirm that our investigation did not reveal any irregularities, which were concerning. I can further confirm that despite BALTZER Christies-PSI-00000032−34. Christies-PSI-00098744. 655 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 656 Christies-PSI-00098749−52. 657 Id. 658 Id. 659 Id. 660 Christies-PSI-00088125. 661 Christies-PSI-0035361−62. 653 654 95 having a significant number of Russian clients there were no transactions, which fall under recent sanctions against Russia.662 The former Global Head of Compliance told the Subcommittee this language satisfied the certification requirement in the February 14, 2014 Letter Agreement.663 2015. A year later, on December 3, 2015, the Compliance Counsel emailed Mr. Omelnitski asking, “could you please let me have a compliance report for this year?”664 Mr. Omelnitski did not provide the requested compliance report.665 2016. The Compliance Counsel emailed Mr. Omelnitski on June 7, 2016 and again asked, “would you please be able to send me a compliance certification again similar to the report you so kindly provided at the end of 2014?”666 Mr. Omelnitski did not provide the requested report.667 On June 28, 2016, the Compliance Counsel again requested that Mr. Omelnitski “confirm when we can expect to receive your compliance certification?”668 Mr. Omelnitski failed to provide the requested compliance report.669 2017. On July 13, 2017, the Compliance Counsel emailed Mr. Omelnitski stating, “we will need the compliance certificate from you as per our agreement.”670 On October 9, 2017, Mr. Omelnitski emailed information regarding BALTZER’s purchases.671 Mr. Omelnitski’s email stated that for “transactions September 2016September 2017,” Baltzer’s agency “had the turnover of £3,269,457.30, Euro 5,775,449.40 and USD 1,402,661.60.”672 The email broke down those amounts between auction houses, clients, and suppliers.673 The email did not provide any certifications regarding compliance with AML policies as required by the Letter Agreement.674 In response, the Compliance Counsel alerted Mr. Omelnitski that “we need to talk and review the approach to client due diligence.”675 Id. Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 664 Christies-PSI-00098858. 665 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 666 Christies-PSI-00098961. 667 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 668 Christies-PSI-00098976. 669 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 670 Christies-PSI-00093620−23. 671 Christies-PSI-00093885−87. 672 Id. 673 Id. 674 Id. 675 Id. 662 663 96 The Compliance Counsel asked Mr. Omelnitski to “clarify the relationship between BALTZER and Markom” on October 20, 2017.676 She raised the fact that “BALTZER is both a client who outsources client due diligence and compliance to Markom Group as well as a related entity due to Markom Group being a director/shareholder.”677 She also addressed the issue of Mr. Baltser’s clients and suggested that “the Compliance Department is able to keep the identity of clients securely within a private and confidential file that is not accessible by anyone other than Compliance/Legal.”678 The Compliance Counsel asserted the information would “be provided solely to me in order to enable Christie’s to comply with our KYC procedures and relied on solely for this purpose.”679 She explained to the Subcommittee that she never received answers to her questions about the Markom Group’s relationship to Mr. Baltser’s companies.680 2018. The parties negotiated the terms of a new agreement, which was signed on March 19, 2018.681 The new agreement contained additional requirements, which the former Global Head of Compliance explained gave Christie’s additional control and comfort regarding purchases by BALTZER.682 For purposes of customer due diligence, the new agreement required that, “For all successful bidders, BALTZER will make the customer due diligence documentation (including any originals) promptly available to Christie’s for inspection within 10 working days after the auction and in any event, prior to the release of the relevant lot.”683 The new terms also stated that “BALTZER warrants on a continuing basis while this agreement remains in force that: i. any bid on behalf of its Members does not facilitate tax evasion or tax fraud; ii. any bid on behalf of its Members does not violate or facilitate a violation of sanctions including those administered or enforced by the US Department of Treasury’s OFAC, US Department of State, the UN Security Council, the EU, Her Majesty’s Treasury or the Hong Kong Monetary Authority; iii. it does not know, and has no reason to suspect that any buyer is under investigation for, charged with or convicted of money laundering, terrorist activities or other crimes; and iv. any shipping of lots on which Baltzer has successfully bid will be done in compliance with all applicable export and import laws.684 Christies-PSI-00094167−68. Id. 678 Id. 679 Id. 680 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 681 Christies-PSI-00005015−27. 682 Subcommittee interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 683 Christies-PSI-00099306−14. 684 Id. 676 677 97 The new agreement was dated March 19, 2018.685 The former Global Head of Compliance explained that with the new agreement, the BALTZER account was restricted until the company provided Christie’s the required customer documentation.686 She told the Subcommittee that BALTZER complied with the new requirement and provided the customer information, but continued to pay for purchases from his bank account.687 Therefore, financially, Christie’s was unable to look beyond BALTZER’s bank account to determine the source of the funds used to make purchases.688 b. Sotheby’s Declined to Sign an Agreement with BALTZER LLP, but Continued to Transact with Mr. Baltser Mr. Baltser also approached Sotheby’s to enter into an agreement with BALTZER LLP. While Sotheby’s considered the proposal, the auction house ultimately declined. According to a document produced by Sotheby’s to the Subcommittee, during the course of the negotiations with Mr. Baltser, the Sotheby’s account representative for Mr. Baltser (“Baltser Account Representative”), represented to Sotheby’s leadership that Mr. Baltser’s clients were Russian oligarchs.689 She also specifically identified Arkady and Boris Rotenberg as two of Mr. Baltser’s clients.690 But when asked by the Subcommittee to confirm that Arkady and Boris Rotenberg were Mr. Baltser’s clients, she said she had fabricated the information to encourage Sotheby’s to agree to Mr. Baltser’s proposal.691 The Subcommittee questions her truthfulness in her interview, given the Subcommittee traced funds used to purchase art by Mr. Baltser back to shell companies linked to the Rotenbergs. i. Mr. Baltser Purchased Art from Sotheby’s on Behalf of Steamort As with Christie’s, Mr. Baltser purchased art from Sotheby’s on behalf of Steamort, signing invoices on behalf of the company as early as 2011.692 The Baltser Account Representative told the Subcommittee that Mr. Baltser used Steamort to purchase items from Sotheby’s.693 She explained that it was common for purchasers to use various companies when purchasing art.694 The Baltser Id. Subcommittee Interview of Christie’s former Global Head of Compliance (Jul. 15, 2019). 687 Id. 688 Id. 689 SOT-015933. 690 SOT-018689−93. 691 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 692 SOT-000406−07; SOT-006167. 693 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 694 Id. 685 686 98 Account Representative asserted Steamort preceded BALTZER LLP and she did not believe Steamort existed anymore.695 She did not know why Mr. Baltser made the switch from Steamort to BALTZER LLP, but she thought that Mr. Baltser created BALTZER LLP around the time that he established his art agency. She also recalled that Mr. Baltser provided BALTZER LLP’s incorporation and compliance due diligence documents to Sotheby’s.696 ii. Mr. Baltser Approached Sotheby’s on his Business Proposal with BALTZER LLP In early 2013, Mr. Baltser also approached Sotheby’s about a business proposal with his art agency. On February 11, 2013, the Baltser Account Representative emailed Sotheby’s Chief Operating Officer in Europe, and other Sotheby’s associates (in pertinent part): Level 1, top transacting Russian client, Mr. Gregory Baltser (Steamort Ltd) is setting up a private club in Moscow for his friends and clients, Russian oligarchs. This club’s activity will be centered around auction house activities. He wants to involve the club members into buying at auctions. Some of these clients have already started transacting through him.697 The Baltser Account Representative explained to the Subcommittee that Mr. Baltser’s club would allow club members to view a live stream of an auction taking place outside of Moscow.698 She also noted that using the word “oligarch” at the time meant a high net worth Russian individual.699 She purposefully used the word “oligarch;” it was her job to sell Mr. Baltser’s ideas to her superiors.700 An internal Sotheby’s meeting invitation dated March 25, 2013 explained how Mr. Baltser’s club would work: The client [Mr. Baltser] would have members bid on his account. He could have members bidding against each other but under the same account, on different paddles. He would remain liable to Sotheby’s for any bids his members provide – he would control that his end to effectively manage his risk…Mostly his members would pay him and he would pay us. His members may wish to be invoiced directly – in Id. Id. 697 SOT-015933. 698 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 699 Id. 700 Id. 695 696 99 which case, if not already known to us, our KYC rules apply and they set up an account and we invoice directly – although in the event of non-payment he knows he can’t “excuse himself”…. We’d have/keep the veto – e.g. would not allow a transfer to a No Bid client.701 The Baltser Account Representative explained that Sotheby’s invoiced Mr. Baltser directly and would divide his purchases into multiple invoices if he requested.702 She asserted Mr. Baltser was the client: “That’s how he bid and that’s how he paid. As far as I’m concerned the client is Greg Baltser.”703 The Baltser Account Representative made clear that she could not register a bid for Mr. Baltser unless the payment would be coming from his company.704 However, she also explained that Mr. Baltser “would almost never tell us on behalf of who he is bidding for.”705 The Baltser Account Representative continued to advocate partnering with Mr. Baltser and forwarded several documents from Mr. Baltser to her colleagues regarding his club on May 31, 2013.706 One of the documents noted that Mr. Baltser would “obtain all the necessary KYC/AML checks required.”707 The document also noted “one of the key components of the KYC/AML process implies checking the identity of every client and collecting personally identifiable information.”708 The Baltser Account Representative recalled there were extensive discussions internally at Sotheby’s about Mr. Baltser performing the KYC checks on his own because Sotheby’s wanted to know who his clients were for KYC purposes.709 Sotheby’s asked him to reveal the identity of his clients, which “obviously made him very uncomfortable as a dealer would never do this normally.”710 She explained that Mr. Baltser was reluctant to do this, but Sotheby’s was unsure how it could satisfy itself that his clients were compliant.711 She recalled that Mr. Baltser provided additional company and compliance documents to address Sotheby’s KYC concerns. She explained that dealers and art galleries never disclose who their clients are. However, she noted that any gallery owner was responsible for running its own client due diligence.712 She stated that Sotheby’s did due diligence on Mr. Baltser as the client, but Mr. Baltser would perform the due diligence on his own clients.713 SOT-115602. Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 703 Id. 704 Id. 705 Id. 706 SOT-172699−711. 707 Id. 708 Id. 709 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 710 Id. 711 Id. 712 Id. 713 Id. 701 702 100 In summer 2013, Mr. Baltser continued to push regarding a partnership between himself and Sotheby’s.714 Through the Baltser Account Representative, Mr. Baltser requested a meeting to “address all the questions and issues we have with” his proposal.715 In the same June 6, 2013 email, the Baltser Account Representative noted that “this week Gregory has set up a record for a Russian painting at auction buying Nichols Roerich’s canvas at Bonhams for [£7.88 million],” referring to Mr. Baltser’s purchase of the Madonna Laboris.716 iii. The Baltser Account Representative Claims Arkady and Boris Rotenberg were Mr. Baltser’s Clients before they were Sanctioned As part of her continued advocacy on behalf of Mr. Baltser, and his business proposal to Sotheby’s, the Baltser Account Representative created a document in advance of a meeting on October 9, 2013 that showed Mr. Baltser’s clients included, Arkady and Boris Rotenberg.717 The Baltser Account Representative sent an email to her assistant that attached Forbes biographies of the men.718 The Deputy Chairman of Sotheby’s Europe and Chairman of Sotheby’s Russia (“Chairman of Sotheby’s Russia”) told the Subcommittee during an interview that when he saw the list that included Arkady and Boris Rotenberg, he thought, “It looked quite impressive to me—to have [] oligarchs on the list.”719 He confirmed that he believed the compliance department and the managing director of Sotheby’s would have seen the client list at the time, which was before sanctions were imposed on Arkady and Boris Rotenberg.720 However, the Baltser Account Representative stated in her Subcommittee interview that Mr. Baltser never represented to her that Arkady and Boris Rotenberg were his clients.721 She stated she fabricated the fact the Rotenbergs were clients of Mr. Baltser to convince her employer, Sotheby’s, there was “significant business potential” in the agreement with Mr. Baltser.722 She stated she located the two Rotenbergs by googling Russians on the Forbes list.723 The biographies attached to her email listed Arkady Rotenberg as number 1,153 on the Forbes list and number 30 in Russia.724 The biography for Boris Rotenberg listed Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019); SOT172576−78. 715 SOT-172576−78. 716 Id. 717 SOT-018689−93. 718 SOT-018689−93. 719 Subcommittee interview of the Deputy Chairman of Sotheby’s Europe and Chairman of Sotheby’s Russia (May 30, 2019). 720 Id. 721 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 722 Id. 723 Id. 724 SOT-018689−93. 714 101 him as number 1,031 on the billionaires list and number 69 in Russia.725 The Subcommittee questions the truthfulness of Baltser Account Representative’s answer given that funds used by Mr. Baltser to purchase art were traced back to shell companies linked to the Rotenbergs. In order to facilitate a decision on Mr. Baltser’s proposal, the Baltser Account Representative and the Chairman of Sotheby’s Russia drafted a list of pros and cons.726 Once they both agreed on the list, they sent the list to the then Managing Director for Sotheby’s Europe (“Managing Director”) on October 15, 2013.727 The list included the following positive points they associated with the proposed business arrangement with Mr. Baltser: 1. Baltser has a client base that wants to buy in our sales and have already been buying using Baltser’s services. We encourage his bids and he pays on time. 2. He declared his plans willingly and honestly to us. He is regulated by the Russian authorities and before accepting to deal with any of his potential clients he has to go through KYC and do all due diligence. 3. His logistics operation, to make buying in auction houses easy and fun, appeals to a number of wealthy Russians who trust him. Among his clients are Forbes list businessmen. 4. On several occasions the identity of his clients has been revealed to us and we set up personal accounts for these clients. Some have already started transacting with us directly.728 The list also included “concerns:” 1. We do not always know who his clients are. We do however know Baltser well and we have transacted with him for a number of years. He is well known to the dealer community for the last 15 years. We assume we are happy that he transacts as usual, if we decide not to recognize his new plans. 2. He can manipulate a market by a ring. There is no evidence at all to support this. Anyway this is not in his interest as the more clients he gets to bid the more fees he can charge. 3. His business becomes too powerful and he dictates terms to us. We don’t think that will happen as we do not see this business growing into 100s of clients. Exclusivity is important to Russians. Also there are too many factions between the powerful elite who will always use Id. SOT-051481–82. 727 SOT-018663−64. 728 Id. 725 726 102 different agents and dealers. There are many more powerful buyers in the market and full [buyer’s premium] is paid by all.729 The email to the Managing Director continued: Whilst we must be fully compliant it does seem duplicitous that we allow him to bid today but have worries when he explains his ambitions. Furthermore we allow other European and US agents that bid on behalf of clients and we do not demand to know who their clients are.730 The email then asked the question: “Should we be partners?”731 And concluded, “In our opinion, no. If Baltser has more clients bidding in our sales we benefit anyway. If his business succeeds and we think this is a winning formula we should then consider changing our office model.”732 As with Christie’s, Mr. Omelnitski provided documentation of anti-money laundering and client due diligence policies and procedures to Sotheby’s on behalf of Mr. Baltser, including a 50-page BALTZER LLP compliance procedures manual and customer due diligence measures, as well as BALTZER LLP incorporation documents.733 He also advocated for Mr. Baltser saying “Gregory is really anxious to commence co-operation with Sotheby’s” on October 11, 2013.734 The Baltser Account Representative told the Subcommittee she understood that Mr. Omelnitski was Mr. Baltser’s representative in the United Kingdom and that his role appeared mainly to involve helping Mr. Baltser set up BALTZER LLP.735 On October 28, 2013, the Chairman of Sotheby’s Russia emailed the Managing Director to request a date to meet with Mr. Baltser in Moscow.736 He responded, “sure but not before I have heard your convincing arguments as to how we protect our position re ‘his’ clients!”737 The Chairman of Sotheby’s Russia responded referencing his October 15, 2013 email of positive points and concerns and noted “I saw [Mr. Baltser] last week with [the Baltser Account Representative] and he has agreed to reveal the names of his clients.”738 Id. Id. 731 Id. 732 Id. 733 SOT-005232−82. 734 SOT-004597−99. 735 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 736 SOT-018624. 737 Id. 738 Id. 729 730 103 iv. Sotheby’s Declined Mr. Baltser’s Business Proposal Sotheby’s corporate headquarters in New York ultimately decided not to sign an agreement with Mr. Baltser.739 The Chairman of Sotheby’s Russia told the Subcommittee that one of the reasons Sotheby’s declined Mr. Baltser’s business proposal was due to concern over his undisclosed clients.740 The concerns extended beyond the identity of his clients to their potential to manipulate market prices by coordinating their bids at Sotheby’s auctions.741 He also explained that Sotheby’s wanted to have more control over the transactions by directing them to occur directly with Sotheby’s, and Mr. Baltser’s proposal overall was more advantageous for Mr. Baltser than Sotheby’s.742 Even though Sotheby’s declined Mr. Baltser’s proposal, Mr. Baltser continued to bid in auctions and purchase art from the auction house. The Chairman of Sotheby’s Russia explained the only difference was that Sotheby’s declined Mr. Baltser’s business proposal to create a direct cable for broadcasting high quality images of items being auctioned by Sotheby’s into Mr. Baltser’s private art club.743 c. Mr. Baltser Purchased Art with Funds Traced to Rotenberglinked Shell Companies The evidence indicates that the Rotenbergs used Mr. Baltser as their art adviser and agent both before and after the imposition of U.S. sanctions in March 2014. Each purchase followed the same pattern. Mr. Baltser purchased the art and took title either through Steamort or later, his own company BALTZER LLP. Then, one of the shell companies highlighted above (Highland Business or Highland Ventures) would wire funds to Steamort to pay for the piece of art. Prior to U.S. sanctions, Mr. Baltser routinely purchased art in the name of Steamort; Steamort would also wire the funds directly to the seller. Following the imposition of U.S. sanctions, which coincided with the establishment of BALTZER, Mr. Baltser added a step. Steamort generally wired funds to purchase the art to BALTZER LLP. Mr. Baltser would then take title for the purchased artwork in the name of BALTZER LLP and wire the funds to the auction house from his BALTZER LLP account. There were exceptions to this post-sanctions practice. One such exception documented below involved Highland Ventures taking title to a $7.5 million SOT-201809−11; SOT-01893; Subcommittee interview of the Deputy Chairman of Sotheby’s Europe and Chairman of Sotheby’s Russia (May 30, 2019). 740 Subcommittee interview of the Deputy Chairman of Sotheby’s Europe and Chairman of Sotheby’s Russia (May 30, 2019). 741 Id. 742 Id. 743 Id. 739 104 Magritte painting, while another shell company linked to Mr. Omelnitski (Advantage Alliance) wired the payment directly to the dealer. The Subcommittee traced those funds to a company owned by Arkady Rotenberg. 4. Examples of Pre-Sanctions Art Purchases Several examples of how the Rotenbergs purchased art pre-sanctions through the services of Mr. Baltser follow. a. Nicholas Roerich’s And We Continue Fishing Date of Sale Price Auction House Purchaser of Record November 1, 2011 $1,426,500 Sotheby’s New York Steamort Limited Transaction background. On November 1, 2011, Sotheby’s held an auction entitled “Important Russian Art.”744 Nicholas Roerich’s And We Continue Fishing from the Bolling Family Collection was part of that sale and was projected to sell for between $1.2 million and $1.5 million.745 The Sotheby’s website noted that the painting was “the fourth of six paintings in Roerich’s Sancta series.”746 Further, the website stated, “These Nicholas Roerich’s And We Continue Fishing (Photo allegorical paintings are meant to Credit: Sotheby’s) represent a spiritual journey, and they are unique within the artist’s 1920s oeuvre for their distinctively Russian setting and imagery.”747  Mr. Baltser purchased the painting for $1,426,500 in the name of Steamort.748 Following the purchase, Sotheby’s invoiced Steamort for the net Important Russian Art, SOTHEBY’S (Nov. 1, 2011), https://www.sothebys.com/en/auctions/ecatalogue/2011/important-russian-art/lot.18.html; SOT000299−301. 745 Id. 746 Id. 747 Id. 748 SOT-000406−07. 744 105 amount of $1,426,500.749 That amount included the $1,200,000 hammer price as well as the $226,500 buyer’s premium.750 Origin of funds used for purchase. On November 16, 2011, Highland Business wired $1,496,862.12 from its account with Societe Generale to Steamort’s Tallinn Business Bank account.751 The notes for the wire transfer stated “payment under finder agreement [dated October 26, 2011].”752 Five days later, on November 21, 2011, Steamort wired $1,415,808.20 from its Tallinn Business Bank account to Sotheby’s New York account at JPMorgan Chase.753 The wire transfer instructions stated “[payment] by statement of account [dated November 2, 2011], Account N 51245607 for subjects of interior.”754 Owner. When questioned, the Sotheby’s Baltser Account Representative told the Subcommittee that she did not know for whom Mr. Baltser purchased this painting, nor did she recall asking him to reveal the identity of the buyer.755 b. Pierre-August Renoir’s Nature Morte aux Fruits Date of Sale Price Auction House Purchaser of Record May 14, 2012 $1,750,000 Sotheby’s New York Steamort Limited Transaction background. On May 14, 2012, Mr. Baltser purchased Renoir’s Nature Morte aux Fruits for $1,750,000 on behalf of Steamort through a private sale.756 The invoice noted the sale was for Sotheby’s sale number: “NOPT122012.”757 Origin of funds used for purchase. On May 16, 2012, Highland Business wired $1,989,000 from its Societe Generale account to Steamort’s Tallinn Business Bank Account.758 The wire transfer instructions noted that the payment was “according to finder agreement dated [May 14, 2012].”759 On May 21, 2012, Steamort wired $1,750,000 from its Tallinn Business Bank account to Sotheby’s Id. Id. 751 SGA_PSI_00506−29, transaction no. 19453397. 752 Id. 753 DBAG0000024, line 256; JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Steamort, line 62. 754 Id. 755 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 756 SOT-006167. 757 Id. 758 SGA_PSI_00506−29, transaction no. 20892304. 759 Id. 749 750 106 New York account at JPMorgan Chase.760 The wire transfer instructions noted the payment was for “Sale: NOPT12 -2012, Lot 0128 for subjects of interior.”761 Owner. When questioned, the Sotheby’s Baltser Account Representative told the Subcommittee that she did not know for whom Mr. Baltser purchased this painting, nor did she recall asking him to reveal the identity of the buyer.762 Shipment. Art Courier managed the shipment of the painting by Dietl to Germany for storage at the Hasenkamp art storage facility.763 c. Pierre-Auguste Renoir’s Femmes dans un Paysage Date of Sale Price Auction House Purchaser of Record June 11, 2012 $2,800,000 Sotheby’s Hong Kong Steamort Limited Transaction background. In May 2012, the Sotheby’s Baltser Account Representative learned of a private sale of Pierre-Auguste Renoir’s Femmes dans un Paysage in Hong Kong.764 The seller wanted $3,300,000 for the painting.765 On June 7, 2012, the Baltser Account Representative said in an email that her client “seems to be interested however he is not ready to pay 3.3. His offer is 2.7 USD.”766 On June 8, 2012, the Sotheby’s representative for the seller in Hong Kong emailed the Baltser Account Representative confirming that “we have a go ahead to sell at $2.8 million.”767 The email continued “we can bill in [Hong Kong] where there is no tax.”768 However, the Baltser Account Representative responded that “the buyer – Steamort Ltd – would like the deal to be done in [New York].”769 She then emphasized “it is very important to the buyer. The lot will then be shipped to Europe or Russia.”770 The Baltser Account Representative told the Subcommittee she did not recall why it was important for the deal to be done in New York.771 DBAG0000024, line 320; JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Steamort, line 72. 761 Id. 762 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 763 Dietl Production (Jun. 28, 2018) (409911 Air Export JFK to FRA). 764 SOT-043264−67. 765 Id. 766 Id. 767 Id. 768 Id. 769 Id. 770 Id. 771 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 760 107 On June 11, 2012, Mr. Baltser – on behalf of Steamort – purchased the painting for $2,800,000.772 Origin of funds used for purchase. On June 20, 2012, Highland Business wired $3,396,600 from its account at Societe Generale to Steamort’s Tallinn Business Bank account.773 The wire transfer instructions noted: “according to finder agreement.”774 On June 22, 2012, Steamort transferred $2,800,000 from its Tallinn Business Bank to Sotheby’s Hong Kong account at HSBC Hong Kong.775 The payment notes for the wire transfer stated: “for subjects of interior.”776 Owner. When questioned, the Sotheby’s Baltser Account Representative told the Subcommittee that she did not know for whom Mr. Baltser purchased this painting, nor did she recall asking him to reveal the identity of the buyer.777 Shipment. Art Courier managed the shipment of the painting by Dietl for “temporary storage at [Cologne],” Germany at the Hasenkamp art storage facility.778 d. René Magritte’s Le Rendez-Vous and Salvador Dali’s Papillons Date of Sale Price Auction House Purchaser of Record November 7, 2012 $869,000 Sotheby’s New York Steamort Limited Transaction background. On November 7, 2012, at Sotheby’s Impressionist & Modern Art Sale, Mr. Baltser purchased René Magritte’s Le Rendez-vous and Salvador Dali’s Papillons in the name of Steamort.779 Le Rendez-vous sold for $662,500, which included the hammer price of $550,000 and buyer’s premium of $112,500.780 Papillons sold for $206,500, which included the hammer price of $170,000 and buyer’s premium of $36,500.781 Together the cost of the two paintings totaled $869,000.782 SOT-006071; SOT-002387−91. SGA_PSI_00506−29, transaction no. 21173983. 774 Id. 775 DBAG0000024, line 339. 776 Id. 777 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 778 SOT-041359−60; SOT-041364. 779 SOT-000402−05. 780 Id. 781 Id. 782 Id. 772 773 108 Origin of funds used for purchase. On November 13, 2012, Highland Business wired $903,180.11 from its account at Societe General to Steamort’s Tallinn Business Bank account.783 The wire transfer instructions noted: “according to finder agreement.”784 On the same day, Steamort wired $869,000 from its Tallinn Business Bank to Sotheby’s New York account at JPMorgan Chase.785 The wire transfer noted it was “for subjects of interior.”786 René Magritte’s Le Rendez-Vous (Photo Credit: Sotheby's) Owner. When questioned, the Sotheby’s Baltser Account Representative told the Subcommittee that she did not know for whom Mr. Baltser purchased these paintings, nor did she recall asking him to reveal the identity of the buyer.787 Shipment. Art Courier managed the shipment for both the paintings by Dietl to Germany for storage at the Hasenkamp art storage facility.788 e. Salvador Dali’s Monstruo Blando Adormecido Date of Sale Price Auction House Purchaser of Record December 13, 2012 $2,350,000 Sotheby’s London Steamort Limited Transaction background. On December 13, 2012, Sotheby’s London invoiced Steamort through Mr. Baltser for the purchase of Salvador Dali’s Monstruo Blando Adormecido for $2,350,000 in a private sale.789 The invoice was numbered: 92179804.790 SGA_PSI_00-00506−29, transaction no. 22320799. Id. 785 DBAG0000024, line 394; JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Steamort, line 87. 786 Id. 787 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 788 DIETL 409911 (Air Export JFK to FRA). 789 SOT-005674−76. 790 Id. 783 784 109 In past instances, Mr. Baltser signed the purchase contract on behalf of Steamort. For this purchase, however, the purchase contract was signed by “A. Solovyeva.”791 The Baltser Account Representative emailed Mr. Baltser: “Sorry, this is not your signature. The accountants cannot accept it. Please sign it yourself and send me again.”792 Instead, Mr. Baltser sent a document that listed Alevtina Solovyeva as holding the power of attorney for Steamort.793 He also provided Ms. Solovyeva’s Russian passport.794 Origin of funds used for purchase. On December 14, 2012, Highland Business wired $3,113,550 from its Societe Generale account to Steamort’s account at Tallinn Business Bank.795 The wire transfer noted: “according to finder agreement.”796 On December 17, 2012, Steamort wired $2,350,000 from its Tallinn Business Bank to Sotheby’s London account at HSBC London.797 The wire transfer noted: “pmt by invoice 92179804 [dated December 13, 2012] for subjects of interior.”798 Owner. When questioned, Sotheby’s Baltser Account Representative told the Subcommittee that she did not know for whom Mr. Baltser purchased this painting, nor did she recall asking him to reveal the identity of the buyer.799 Shipment. A November 29, 2012 letter from Sotheby’s London to Mr. Baltser confirmed the export license for the painting and also noted, “The next step is for the painting to be shipped to Cologne as per your discussions with [Sotheby’s Baltser Account Representative].”800 Art Courier managed the shipment of the painting to Germany for storage at the Hasenkamp art storage facility.801 SOT-005630−31. SOT-005690. 793 SOT-005686−87. 794 SOT-5681−82. 795 JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Highland Business Group, line 15. 796 Id. 797 DBAG0000024, line 409. 798 Id. 799 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 800 SOT-015974 801 SOT-005713−14. 791 792 110 f. Lyonel Feininger’s Brucke II; Salvador Dali’s Sans Titre: New Accessories; and Man Ray’s Le Trop-Plein Date of Sale Auction House Purchaser of Record February 4, 2014 Christie’s London Baltzer Limited Transaction background. On February 4, 2014, Christie’s London held its Impressionist/Modern Evening Sale.802 During that sale, Mr. Baltser purchased Lyonel Feininger’s Brucke II for £4,786,500.803 Baltser Limited took title of the painting.804 In another Christie’s sale that same day, The Art of the Surreal, Mr. Baltser purchased Salvador Dali’s Sans Titre: New Accessories and Man Ray’s Le trop-plein.805 Baltzer Limited took title for those two paintings as well.806 Origin of funds used for purchase. The Subcommittee did not receive wire information regarding the above paintings since Mr. Baltser purchased the paintings in British pounds in London. However, as explained below, it is likely Mr. Baltser purchased these paintings on behalf of the Rotenbergs. On August 30, 2015, an employee of Mr. Baltser emailed a Christie’s employee a list of “links of our Client’s works.”807 Mr. Baltser’s employee explained “If you see any opportunities to promote these works or to make this collection more valuable please let me know.”808 The list of 31 works included Sans Titre, Le Trop-Plein, and Brucke II.809 The Subcommittee traced funds used to purchase 16 of these paintings to Rotenberg-linked shell companies. Specific to Brucke II, Mr. Baltser’s employee noted “The client wants to send this painting to an exhibition. Do you have any ideas? Do you have any news re Brucke 0? Is it possible to make an offer to the owner?”810 Owner. The Christie’s Baltser Client Advisor told the Subcommittee Mr. Baltser bid for these paintings over the phone with her.811 She stated someone was with Mr. Baltser during the bidding, but she did not recognize the individual’s voice Sale 1505: Impressionist/Modern Evening Sale, CHRISTIE’S (Feb. 4, 2014), https://www.christies.com/salelanding/index.aspx?intsaleid=24583&saletitle=. 803 Christies-PSI-00046436; see also Sale 1505: Impressionist/Modern Evening Sale, Lot 36, CHRISTIE’S (Feb. 4, 2014), https://www.christies.com/lotfinder/lot/lyonel-feininger-5766388details.aspx?from=salesummery&intobjectid=5766388. 804 Christies-PSI-00046436. 805 Christies-PSI-00046433-35. 806 Id. 807 Christies-PSI-00062223−26. 808 Id. 809 Id. 810 Id. 811 Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2015). 802 111 or ask who was with Mr. Baltser.812 She did not know for whom Mr. Baltser purchased the paintings.813 As explained below, Mr. Baltser attempted to sell the Brucke II five years later at an auction at Sotheby’s in February 2019.814 However, prior to the auction, Sotheby’s withdrew Brucke II from the auction due to a lack of interest in bidding on the painting.815 5. The United States Sanctioned Arkady and Boris Rotenberg on March 20, 2014 As stated above, the United States government imposed sanctions on certain “Russian government officials and members of the inner circle” on March 20, 2014 in response to Russia’s annexation of Crimea, including Arkady and Boris Rotenberg.816 Despite these sanctions, Mr. Baltser’s business model did not change. He continued to purchase art just as he did before the United States imposed sanctions on the Rotenbergs and several entities associated with them.817 This continued despite the auction houses taking actions to block transactions by sanctioned individuals. Sotheby’s. Boris Rotenberg and his wife, Karina, were listed in the Sotheby’s client directory.818 Sotheby’s records reflect only one transaction regarding Boris or Katrina Rotenberg, which was Karina’s art purchase for approximately £3,000 in May 2012.819 In February 2014, the month before U.S. sanctions were imposed, the Baltser Account Representative requested that Sotheby’s consider Boris and his wife “level 2” collectors.820 Sotheby’s considered clients given this designation “high value clients or collectors” with “a total transaction value greater than or equal to $5 [million], but less than $25 [million] in the last three years” or “a documented collection value of between $5 and 25 [million].”821 Id. Id. Counsel for Christie’s explained that this is consistent with historic practice for an auction house not to routinely ask dealers for the identity of dealers’ clients because of concerns that auction houses would poach dealers’ clients. See Letter from Counsel for Christie’s to the Subcommittee (July 22, 2020). 814 SOT-202107−09. 815 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 816 Press Release, U.S. Dep’t of Treasury, Treasury Sanctions Russian Officials, Members of the Russian Leadership’s Inner Circle, and An Entity for Involvement in the Situation in Ukraine, (Mar. 20, 2014), https://www.treasury.gov/press-center/press-releases/pages/jl23331.aspx. 817 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019); Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). 818 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 819 SOT-38579–85; SOT-038569–70. 820 SOT-061223. 821 SOT-059764–65. 812 813 112 When asked by a Sotheby’s colleague over email about Boris and Karina Rotenberg’s collection interests, the Baltser Account Representative replied that they collected “Russian [works of art]” and “Sculpture (bronze).”822 The Baltser Account Representative told the Subcommittee she could not remember why she requested that Sotheby’s upgrade the Rotenbergs to level 2 clients when they had not made any purchases in the past two years before the request.823 She commented she believed moving them to a level 2 client better reflected their significant potential to purchase artwork because of their wealth, and would give them access to preferred events.824 The Baltser Account Representative said she never worked directly with Karina or Boris Rotenberg or met them in person.825 Internal emails indicate that Sotheby’s blocked Boris Rotenberg from purchasing or consigning with the auction house following the March 20, 2014 sanctions.826 On March 21, 2014, a Sotheby’s employee emailed the Baltser Account Representative the list of 16 newly sanctioned Russian individuals from the U.S. Treasury Department that included Arkady and Boris Rotenberg and stated, “There are some familiar names on this list. I hope it won’t effect [sic] the rest of our business.”827 In another email to the Baltser Account Representative, another Sotheby’s employee noted, “quite a few of our clients are affected by this.”828 According to the Baltser Account Representative, transactions with Boris Rotenberg were subsequently blocked.829 Christie’s. Christie’s General Counsel explained to the Subcommittee that following the imposition of U.S. sanctions on Russia in March 2014, Christie’s immediately recognized these sanctions posed a new “high risk” for them.830 She observed that Christie’s has a lot of Russian clients who are high net worth individuals.831 In response to the imposition of sanctions, Christie’s Compliance Manager for the Americas added that Christie’s screened their client lists against the revised SDN lists and restricted any accounts they identified in their system.832 He noted that Christie’s increased its scrutiny of Russian art sales in the United Kingdom.833 Neither Christie’s General Counsel nor the Compliance Manager for the Americas were aware of any specific guidance provided to Christie’s employees in response to the March 2014 sanctions.834 SOT-061223. Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 824 Id. 825 Id. 826 SOT-202066−69. 827 SOT-202071−74. 828 SOT-202066−69. 829 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 830 Subcommittee Briefing with Christie’s Employees (Feb. 8, 2019). 831 Id. 832 Id. 833 Id. 834 Id. 822 823 113 A Christie’s employee circulated the U.S. Treasury Department’s announcement of the April 28, 2014 sanctions to a group with the note “I thought it might [be] interesting to read.”835 Another Christie’s employee responded “not good news unfortunately.”836 Still another Christie’s employee, Managing Director of Christie’s Russia, on the email chain responded: No. The message internally though should I think focus on the fact that there is huge amounts of money currently being repatriated to Russia from overseas. This will lead to a lot of money needing to be invested in ‘safe’ assets which means being able to sell [post sanctions] locally becomes increasing interesting. And hence the need for the new office is crucial. It’s also a strong message of support from Senior management that even in this economic climate Christie’s is still investing in its Russian operation by going ahead with the new office. So look at the positives.837 While another Christie’s employee responded that “its just more familiar faces are on the sanctions list,” the Managing Director of Christie’s Russia agreed, but wrote “I’m just telling you what I’m telling everyone in London…to fend off the ‘poor you’ ‘poor russia’ chat!”838 On May 19, 2014, Christie’s blocked Arkady and Boris Rotenberg from Christie’s spring exhibition marketing.839 6. Examples of Post-Sanctions Art Purchases Despite blocking Arkady and Boris Rotenberg from buying or selling directly with their businesses, U.S. auction houses continued to do business with Mr. Baltser, even though he was known to be participating in art deals with wealthy Russian oligarchs, who could be subject to U.S. sanctions. Sotheby’s, in particular, was on notice given that the Sotheby’s Baltser Account Representative told members of Sotheby’s management that Arkady and Boris Rotenberg were Mr. Baltser’s clients. The Subcommittee also identified transactions with a private dealer and a public gallery based in New York linked to Rotenberg shell companies. In total, the Subcommittee identified $18,405,625 in art purchased in the months following the Rotenbergs being sanctioned by the United States. Examples of post- Christies-PSI-00035164−69. Id. 837 Id. 838 Id. 839 Christies-PSI-00101137−74. 835 836 114 sanctions transactions facilitated by Mr. Baltser linked back to the Rotenbergs follow.840 a. Sotheby’s New York Impressionist and Modern Art Day Sale: Multiple Works Date of Sale Price Auction House Purchaser of Record May 8, 2014 $6,806,125 Sotheby’s New York BALTZER LLP Transaction background. On May 8, 2014, less than two months after the United States imposed sanctions on Russia, Sotheby’s New York held its Impressionist & Modern Art Day Sale.841 The sale brought in $66 million, “marking a new record result for this auction in New York.”842 At that sale, Mr. Baltser purchased the following items listed on invoice number 92320018:843 Description Henry Moore, Figures Marc Chagall, Femme et Enfant Lyonel Feininger, Ulla Lyonel Feininger, Yellow Ship on Red Sea Lyonel Feininger, Steile Strasse Georges Braque, Pichet et Journal Tsuguharu Foujita, Portrait de Jeune Femme (Hanka Zborowska) Maurice de Vlaminck, La Seine à Chatou Tamara de Lempicka, Le Coquillage Hammer Price $500,000 $980,000 $170,000 $60,000 Buyers Premium $105,000 $201,000 $39,000 $15,000 Total $605,000 $1,181,000 $209,000 $75,000 $200,000 $2,500,000 $290,000 $45,000 $465,000 $63,000 $245,000 $2,965,000 $353,000 $475,000 $100,000 $575,000 $450,000 $95,000 $545,000 While art is the focus of this report, the Subcommittee also reviewed transactions related to Mr. Baltser purchasing wine through the auction houses. In one instance, Mr. Baltser facilitated Christie’s shipment of wine directly to a residence linked to Igor Rotenberg after Igor was sanctioned by the United States. In August 2018, an employee of Mr. Baltser requested that Christie’s ship $32,000 worth of wine to the following address: Case dell’Olmo in Monte Argentario, Italy. See Christies-PSI-00080314. Public information suggests this residence belongs to Igor Rotenberg. See Enea LandArt LLC Invoice, Mr. and Mrs. Rotenberg, Casa dell Olmo, Monte Argentario, Italy, https://novayagazeta.ru/storage/b/2014/09/26/Dok4.pdf. 841 Impressionist & Modern Art Day Sale, SOTHEBY’S (May 8, 2014), https://www.sothebys.com/en/auctions/2014/impressionist-modern-art-day-sale-n09140.html. 842 Id. 843 SOT-028595−98. 840 115 The invoice number 92320018 reflected the total purchase of art by Mr. Baltser as $6,753,000.844 Mr. Baltser also purchased Emile Othon Friesz’s La sieste for $53,125, which included a hammer price of $42,500 and a buyer’s premium of $10,625.845 Sotheby’s numbered the invoice for La sieste as 92320019.846 Together, both invoices totaled $6,806,125. The Sotheby’s Baltser Account Representative told the Subcommittee that Mr. Baltser had participated in the auction over the telephone with her.847 Origin of funds used for purchase. On May 27, 2014, Steamort wired $3,956,825 from its Tallinn Business Bank account to BALTZER LLP’s Barclays account.848 The wire transfer noted it was “part Tsuguharu Foujita’s, Portrait payment by invoice 40 [dated May 16, 2014] for subjects de Jeune Femme/Hanka of interior.”849 And on June 3, 2014 Steamort wired Zborowska (Photo Credit: Sotheby’s) $2,965,000 from its Tallinn Business Bank account to BALTZER LLP’s Barclays account.850 That wire transfer stated, “payment by invoice 40 [dated May 16, 2014] for subjects of interior.”851 Together the wires totaled $6,921,825. On June 3, 2014, BALTZER LLP wired $6,806,125 from its Barclays bank account to Sotheby’s New York JPMorgan Chase account.852 The payment details noted that the wired funds were for invoices “92320018” and “92320019.”853 Owner. When asked about these purchases, the Sotheby’s Baltser Account Representative stated she assumed Mr. Baltser was purchasing these lots on behalf George Braque's Pichet et Journal (Photo Credit: Sotheby's) Id. SOT-028593−94. 846 Id. 847 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 848 DBAG0000024, line 559; BARC_006850, line 10. 849 Id. 850 DBAG0000024, line 561; BARC_006850, line 11. 851 Id. 852 JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Baltser, Line 11; BARC_006850, line 12. 853 Id. 844 845 116 of one or more of his clients.854 She recalled hearing Mr. Baltser talking to his client on the phone call during the auction and described “another Russian male voice in the background.”855 She did not know, however, with whom Mr. Baltser interacted during the auction.856 Shipment. Art Courier managed the shipment of the paintings by Dietl to Germany for storage at the Hasenkamp art storage facility.857  b. Works by Yakov Georgievich Chernikhov Date of Sale Price Auction House Purchaser of Record June 4, 2014 $598,000 Bonhams New York BALTZER LLP Transaction background. On June 4, 2014, Bonhams held an auction in New York titled, “The Story of the 20th Century.”858 The auction examined “the last century from several angles, including history & politics, art & literature and science & technology, closing with a private collection of materials related to the history of computing.”859 The description of the auction continued: “The Arts & Literature section is anchored by an important graphic archive of Soviet architect and futuristic visionary, Yakov Chernikov, consisting of more than 1,000 original and richly detailed illustrations (estimate $350,000-450,000).”860 The auction was held in Bonhams’ Madison Avenue salesroom in New York.861 At the auction, Mr. Baltser purchased Lot 28 for $425,000, which included the $350,000 hammer price and a $75,000 buyer’s premium.862 Lot 28 included architectural drawings and sketches by Chernikhov.863 Mr. Baltser also purchased Lot 29 for $173,000, which included the $140,000 hammer price and a $33,000 buyer’s premium.864 Lot 29 included Chernikhov’s “unpublished journals, Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). Id. 856 Id. 857 DIETL 45253 (Air Export JFK to CGN). 858 Press Release, Bonhams, The Story of the 20th Century (Jun. 4, 2014), https://www.bonhams.com/press_release/16539/. 859 Id. 860 Id. 861 Id. 862 BON000569. 863 Lot 28, Yakov Georgievich Chernikhov, BONHAMS (Jun. 4, 2014), https://www.bonhams.com/auctions/21652/lot/28/?category=list&length=186&page=1. 864 BON000569. 854 855 117 sketchbooks, and treatises.”865 Bonhams invoiced BALTZER LLP for both lots.866 The invoice noted “auction details: BOK14061NY – 21652” and the Client number for BALTZER LLP as 20353471.867 Origin of funds used for purchase. On June 16, 2014, Highland Ventures wired $612,950 from its Gazprombank account in Moscow to Steamort’s Tallinn Business Bank account.868 The wire transfer noted, “as per invoice 50 [dated June 9, 2014].”869 On June 20, 2014, Steamort wired this same amount from its Tallinn Business Bank account to BALTZER LLP’s Barclays bank account.870 That wire transfer noted, “payment by invoice 61 [dated June 19, 2014] for subjects of interior.”871 On July 8, 2014, BALTZER LLP wired $598,000 from its Barclays bank account to Bonhams’ account at City National Bank.872 The wire instructions noted “as per invoice 19146328 for sale BOK14061NY-21652 Client ID 20353471.”873 Shipment. Art Courier handled the shipment for both Chernikhov lots, which were shipped by Dietl to Germary for storage at the Hasenkamp art storage facility.874 c. René Magritte’s La Poitrine Date of Sale Price Private Sale Purchaser of Record June 2014 $7,500,000 Private Art Dealer Highland Ventures Group Limited Transaction background. Magritte’s La Poitrine was sold through a private art dealer located in New York City (“Private Dealer”). The Private Dealer explained to the Subcommittee during her interview that the sale of La Poitrine started like most of her sales, in that the seller’s agent reached out to her to ask if she knew anyone interested in buying the painting.875 Initially, the painting was located in Pittsburgh, Pennsylvania, but was transported to Cirkers Warehouse in Lot 29, Yakov Georgievich Chernikhov, BONHAMS (Jun. 4, 2014), https://www.bonhams.com/auctions/21652/lot/29/?category=list&length=12&page=3. 866 BON000569. 867 Id. 868 DBAG0000024, line 565. 869 Id. 870 DBAG0000024, line 568; BARC_006850, line 20. 871 Id. 872 BARC_006850, line 28. 873 Id. 874 DIETL 458323 (Air Export JFK to FRA). 875 Id. 865 118 New York City where the Private Dealer viewed it.876 The Private Dealer explained that she did extensive due diligence to ensure the provenance of the painting. That due diligence included researching the artwork using well-established industry resources, viewing the painting herself, confirming based on information available to her and an analysis of the label on the back of the painting that the seller was the owner and the work was authentic, and consulting legal counsel.877 The Private Dealer explained to the Subcommittee that she contacted Olga Vaschilina to see if she knew of an interested buyer for La Poitrine because she had known Ms. Vaschilina was looking for a Magritte.878 The Private Dealer told the Subcommittee that she knew Ms. Vaschilina from her time previously working for another gallery.879 The Private Dealer stated that Ms. Vaschilina was well known to that gallery, as well as in the industry, and had made a number of purchases there.880 However, the Private Dealer had never sold a piece to Ms. Vaschilina before contacting her regarding La Poitrine.881 The Private Dealer emailed Ms. Vaschilina on May 9, 2014: “[A]ttached is a poor photo of the Magritte that has been offered to me for $9,500,000. I think it is a very good picture but too expensive. If you have interest I can see if there is flexibility. It is in NYC as well!”882 Following several emails regarding negotiations on price, the Private Dealer emailed Ms. Vaschilina on May 19, 2014: “I believe the owner will take $6,750,000 if payment is fast so we can close at $7.5 if you can get him to agree.”883 Ms. Vaschilina emailed the Private Dealer to inform her that she should issue the invoice to: HIGHLAND VENTURES GROUP LTD Akara bldg., 24 De Castro str. Wickhams Cay 1 Road Town Tortola, BVI884 The Private Dealer issued the invoice to Highland Ventures on May 30, 2014.885 On June 5, 2014, Ms. Vaschilina emailed the Private Dealer and relayed that “[t]he client want[s] the guarantee or certificate that it’s exact Magritte from catalogue reasonee….He wants guarantee that [] its exact[ly] this work from Id. Id. 878 Id. 879 Id. 880 Id. 881 Id. 882 DEALER000002−04. 883 DEALER000007. 884 DEALER0000018. 885 DEALER0000026. 876 877 119 catalogue. And he send money.”886 Ms. Vaschilina continued, “can we do just certifyed [sic] of the back photos by his lawyer? just easy 2 photos and certify that its original?”887 In response, the Private Dealer emailed Ms. Vaschilina “an image of the back of the painting with the Carnegie Museum label and name of the owner covered” and a picture of “the loan letter from Carnegie (also name of owner covered).”888 At the request of the Private Dealer, a New York Law Firm describing itself as “a boutique law firm with a practice focused on art matters,” provided an opinion letter on La Poitrine dated June 5, 2014.889 The New York Law Firm addressed the opinion letter to “Undisclosed Potential Purchaser” at “Undisclosed Address.”890 The opinion letter explained that a client of the law firm “requested that we view and confirm that the painting…is located in New York and ready to ship.”891 The letter stated that two attorneys, including the letter’s signatory, had viewed the painting and included two pictures of the front of the painting and one of the back (or verso).892 The letter stated that the attorneys were “provided with what appear to be copies of (i) an invoice reflecting the sale of the Artwork in 1965 (as described in the Catalogue Raisonne excerpt), (ii) 1981 correspondence with the editor of the Catalogue Raisonne, and (iii) museum documents with a name matching that on the verso of the painting.”893 The letter concluded: While we, as attorneys, cannot provide warranties or legal advice to an undisclosed potential purchaser, we can and do confirm that the facts set forth above based on our personal knowledge are accurate and that we did today view and photograph the painting as described above. We are also advised that the current owner of the painting is, in connection with its sale, prepared to represent and warrant without qualification or reservation of any kind that the painting is an authentic work of art created by Rene Magritte. On June 10, 2014, the Private Dealer emailed Ms. Vaschilina the executed purchase agreement dated May 28, 2014. The purchase agreement listed Highland Ventures Group Limited as the buyer, while the Private Dealer was listed as the agent for the “Undisclosed Owner” for the purchase price of “US$7,500,000 (to be paid in equivalent Euros (€) with rate determined on the date of payment).”894 The DEALER000030. DEALER000033. 888 DEALER000034−37. 889 DEALER000040−43. 890 Id. 891 Id. 892 Id. 893 Id. 894 Private Dealer Production on file with the Subcommittee (Apr. 11, 2018). 886 887 120 Private Dealer signed on behalf of her company as the Managing Member; Anna Wilkes signed on behalf of Highland Ventures as the company’s Director.895 The purchase agreement attached wire transfer instructions that stated $7,500,000 was sent from Advantage Alliance’s account at Barclays to the Private Dealer’s account at First Republic Bank.896 On July 7, 2014, the Private Dealer wired Ms. Vaschilina’s mother Natalia $400,000 for “[f]ixed agreed introduction commission fees on René Magritte’s La Poitrine (Photo Credit: Private Dealer) purchase of the painting by the client” to her LGT Group Bank account.897 The Private Dealer kept $237,500 and wired the remaining $6,862,500 to the seller’s agent.898 The Private Dealer told the Subcommittee she never questioned the involvement of Highland Ventures or Advantage Alliance in the transaction, nor would it occur to her to question the involvement of either entity.899 She stated she had relied, in part, on the advice of outside legal counsel and the involvement of established financial institutions in connection with the transaction.900 She explained she also took comfort in the fact that the buyer was represented by a well-known person in the industry who had previous dealings with well-established galleries and art auction houses.901 Both the buyer and the seller remained confidential for the duration of the sale.902 The Subcommittee also interviewed Ms. Vaschilina, who reported that she did not know the buyer’s identity.903 Ms. Vaschilina told the Subcommittee she was Id. Private Dealer Production on file with the Subcommittee (Apr. 11, 2018). 897 Id.; Subcommittee interview of Private Dealer (Sept. 7, 2018). 898 Subcommittee interview of Private Dealer (Sept. 7, 2018). 899 Id. 900 Id. 901 Id. 902 Id. 903 Subcommittee interview of Olga Vashchilina (Jun. 14, 2019). 895 896 121 working for Raisa Sidorenko, who she believed knew the name of the buyer.904 The Subcommittee interviewed Ms. Sidorenko and asked her for the name of the buyer of La Poitrine.905 Ms. Sidorenko declined to give the Subcommittee the name of the buyer without the buyer’s consent; Subcommittee staff asked Ms. Sidorenko to request the buyer allow her to provide their name to the Subcommittee.906 Subcommittee staff also emailed Ms. Sidorenko and asked for the name of the buyer.907 She initially replied that she was still waiting for her client to answer the request to reveal his or her identity.908 Subcommittee staff emailed Ms. Sidorenko again a month later; she did not respond.909 Origin of funds used for purchase. The Subcommittee traced the payment for La Poitrine to Senton Holdings Limited (“Senton Holdings”).910 A Barclays’s investigation found that Senton Holdings is a company that is ultimately owned by Arkady Rotenberg.911 The Barclays investigatory memorandum explained that Senton Holdings was an offshore entity operated by AKM Associates Ltd on behalf of Estate Managers (Surrey) Ltd, which is owned by Arkady Rotenberg.912 On June 17, 2014, Senton Holdings wired $7,555,000 from its Gazprombank account in Moscow to Advantage Alliance’s Barclays account in the United Kingdom.913 The following day on June 18, 2014, Advantage Alliance sent $7,500,000 from its Barclays bank account to the Private Dealer’s account at First Republic Bank with the wire instructions, “as per purchase confirmation [dated May 28, 2014].”914 Shipment. A BALTZER employee coordinated the shipment of the painting through Dietl International.915 The painting was shipped to the Hasenkamp storage facility in Germany.916 Id. Subcommittee interview of Raisa Sidorenko (Jul. 12, 2019). 906 Id. 907 Email to Raisa Sidorenko from Subcommittee Staff (Jul. 22, 2019). 908 Email from Raise Siderenko to Subcommittee Staff (Sept. 6, 2019). 909 Email from Subcommittee Staff to Raisa Siderenko (Oct. 10, 2019). 910 BARC_000002, lines 24 and 25. 911 BARC_006912−15. 912 Id. 913 BARC_000002, line 24. 914 BARC_000002, line 25. 915 DEALER000055; DEALER000070. 916 DIETL 456047 (Air Export JFK to FRA). 904 905 122 d. Jean-Paul Riopelle’s Ombre d’Espace Date of Sale Price Private Sale Purchaser of Record June 23, 2014 $1,750,000 Public Art Gallery in New York Igor Rotenberg; BALTZER LLP Transaction background. In June 2014, a public art gallery located in New York (the “Gallery”) exhibited works for sale at the annual Art Basel art fair in Switzerland.917 The exhibit included a “large canvas by Jean-Paul Riopelle, a leading member of the European Abstract Expressionist movement.”918 The Gallery described Riopelle’s Ombre d’Espace as “a thrilling juxtaposition of vivid reds, blues, yellows and greens in a rich, thick impasto. The painting flashes with energy, representing the dynamic action of the painter.”919 Jean Paul Riopelle's Ombre d'Espace On June 17, 2014, representatives from the Gallery met Igor Rotenberg at the Art Basel exhibit in Switzerland.920 Igor Rotenberg gave the Gallery representative his business card, which indicated he was the Chairman of the Board for NPV Engineering.921 According to notes taken by the Gallery representative on Mr. Baltser’s business card, Mr. Baltser accompanied Igor Rotenberg as his art advisor and translator.922 The notes also indicated that Mr. Baltser “lives in Fort Lee,” New Jersey.923 Later that day, June 17, 2014, a Gallery representative emailed Igor Rotenberg, “Congratulations on your decision to acquire the extraordinary painting Ombre d’Espace, 1954, by Jean Paul Riopelle for your collection.”924 The email attached the invoice for the painting stating the price of $1,750,000.00 and addressed the invoice to: Website on file with the Subcommittee. Id. 919 Id. 920 GALLERY PSI 0029. 921 GALLERY PSI 0054. 922 Id. 923 Id. 924 GALLERY PSI 0045−47. 917 918 123 Igor Rotenberg Chairman of the Board of Directors NPV Engineering 5, B Strochenovsky Pereulok Moscow 115054 RUSSIA925 This was the same address found on Igor Rotenberg’s business card.926 On June 19, 2014, a Gallery representative emailed Mr. Baltser: “I understand from your conversation with [the Gallery owner] that information for the invoice for the Riopelle painting needs to be changed. Kindly send to us as soon as possible the updated details.”927 Mr. Baltser responded that same day with the updated information, which requested the invoice be changed to BALTZER LLP.928 Mr. Baltser requested, “Please issue an invoice to BALTZER LLP using our London address.”929 As requested, the Gallery representative updated the invoice with the following address: BALTZER LLP Suite 9, 68 South Lambeth Road London, UNITED KINGDOM930 Origin of funds used for purchase. On June 24, 2014, Highland Ventures wired $1,785,000.00 from its Gazprombank account to Steamort’s account at Tallinn Business Bank.931 The associated wire transfer instructions noted: “as per invoice no 65 [dated June 23, 2014].”932 On June 26, 2014, Steamort wired $1,785,000.00 from its Tallinn Business Bank account to BALTZER LLP’s Barclay’s account.933 The wire transfer instructions stated, “payment by invoice 65 [dated June 23, 2014] for subjects of interior.”934 That same day, BALTZER LLP sent $1,750,000 from its Barclay’s account to the Gallery’s account at Citibank.935 The wire instructions noted, “invoice 11116 [dated June 17, 2014] client BALTZER LLP.”936 Id. GALLERY PSI 0054. 927 GALLERY PSI 0073. 928 GALLERY PSI 0075−76. The updated BALTZER LLP information for the invoice was on Markom Management letterhead. 929 GALLERY PSI 0089−90. 930 GALLERY PSI 0125−26. According to public filings, this was the same address for Markom Management Ltd at this time. Markom Management Ltd, Company No. 05291280, Annual Return, (Feb. 13, 2014), https://beta.companieshouse.gov.uk/company/05291280. 931 DBAG0000024, line 571. 932 Id. 933 DBAG0000024, line 572. 934 Id. 935 BARC_006850, line 22; CITI0000628 (Nov. 15, 2018), 1811141 wires, Baltzer LLP, line 1. 936 Id. 925 926 124 Shipment. In July 2014, Ombre d’Espace was shipped to the Gallery’s warehouse in New York located at Crozier Fine Arts.937 Internal Gallery emails indicated that Mr. Baltser “asked us to keep the Riopelle in the US for Igor until his home in Italy is finished. He said that they would probably have it delivered in September when the home is ready.”938 On October 20, 2014, a Gallery representative emailed Crozier Fine Arts and requested that Ombre d’Espace be released to Dietl.939 Dietl, in turn, requested that the painting be released to Tiffany Transport on October 22, 2014.940 The airway bill indicated that the painting was shipped to the Hasenkamp art storage facility in Germany.941 e. Ormond Gigli’s Girls in the Windows, New York City, 1960 Date of Sale Price Auction House Purchaser of Record September 29, 2014 $32,500 Christie’s New York BALTZER LLP Transaction background. On September 29, 2014, Christie’s New York held a photography auction that included Ormand Gigli’s photograph Girls in the Windows, New York City, 1960.942 At that auction, Mr. Baltser purchased Girls in the Windows for $32,500.943 That price included a $26,000 hammer amount and a $6,500 buyer’s premium.944 The invoice was issued to BALTZER LLP in Moscow, Russia and was numbered: “DB 14002121.”945 The condition report for the photograph stated: Vibrantly colored chromogenic print on semi-glass paper with margins and flush-mounted on aluminum. Very minor bumps to print corners not affecting image, visible under close inspection only. A beautiful print in excellent condition.946 GALLERY PSI 0218−20. GALLERY PSI 0223. 939 GALLERY PSI 0257. 940 GALLERY PSI 0265. 941 GALLERY PSI 0306. 942 Lot 119: Girls in the Windows, CHRISTIE’S (Sept. 29, 2014), https://www.christies.com/lotfinder/Lot/ormond-gigli-b-1925-girls-in-the-5827326-details.aspx. 943 Id. 944 Christies-PSI-00034727−29. 945 Id. 946 Christies-PSI_00040866. 937 938 125 Origin of funds used for purchase. On October 6, 2014, Highland Ventures wired $33,312.50 from its Gazprombank account to Steamort’s Tallinn Business Bank account.947 The wire noted “per request DD October 2, 2014 (Ref. Christie’s 20/21 Photographs.”948 On October 30, 2014, BALTZER LLP wired $32,500.00 to Christie’s New York account at JPMorgan Chase with the note “invoice no DB 14002121 [dated September 29, 2014].”949 Owner. The Christie’s Baltser Client Advisor stated that since Christie’s New York auctioned the photograph, she was Ormond Gigli's Girls in the Windows, New York City, 1960 (Photo Credit: Christie's) not on the phone with Mr. Baltser when he bid for it.950 She did not know for whom Mr. Baltser purchased the photo, nor did she ever ask him to reveal the identity of the buyer.951 f. Tamara De Lempicka’s Un Port Sous La Lune Date of Sale Price Auction House Purchaser of Record November 6, 2014 $665,000 Christie’s New York BALTZER LLP Transaction background. On November 6, 2014, at Christie’s New York Impressionist & Modern Day Sale, BALTZER LLP successfully purchased Tamara De Lempicka’s Un port sous la lune for $665,000, which included the hammer price DBAG0000024, line 587. Id. 949 BARC_006850, line 41; JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Baltzer, line 27. 950 Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). 951 Id. As noted above, Counsel for Christie’s stated this was consistent with historic industry practice for an auction house not to routinely ask dealers for the identity of their clients because of concerns that auction houses would poach dealers’ clients. See Letter from Counsel for Christie’s to the Subcommittee (July 22, 2020). 947 948 126 of $550,000 and a buyer’s premium of $115,000.952 Christie’s issued an invoice numbered: DB 14005218.953 The condition report for the painting stated: Oil on canvas. Wax-lined. There is frame abrasion to the extreme edges with associated losses in the upper corners. There are horizontal and vertical stretcher-bar marks. There are lines of stable craquelure to the canvas. There are surface abrasions to the right of the bird and above the hammer. There are pin-points of paint loss near the center right edge. Examined under ultra-violent light. There are scattered strokes of inpainting, predominantly to the aforementioned stretcherbar marks and to the wall on the left.954 Origin of funds used for purchase. On November 26, 2014, Highland Ventures sent three wires totaling $721,369.98 from its Gazprombank account in Moscow to Steamort’s Tallinn Business Bank account.955 These three wires were in the following increments: $681,685; $15,435; and $24,249.98.956 All three wires referenced a request or invoice dated November 24, 2014.957 Tamara De Lempicka's Un Port Sous La Lune (Photo Credit: Christie's) On December 1, 2014, Steamort wired $697,120.00 from its Tallinn Business Bank account to the BALTZER LLP’s Barclays bank account.958 On December 3, 2014, BALTZER LLP wired $665,000 to Christie’s New York.959 The wire noted it was for “invoice [number] DB 14005218 DD [November 6, 2014].”960 Christies-PSI-00071575−76. Id. 954 Christies-PSI-00041703. 955 DBAG0000024, lines 600, 601, and 602. 956 Id. 957 Id. 958 DBAG0000024, line 605; BARC_006850, line 54. 959 BARC_006850, line 55; JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Baltzer, line 35. 960 Id. 952 953 127 Owner. When asked, the Christie’s Baltser Client Advisor stated she did not know for whom Mr. Baltser purchased the painting, nor did she ask Mr. Baltser to reveal the identity of the buyer.961 Shipment. Art Courier managed the shipment of Un port sous la lune by Dietl to the Hasenkamp art storage facility in Germany.962 g. Andreas Gursky’s James Bond Island I and Niagara Falls Date of Sale Price Auction House Purchaser of Record November 13-14, 2014 $1,054,000 Phillips New York Steamort Ltd Transaction background. On November 13, 2014, Mr. Baltser purchased Andreas Gursky’s James Bond Island I at the Phillips Contemporary Art auction (Sale NY010714, Lot 14) in New York for $725,000.963 This amount included the $600,000 hammer price and the $125,000 buyer’s premium.964 The next day, November 14, 2014, Mr. Baltser purchased Gursky’s Niagara Falls at the same auction (Sale NY010814, Lot 228) for $329,000.965 That amount included the $270,000 hammer price and the $59,000 buyer’s premium.966 Phillips originally invoiced BALTZER LLP for both pieces of art on November 19, 2014.967 The two purchases together totaled $1,054,000. Origin of funds used for purchase. On November 21, 2014, Highland Ventures wired $743,185 from its Gazprombank account in Moscow to Steamort’s Tallinn Business Bank account.968 The same day, Highland Ventures also wired $337,285 from its Moscow-based Gazprombank account to Steamort’s Tallinn Business Bank account.969 The amounts together totaled $1,080,470. However, instead of Steamort forwarding the payment to BALTZER LLP, Steamort paid Phillips directly. An employee of Mr. Baltser’s emailed Phillips that Mr. Baltser’s client wired the money for the paintings to the wrong account.970 Mr. Baltser’s employee asked Phillips to re-invoice to a third party, Steamort.971 Prior Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). DIETL 46653 (Air Export JFK to FRA). 963 PHILLIPS-00441. 964 Id. 965 PHILLIPS-00442. 966 Id. 967 PHILLIPS-08282−84. 968 DBAG0000024, line 598. 969 DBAG0000024, line 597. 970 PHILLIPS-08266−68; PHILLIPS-08280. 971 Id. 961 962 128 to re-invoicing to Steamort, consistent with Phillip’s then-controlling policy, Phillips required Steamort to establish an official account with Phillips. It was within this process that Phillips obtained Steamort’s certificate of incorporation and a letter of authorization,972 which were provided.973 The letter stated: STEAMORT LTD, a company incorporated under the laws of Belize under registration number 77,269 on the 28th of August 2008, (hereinafter referred to as the “Company”) hereby confirms that the Company has effected the payment of $1,054,000 (one million and fifty four thousand US dollars zero cents) with regard to the purchase of the artworks by BALTZER LLP who was acting as an agent of the Company at Phillips’ Contemporary Art auctions held on 13 and 14 November 2014 in New York. The details of the purchased works of are as follows: Lot No. 14. – Andreas Gursky, James Bond Island I (Invoice No. NY10714/1025/1) Andreas Gursky's James Bond Island I (Photo Credit: Phillips) Lot No. 228 – Andreas Gurksy, Niagara Falls (Invoice No. NY010814/1109/1).974 The letter was electronically signed by Steamort Director Jason Hughes.975 Phillips changed the purchaser on the invoice to Steamort for both works.976 On December 1, 2014, Steamort wired $725,000 and $329,000 from its Tallinn Business Bank account in two separate wires to Phillips’ account at Citibank.977 The wire transfer instructions noted the payment was for “payment by invoice…for subject of interior.”978 The instructions specifically referenced NY010714, Lot 14 and NY010814, Lot 228.979 Id. PHILLIPS-08255−60. 974 Id. 975 Id. 976 PHILLIPS-00441−42. 977 DBAG0000024, lines 603, 604. 978 Id. 979 Id. 972 973 129 Owner. The Phillips Baltser Account Representative stated she did not know for whom Mr. Baltser purchased these photographs or the owner of Steamort.980 Shipment. The photographs were separated for shipment. James Bond Island I was shipped to Moscow with Alexander Dobrovskiy listed on the invoice on Phillips letterhead.981 Niagara Falls was shipped to Hasenkamp art storage facility in Germany with BALTZER LLP listed on the invoice.982 Art Courier managed the shipments handled by Dietl.983 7. Mr. Baltser Shipped Art Purchased by Rotenberg-linked Companies to the Hasenkamp Storage Facility in Germany A number of pieces of art examined by the Subcommittee were shipped to Hasenkamp in Germany for storage. As such, the Subcommittee requested information from Hasenkamp on the pieces of art maintained there in storage related to Mr. Baltser or BALTZER LLP.984 In response, a Hasenkamp representative initially stated that he would need Mr. Baltser’s consent to release that information.985 Later, the Hasenkamp representative sent an email indicating that he had determined that Mr. Baltser only managed the art stored at the facility.986 The name on the contract with Hasenkamp to store the art was Highland Business Limited, which was later replaced by Taide Connoisseur Selection.987 The Hasenkamp representative could not provide the name of the individual behind Highland Business Limited, since the contract was signed in the company’s name.988 A website that is no longer publicly available stated, “Taide Connoisseur Selection Limited was incorporated on 5th October 2016 with registration number 2016-00336 and is licensed by Financial Services Regulatory Authority as Private Mutual Fund (number IMF (PF)/025 as characterized by The International Mutual Act 12.16.”989 A tab for “Key Staff” listed only one person: Dr. Mark Omelnitski.990 Subcommittee interview of Phillips Baltser Account Representative (Apr. 4, 2019). DIETL 465442 (Air Export JFK to MOW). While Phillips created invoices listing both BALTZER LLP and Steamort as the owner of James Bond Island I, Dietl’s shipping records included the invoice on Phillips letterhead indicating Alexander Dobrovskiy had purchased and taken title for the painting. After an internal investigation, Phillips found no record of this version of the invoice in its files, nor were any Phillips employees aware of the invoice listing Mr. Dobrovskiy as the owner of James Bond Island I. See Letter from Counsel for Phillips to Subcommittee staff (May 6, 2019). 982 DIETL 46653 (Air Export JFK to FRA). 983 DIETL 465442 (Air Export JFK to MOW); DIETL 46653 (Air Export JFK to FRA). 984 Email from Subcommittee staff to Hasenkamp representative (Jun. 25, 2019). 985 Email from Hasenkamp representative to Subcommittee staff (Jun. 28, 2019). 986 Email from Hasenkamp representative to Subcommittee staff (Jul. 16, 2019). 987 Id. 988 Email from Hasenkamp representative to Subcommittee staff (Jul. 26, 2019). 989 Screenshots of website on file with the Subcommittee. 990 Id. 980 981 130 In August 2019, during the course of the Subcommittee’s investigation, the Taide Connoisseur Selection account at Hasenkamp was closed and all art stored under the account was shipped to Moscow.991 The Subcommittee documented at least one purchase by Taide Connoisseur during the course of its investigation. That purchase was of Joseph Albers’s Embedded Linear Construction II. a. Joseph Albers’s Embedded Linear Construction II Date of Sale Price Auction House Purchaser of Record September 28, 2017 $47,500 Christie’s New York Baltzer Limited Transaction background. Josef Albers’s Embedded Linear Construction II was offered for sale on September 28, 2017 as part of Christie’s Post-War and Contemporary Art sale in New York, sale number 13892.992 The work was Lot 17. The condition report provided by Christie’s noted that, “The work is structurally sound and in working order. Faint abrasions, small spots of discoloration and minute accretions are visible occasionally to the metal. A few faint handling marks are to the glass.”993 Mr. Baltser bought the work in the name of Baltzer Limited with a hammer price of $38,500 and a buyer’s premium of $9,500 for a total of $47,500.994 Origin of funds used for purchase. On November 14, 2017, Taide Connoisseur sent $50,129.88 from its Gazprombank account in Moscow to Baltzer Limited’s account at Ameriabank.995 On November 16, 2017, Baltzer Limited sent $47,500 to Christie’s account at JPMorgan Chase in New York with the wire instructions “Sale no 13892 [dated September 28, 2017] Lot 17.”996 Email from Hasenkamp representative to Subcommittee staff (Jul. 23, 2020). Christies-PSI-00026831. 993 Christies-PSI-00026828. 994 Christies-PSI-00058908−09. 995 CITI000628 (Nov. 15, 2018), 1811141 wires, Baltzer Limited, line 6. 996 JPMorgan Chase (Nov. 7, 2018), SB981623-F1 US Wire Search, Baltzer, line 166. 991 992 131 Shipment. A BALTZER employee emailed Christie’s on November 28, 2017 and requested that the auction house “organize shipping of this lot from New York to Frankfurt.”997 The BALTZER employee referred Christie’s to an ArtCourier employee who explained that “Christie’s will need to organize export from the USA and airfreight to [Frankfurt Airport] airport only, uncleared. We will handle supervision in Germany, collection of the crate from [Frankfort Airport] and local delivery under bond to our bonded warehouse by ourselves.”998 The Joseph Alber's Embedded Linear Construction II contact for Christie’s at the Frankfort (Photo Credit: Christie's) Airport was an employee of Hasenkamp art storage facility located in Cologne.999 BALTZER paid Christie’s the shipping costs of $2,575 on January 12, 2018.1000 8. Mr. Baltser Attempted to Sell Art Purchased with Funds Traced to Rotenberg-linked Companies Information provided to the Subcommittee indicates that Mr. Baltser has also sought to sell pieces of art owned by his clients. His efforts in 2015 to generate interest among potential buyers in 31 high-value paintings provides further evidence of Mr. Baltser’s business relationship with the Rotenbergs. a. Mr. Baltser Sent Christie’s a List of Works in the Rotenberg’s Collection On August 30, 2015, one of Mr. Baltser’s employees emailed Christie’s stating: “Please find below the links of our Client’s works….If you need any extra information for any of these works, please feel free to ask. If you see any opportunities to promote these works or to make this collection more valuable please let me know.”1001 Mr. Baltser’s employee continued: “I also have more clients with some [impressionist] works they are ready to sell.”1002 Christies-PSI-00078529. Christies-PSI-00078545−50. 999 Christies-PSI-00078604−11. 1000 Christies-PSI-00079041−61. 1001 Christies-PSI-00062223−26. 1002 Id. 997 998 132 The email listed 31 paintings by Giorgio de Chirico, Salvador Dali, René Magritte, Pierre-Auguste Renoir, Man Ray, Lyonel Feininger, Tsuguharu Foujita, Tamara de Lempicka, Henry Moore, Marc Chagall, Maurice de Vlaminck, Georges Braque, and Yves Tanguy.1003 The list read as stated below and included the following paintings, 16 of which are also highlighted above:1004 1. Giorgio de Chirico Le Muse Inquietanti Ettore e Andromatica 2. Salvador Dali Nu de Dos, Gala Bataille Autour d’un Pissenlit (This work is available for sale) Sans Titre Ampurdanese Yang and Yin Papillons, 1950 Soft Monster, 1976 3. Renee Magritte The Pleasure Principle La Generation Spontanee, 1937 (This work is available for sale) La Poitrine, 1960 Le Renez-Vous La Traversee Difficile II Le Prince Charmant Towards Pleasure 4. Pierre-Auguste Renoir Femme dans un paysage Still Life with Fruits 5. Man Ray Le Trop-plein, 1937 6. Lyonel Feininger Brucke II The Clients wants to send this painting to an exhibition. Do you have any ideas? Do you have any news re Brucke 0? Is it possible to make an offer to the owner? Steep Street Ulla Sailing ship on Red Sea 1003 1004 Id. Id. 133 7. Tsuguharu Foujita Hanka Zborowska 8. Tamara De Lempicka Le Coquillage, 1939 Nature Morte avec Lys et Photo New York Harbor All these three works are in Turin till tomorrow (August 31) and then they move to Verona for the exhibition. 9. Henry Moore Three Figures 10. Marc Chagall Scène champêtre 11. Maurice de Vlaminck La Seine a Chatou, 1909 12. Georges Braque Pichet et Journal Marc Chagall's Scene Champetre/Femme et enfant (Photo Credit: Sotheby's) 13. Yves Tanguy The Speeding Bow When the Subcommittee showed the email containing the above list of works to her, the Christie’s Baltser Client Advisor noted that the email was not addressed to her, and she did not know who owned the collection of works.1005 As explained above, the Subcommittee traced funds used to purchase 16 of the 31 listed paintings back to Rotenberg-linked shell companies suggesting the Rotenbergs were the “client” of Mr. Baltser’s who owned the collection.1006 Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). The 16 paintings the Subcommittee traced funds used to purchase the paintings to Rotenberglinked shell companies include: (1) Salvador Dali’s Papillons and (2) Soft Monster (Monstruo Blando Adormecido); (3) Renee Magritte’s Le Rendez-Vouz and (4) La Poitrine; (5) Pierre-Auguste Renoir’s Femme dans un paysage and (6) Still life with fruits (Nature Morte aux fruits); (7) Lyonel Feininger’s Steep Street (Steile Strasse), (8) Ulla, and (9) Sailing ship on Red Sea; (10) Tsuguharu Foujita’s Hanka Zborowska (Portrait de Jeune Femme); (11) Tamara de Lempicka’s Le Coquillage and (12) New York Harbor (Un Port Sous la Lune); (13) Henry Moore’s Three Figures; (14) Marc Chagall’s Scene Champetre (Femme et Enfant); (15) Maurice de Vlaminck’s La Seine a Chatou; and (16) Georges Braque’s Pichet et Journal. 1005 1006 134 b. Mr. Baltser Attempted to Sell Brucke II In late 2018, Mr. Baltser approached Christie’s and Sotheby’s about selling two works that were part of the collection listed above. Those two works were Salvador Dali’s Bataille Autour d’un Pissenlit (“Battle around a dandelion”) and Lyonel Feininger’s Brucke II.1007 Both auction houses Salvador Dali's Battle Around a Dandelion (Photo Credit: Fundacio provided estimates for the Gala Salvador Dali) auction of the paintings and deal terms. Mr. Baltser chose Sotheby’s to auction Brucke II, but the painting was ultimately pulled from the auction due to lack of interest. At the time, the Subcommittee was investigating both auction houses and Mr. Baltser. i. Mr. Baltser Approached Christie’s to Sell Brucke II An employee of Mr. Baltser emailed Christie’s Baltser Client Advisor on December 7, 2018 to alert Christie’s that one of Mr. Baltser’s clients was interested in selling Salvador Dali’s Bataille Autour d’un Pissenlit and Lyonel Feininger’s Brucke II.1008 The email noted that both of the paintings were located in Germany for storage.1009 She responded to Mr. Baltser’s employee on December 21, 2018 that Christie’s suggested an offering price for Feininger’s Brucke II between £4 million and £6 million and an offering price between £2 million and £3 million for Dali’s Bataille Autour d’un Pissenlit.1010 As noted above, Dali’s Battle around a dandelion (Bataille Autour d’un Pissenlit) was included in the list of 31 works sent by Mr. Baltser’s employee to Christie’s. See Christies-PSI-00062223−26. The provenance provided by Mr. Baltser to Christie’s stated the current owner purchased the painting in July 2013 at ARTEXPO SA. Christies-PSI-0073512−13. Financial records provide support for this purchase. On July 11, 2013, Steamort sent $7,000,000 from its Tallinn Business Bank account to ARTEXPO SA’s UBS account in Geneva, Switzerland. DBAG0000024, line 462. The wire instructions stated: “Payment by invoice GB-130702 [dated July 4, 2013] for subject of interior.” Id. The fact that Christie’s only estimated the painting would sell for between £2 million and £3 million explains why the painting was not considered for auction. 1008 Christies-PSI-00081879−83. 1009 Id. 1010 Christies-PSI-00096106−26. 1007 135 On January 14, 2019, Christie’s Director, Head of Evening Sale for Impressionist and Modern Art emailed Mr. Baltser the terms the auction house would provide if Mr. Baltser chose Christie’s to consign and sell Brucke II.1011 The email documented what Christie’s would offer with regard to “Sale date and Context: Our Impressionist & Modern Art Evening Sale will be held on the 27th February. The market for German art is incredibly strong at the moment, so now is a very good time for your client to offer the work. Your work would be a highlight of the German section of the sale. You will recall the work was acquired from us by your client, so it is a work we know very well, and we also know the under-bidders of the work when it was sold to your client. This is a unique knowledge advantage that Christie’s has. This February sale season will be one of the strongest ever at King Street – we have an incredible single owner collection ‘Hidden Treasures’ which will be before the Evening Sale, and a number of masterpieces confirmed for the Evening Sale. I attach an overview of these works, and also the related press releases. As a result, all top Impressionist & Modern collectors will be at Christie’s this season. These works already consigned are very complementary to your work – and nothing we have consigned will compete with your work.”1012 The email also described the marketing Christie’s would offer stating, “We can provide the following: 1. Feature window banner at King Street 2. Frontispiece detail inclusion in the Impressionist & Modern Art Evening Sale 3. Tour to New York as part of February’s sale preview (early February) 4. Eight pages in the catalogue including a fold-out illustration 5. Inclusion in Christie’s Magazine as a highlight of the Impressionist & Modern Art Evening Sale 6. Inclusion in the Chinese language sale ebrochure 7. Online highlight of the sale 8. Postcard at front of House”1013 Christies-PSI-00082059−66. Id. (emphasis in original). 1013 Christies-PSI-00082059−66. 1011 1012 136 Financially, Christie’s offered “an enhanced hammer of 106%.”1014 Regarding timing, Christie’s noted, “We will be printing the catalogue around the 31st [of] January, so we have around two weeks to finalise everything. The timing will be tight, but it is all possible.”1015 Two days later, on January 16, 2019, Christie’s offered to increase the hammer level to 107.5 percent explaining, “This is beyond our normal level for this value but we are keen to work with you on this project and to work again with this fantastic picture.”1016 The Baltser Client Advisor explained that Christie’s was eager to have the Brucke II for the evening sale, but the consignment was very competitive.1017 She noted that Mr. Baltser was also talking to Sotheby’s about selling the painting.1018 Ultimately, Mr. Baltser consigned Brucke II with Sotheby’s to sell, but the Baltser Client Advisor stated that Mr. Baltser did not make the decision.1019 She explained that Mr. Baltser told her the lawyer for his client who owned the painting made the decision to consign the painting to Sotheby’s.1020 ii. Sotheby’s Agreed to Sell Brucke II Mr. Baltser also contacted the Baltser Account Representative at Sotheby’s about consigning and selling Brucke II. She emailed Mr. Baltser that Sotheby’s estimated the painting would bring between £4 million and £6 million at auction.1021 In an internal Sotheby’s email, she confirmed that “the estimate was fine (around the same as offered by other auction houses).”1022 She also noted, “this client has an important collection which might be potentially for sale in the future: 4 works by Magritte 3 works by Dali several De Chirico(s) several De Lempicka”1023 Id. (emphasis in original). Id. 1016 Christies-PSI-00065736. 1017 Subcommittee interview of Christie’s Baltser Client Advisor (Jul. 15, 2019). 1018 Id. 1019 Id. 1020 Id. 1021 SOT-202506. 1022 SOT-202405. 1023 Id. 1014 1015 137 Brucke II was added to Sotheby’s Impressionist and Modern Art Evening Sale in London scheduled for February 26, 2019.1024 Two versions of the contract to consign and sell the painting existed. The first contract was dated January 15, 2019.1025 The terms of the contract made clear that Sotheby’s estimated Brucke II would sell for between £4,000,000 and £6,000,000 at auction.1026 The contract also established that Sotheby’s would pay Mr. Baltser “7.5 [percent] of the hammer price achieved for the [Brucke II].”1027 Mr. Omelnitski signed on behalf of BALTZER LLP, but Sotheby’s did not execute this version.1028 Sotheby’s did sign a version of the contract with the same terms dated January 18, 2019.1029 However, this version was not signed by Mr. Omelnitski on behalf of Mr. Baltser. Instead, Markom Directors (Cyprus) LTD signed the January 18, 2019 version of the contract on behalf of Mr. Baltser.1030 The Baltser Account Representative did not know why there were two versions of the contract, or why Sotheby’s only signed the January 18, 2019 version of the contract.1031 Following the execution of the contract, the Baltser Account Representative coordinated the shipment of Brucke II from Cologne to London.1032 Sotheby’s requested information related to sanctions compliance. In light of the Subcommittee’s ongoing investigation, Sotheby’s sent due diligence questions to Mr. Baltser regarding the proposed transaction and his general compliance program.1033 In the email attaching the questions, the Baltser Account Representative explained to Mr. Baltser, “There is additional scrutiny being placed on transactions with clients in certain regions and we are therefore asking for this additional information.”1034 The Baltser Account Representative told the Subcommittee this was the first time she had seen Sotheby’s request such information from a client.1035 Sotheby’s questioned Mr. Baltser regarding the February 2014 purchaser of Brucke II. As part of Sotheby’s due diligence questions to Mr. Baltser regarding the Brucke II proposed consignment, Sotheby’s requested that Mr. Baltser respond to a series of questions regarding compliance with sanctions laws entitled, “Sotheby’s A Century of Bauhaus: School of Modernity, SOTHEBY’S (Feb. 12, 2019), https://www.sothebys.com/en/articles/a-century-of-bauhaus-school-of-modernity. 1025 SOT-202176−78. 1026 Id. 1027 Id. 1028 Id. 1029 SOT-202107−09. 1030 Id. 1031 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 1032 SOT-202532−33. 1033 SOT-202154−55. 1034 Id. 1035 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 1024 138 Sanctions Questionnaire.”1036 Sotheby’s asked: “When you purchased Lyonel Feininger, Brucke II, from Christie’s on 4 February 2014, were you acting as a bidding or buying agent on behalf of another individual or entity? If yes, on whose behalf were you acting?”1037 Mr. Baltser responded: The purchase was made on May 14, 2014. Yes, we were acting on behalf of our client, the legal entity. However, our Finder agreement with the client contains a non-disclosure provision, which legally prohibits us to disclose the client’s identity to anyone without the client’s consent. Further to the below explanations, please note that after all appropriate checks by us at that time, we are able to confirm absence of any sanctions of any country in relation to that client.1038 The Subcommittee subsequently requested that Sotheby’s provide it with a copy of those due diligence questions and answers and told Sotheby’s that it had no objection to Sotheby’s notifying Mr. Baltser at that time of the Subcommittee’s request for those documents. After the Subcommittee reviewed those materials, which disclosed the identity of the company and individual Mr. Baltser stated currently owned Brucke II; it did not disclose the name of the previous owner who purchased Brucke II at a Christie’s auction on February 4, 2014 due to a nondisclosure agreement. The Subcommittee requested that Sotheby’s ask Mr. Baltser to request that his previous client consent to disclosing his or her name to Sotheby’s.1039 Sotheby’s requested the information, but as of the publishing of this report, Sotheby’s has been unable to obtain the requested consent.1040 In addition, recognizing the disparity in the public sale date and the sale date provided by Mr. Baltser in his response to Sotheby’s due diligence questions, the Chairman of Sotheby’s Russia emailed Mr. Baltser on April 1, 2019 and pointed out “the Christie’s sale occurred in February, and not in May.”1041 Mr. Baltser responded, “My apologies, you are indeed correct and the sale date was on 4 February 2014.”1042 Mr. Baltser did not provide the name of the February 2014 purchaser. As stated above, Mr. Baltser asserted that he could not reveal the name of the individual or entity that purchased the Brucke II on February 4, 2014 due to a nondisclosure provision in the relevant contract.1043 Mr. Baltser stated, however, “Yes, we have identified the ultimate beneficial owner of the purchasing entity, and SOT-202045−89. Id. 1038 Id. 1039 Email from Subcommittee Staff to Counsel for Sotheby’s (Jul. 18, 2019). 1040 Email from Counsel for Sotheby’s to Subcommittee Staff (Jul. 18, 2019). 1041 SOT-202045−89. 1042 Id. 1043 Id. 1036 1037 139 determined that neither the entity nor the ultimate beneficial owner of the entity were on any sanctions list or blocked persons list in any jurisdiction.”1044 Sotheby’s also asked Mr. Baltser: “Are you now selling on behalf of another individual or entity or does any other individual or entity have a financial interest in the sale?”1045 Mr. Baltser responded to that question, “Yes, we are selling on behalf of our current client (who is different from, and not associated with, the previous client), whose details are presented below.”1046 The attachments asserted that the Brucke II now belonged to a company incorporated in the Marshall Islands.1047 In response to further questioning by Sotheby’s, Mr. Baltser confirmed ultimate beneficial owner of the Marshall Island company and provided a Russian passport for that individual.1048 He continued, “We confirm that appropriate sanctions checks have been done for [the UBO] and [the UBO] is not subject to sanctions in any jurisdiction.”1049 Sotheby’s also questioned Mr. Baltser about his other clients and asked, “Have you done all appropriate checks to ensure that none of the individuals or entities on whose behalf you have acted for in prior transactions with Sotheby’s were subject to any sanctions by the U.S., UK, EU or other country?”1050 In response, Mr. Baltser stated, “Yes, we have done such checks and none of these check found any sanctions applicable to the persons on whose behalf we have acted for in prior transactions with Sotheby’s.”1051 Brucke II was in storage at Hasenkamp art storage facility in Germany.1052 The transport of the painting to London was managed by Art Courier.1053 The Baltser Account Representative explained that the Brucke II was removed from the auction because Sotheby’s was not able to identify any potential bidders before the day of the sale.1054 Id. Id. 1046 Id. 1047 Id. 1048 Id. (including a Russian passport for the named UBO at SOT-202083). 1049 Id. 1050 Id. 1051 Id. 1052 SOT-202710−11; SOT-202727−28. 1053 SOT-202727−28. 1054 Subcommittee interview of Sotheby’s Baltser Account Representative (Jun. 27, 2019). 1044 1045 140 9. Mr. Baltser Did Not Cooperate with the Subcommittee’s Investigation During the course of its investigation, the Subcommittee asked to interview Mr. Baltser.1055 Through his counsel, Mr. Baltser declined the interview request and stated that he was in Moscow with no plans to return to the United States. On August 23, 2019, Mr. Baltser’s counsel wrote to the Subcommittee on behalf of Baltzer Limited (the “August 2019 Letter”) following a discussion of the Subcommittee’s findings. The August 2019 letter stated, in part: Baltzer [Limited], a Cyprus company, is one of many art dealerships that offer services to individuals and entities who wish to purchase or sell fine art in private sales or at auctions. Some of Baltzer [Limited]’s clients are Russian nationals and entities, and Russian law allows such individuals and entities to engage Baltzer [Limited] on a basis which affords them confidentiality and prohibits Baltzer [Limited] from disclosing their identities without their consent under pains of administrative, civil, or criminal penalties. As such, Russian law severely limits the information that Baltzer [Limited] would be able to provide your Subcommittee. Baltzer [Limited] can confirm, however, that it has never, at any time, represented or transacted in any way with Boris or Arkady Rotenberg. Baltzer [Limited] strongly denies any suggestion to the contrary.1056 In another letter from his attorney on July 13, 2020 letter (the “July 2020 Letter”), Mr. Baltser stated that BALTZER LLP was dissolved in 2017, but never dealt with Arkady or Boris Rotenberg.1057 The July 2020 Letter also stated that Mr. Baltser’s agreement with Steamort required him to maintain the confidentiality of Steamort’s clients, but he “has personal knowledge that he was never involved in any transaction involving Steamort Ltd. that constituted any transaction with any person or entity that appear on the OFAC list at the time of the transaction.”1058 The July 2020 Letter also stated that Mr. Baltser could not confirm whether he ever dealt with Igor Rotenberg due to Russian law.1059 Neither letter addressed whether Highland Business or Highland Ventures were clients of Baltzer Limited, BALTZER LLP, or Steamort. Despite ICIJ Subcommittee conference call with David Vicinanzo, Counsel for Baltzer Limited (Jul. 23, 2019). Letter from David Vicinanzo, Counsel for Baltzer Limited to the Subcommittee (Aug. 23, 2019). 1057 Letter from David Vicinanzo, Counsel for Baltzer Limited to the Subcommittee (Jul. 13, 2020). 1058 Id. (noting that Nixon Peabody, Mr. Vicinanzo’s firm, did not represent BALTZER LLP or Steamort Ltd.). 1059 Id. 1055 1056 141 publishing information surrounding the Panama Papers since the spring of 2016, the July 2020 Letter stated that Baltzer Limited had: no access to or knowledge of the Panama Papers and is unaware of anyone who does. Accordingly, Baltzer has and must reasonably rely on the U.S. Department of Treasury’s own determination through the OFAC list. That list – the government’s own official position – confirms that Highland [Business and Highland Ventures are] not sanctioned. Additionally, the most widely-accepted commercial sanctions list check services, Visual Compliance and Thompson Reuters World-Check, do not list Highland entities as owned by Boris or Arkady Rotenberg.1060 As noted above, Barclays used the information found in the Panama Papers to conduct an extensive investigation of its accounts related to Mr. Omelnitski. This investigation determined that Mr. Omelnitski and his company “created shell companies for sanctioned individual [Arkady] Rotenberg…intentionally structured to be opaque in order to hide the identity of the true beneficiaries.”1061 The investigation led to the bank closing all Mr. Omelnitski’s accounts, including accounts related to Mr. Baltser.1062 10. During the Course of the Subcommittee’s Investigation Phillips, Christie’s, and Sotheby’s Stopped Transacting with Mr. Baltser During the Subcommittee’s investigation Phillips, Christie’s, and Sotheby’s reported that the auction houses would no longer transact with Mr. Baltser or BALTZER LLP due to the Subcommittee’s investigation. Counsel for Phillips told the Subcommittee it stopped transacting with Mr. Baltser when it received the Subcommittee’s initial request.1063 Christie’s stopped transacting with Mr. Baltser during the course of the Subcommittee’s investigation.1064 And counsel for Sotheby’s reported the auction house added Mr. Baltser to its “all transactions blocked” list, which requires an analysis of each transaction before it is executed.1065 Counsel for Sotheby’s reported the auction house made this determination after reviewing documents from another auction house used by Subcommittee staff during its interview of a Sotheby’s employee. Counsel for Baltser Limited addressed the auction houses blocking Mr. Baltser in his August 2019 Letter response to the Subcommittee: Letter from David Vicinanzo, Counsel for Baltzer Limited to the Subcommittee (Jul. 13, 2020). BARC_006752−761. 1062 BARC_005547−51; BARC_007036. 1063 Email to Subcommittee staff from Counsel for Phillips (Mar. 6, 2020). 1064 Conference call with Counsel for Christie’s (Mar. 18, 2020). 1065 Conference call with Counsel for Sotheby’s (Mar. 23, 2020). 1060 1061 142 Despite Baltzer’s innocence, the inquiries posed by this Subcommittee to the art dealership and auction community have already severely impacted Baltzer’s ability to conduct the legitimate business in which it has engaged for several decades. This has done substantial collateral damage to Baltzer and its employees, and has forced Baltzer to largely suspend operations.1066 Counsel for Bonhams U.S. reported that the auction house has continued to transact with the BALTZER Agency in a limited capacity.1067 Specifically, Bonhams U.S. has accepted bids from the BALTZER Agency, but has not accepted consignments.1068 With respect to each bidding registration, the BALTZER Agency has been asked to confirm, prior to bidding, whether they are acting as an agent or principal.1069 If the BALTZER Agency has responded that it is acting as an agent, it must provide (and has provided) as a condition of being permitted to bid: (i) the full name, address and date of birth of the principal; (ii) a copy of the passport of the principal; (iii) a letter of authorization from the principal; and (iv) a completed bidding registration form, signed by the principal.1070 Letter from David Vicinanzo, Counsel for Baltzer Limited to the Subcommittee (Aug. 23, 2019). Email from Counsel for Bonhams to Subcommittee staff (Jul. 25, 2020). 1068 Id. 1069 Id. 1070 Id. 1066 1067 143 IV. ADDITIONAL U.S. DOLLAR TRANSACTIONS BY ROTENBERGLINKED SHELL COMPANIES While the Subcommittee investigation concentrated on certain high-value art purchases involving the Rotenberg-related shell companies Highland Business and Highland Ventures, those companies did not limit their activities to art transactions. Records indicate that the companies were also used for other purposes and conducted other transactions in U.S. dollars after Arkady and Boris Rotenberg were sanctioned in March 2014. Between the announcement of sanctions by President Obama on March 16, 2014 and the addition of Arkady and Boris Rotenberg to the SDN list on March 20, 2014, shell companies linked to the Rotenbergs repatriated $121,966,500 to Russia. As explained below, these companies and others continued conducting transactions—including art purchases—in U.S. dollars totaling $91,554,202.30 after the imposition of U.S. sanctions on Arkady and Boris Rotenberg on March 20, 2014. Steamort. Although the UBO of Steamort is unknown, it is clear the company served as an intermediary between Rotenberg-linked shell companies and BALTZER LLP in the purchase of art. Following the imposition of sanctions on March 20, 2014, Steamort was a part of 160 transactions totaling $22,643,828.05.1071 The most recent transaction was dated May 15, 2017.1072 Highland Ventures. Highland Ventures sent $39,588,000.00 from its account at The Pictet Group in Switzerland to its Gazprombank account in Moscow on March 18, 2014, two days after President Obama announced sanctions on Russia related to its annexation of Crimea, but before Arkady and Boris Rotenberg were added to the SDN list on March 20, 2014.1073 Highland Ventures continued to operate in U.S. dollars through U.S.-based financial institutions post-March 20, 2014.1074 Bank wire information shows that the company was involved in 36 transactions amounting to $16,433,804.16; most of these transactions were payments made by Highland Ventures to a variety of parties, including Steamort, Advantage Alliance, Ernst and Young, and other art galleries.1075 Advantage Alliance. Advantage Alliance also participated in U.S. dollar transactions through U.S.-based financial institutions following the imposition of U.S. sanctions in March 2014. From April 3, 2014 to June 6, 2016, Advantage DBAG0000024, line 548–707. DBAG0000024, line 707. 1073 DBAG0000013, lines 17−18. 1074 DBAG0000013, lines 19−54. 1075 Id. 1071 1072 144 Alliance was involved in 87 transactions totaling $29,048,139.65.1076 Those transactions included the receipt of $16,033,224.30 and the payment of $13,014,915.35.1077 Despite dealing in U.S. dollars, the counterparties to these transactions were not always located in the United States.1078 Other Rotenberg-related shell companies listed in the Panama Papers engaged in high-dollar transactions unrelated to art after March 2014. Causeway Consulting. The Panama Papers linked Arkady Rotenberg to Causeway Consulting.1079 An investigation by Barclays confirmed Arkady Rotenberg owned the shell company.1080 Causeway Consulting sent $14,663,000 from its Gazprombank account in Moscow through a U.S.-based financial institution to entities located outside of the United States from January 13, 2015 to April 8, 2015.1081 Culloden Properties. The Panama Papers identified Boris Rotenberg as the owner of Culloden Properties.1082 An investigation by Barclays confirmed Boris Rotenberg was the UBO for the company.1083 Culloden Properties sent $82,378,500 from its Pictet Group account to an account at Gazprombank in Moscow on March 18, 2014, two days after President Obama announced sanctions on Russia for its occupation of Crimea, but before sanctions were imposed on March 20, 2014 on Arkady and Boris Rotenberg.1084 Culloden sent $255,800 in two transactions on March 11, 2015 and August 12, 2015 from its Gazprombank account in Moscow to entities located outside of the United States.1085 Other companies linked to the Rotenbergs also continued to transact in U.S. dollars post-sanctions on Arkady and Boris Rotenberg: Milasi Engineering. As explained above, the 2014 Financial Statement for Milasi Engineering listed Arkady Rotenberg as the UBO.1086 Post March 20, 2014 sanctions on Arkady Rotenberg, Milasi Engineering sent $99,700 on March 13, 2015 to a shell company located in BVI.1087 BARC_000002, lines 23−109. BARC_000002. 1078 Id. 1079 SGA_PSI_00063−82. 1080 BARC_006124. 1081 DBAG00000008, lines 3−5. 1082 SGA_PSI_00063−82. 1083 BARC_006068−69. 1084 DBAG0000010, line 5. 1085 DBAG0000010, lines 6−7. 1086 BARC_006014−6043. 1087 DBAG0000019, line 37. 1076 1077 145 Senton Holdings. An investigation by Barclays determined that Arkady Rotenberg was the UBO for Senton Holdings.1088 After March 20, 2014, Senton Holdings was a part of transactions worth $8,409,930.44, with the most recent wire transfer dated June 26, 2018.1089 The largest transfer of $7,555,000, as mentioned above, was tied to the purchase of La Poitrine by René Magritte.1090 BARC_006912−15. DBAG0000022, lines 5−15. 1090 DBAG0000022, line 5. 1088 1089 146 V. CONCLUSION As Congress and the Executive Branch consider ways to ensure the effectiveness of sanctions, the role that shell companies play in allowing UBOs to remain anonymous must be considered. While there are legitimate business reasons to retain confidentiality, offshore entities with nominee directors and shareholders pose a significant threat to the success of U.S. efforts to block sanctioned individuals from engaging in prohibited transactions. The Subcommittee’s investigation also makes clear that the voluntary programs in place at auction houses are not enough. Further, there is a lack of transparency in private art sales. As such, Congress should add high-value art to the list of industries that must comply with BSA requirements. Given the intrinsic secrecy of the art industry, it is clear that change is needed in this multi-billiondollar industry. 147