Sanctioned Russian billionaires Arkady and Boris Rotenberg reportedly dodged sanctions by using multimillion-dollar art deals to move money out of the US. 

The two stoligarchs, or “state sponsored oligarchs,” are members of Russian President Vladimir Putin’s tight inner circle, who he uses to build massive state-funded infrastructure projects such as the Power of Siberia gas pipeline to China and the Kerch bridge that links Russia’s mainland to the Crimea peninsula, making the nominally private businessmen into billionaires.

Having been friends with Putin since his KGB days, both men were included in the US Treasury Department (USTD) sanctions list, which bans them from doing business with US companies or individuals. Except there is a loophole: the art world is not regulated and has also been highly secretive to boot, making it the ideal vehicle for the Rotenbergs to move money in and out of the US.

And they have a lot of money to move: Forbes estimates their combined wealth at $4.1bn, making them among the richest men in Russia. Vedomosti dubbed them the “Kings of the state contracts” a few years ago as development companies scooped up the lion’s share of the most lucrative state investment project contracts.

Now it appears they have been using art world deals to move tens of millions of dollars in out and out of the US, according to a report presented at the end of July by members of the permanent subcommittee on the Investigations of the US Senate Committee on Homeland Security and State Affairs, as reported by the RusLetter blog.

The committee has been investigating the brothers' businesses for two years and concluded that the US art market is not regulated by the rules of anti-money laundering legislation, so deals can be carried out in the interests of people included in the sanctions list without penalties.

The report names Moscow art dealer and US citizen Grigory Baltser as instrumental in the deals: between May to November 2014 shortly after the brothers were included in the sanctions list, Balzer allegedly purchased works of art worth a total of $18mn with money from companies associated with businessmen, according to the report, including a painting by René Magritte La Poitrine worth $7.5mn.

 

All in all, the report says that the Rotenbergs concluded a total of $91mn worth of art deals in the US after they had been sanctioned. In addition, almost $122mn was withdrawn from accounts and sent to Russia between March 16, 2014, when US President Barack Obama announced the imposition of sanctions, and on March 20, when the Rotenbergs were added to the sanctions list, the report said.

And it appears that most of the most famous art auction houses have been caught up in the scheme. The report names Christies, Sotheby’s as well as London-based Phillips and Bonhams, as venues for the Rotenberg-connected deals. These companies all claimed they didn't know who the final buyer was in any of the suspected transactions, but said they were ready to co-operate with the US authorities.

“The art industry now operates under a veil of secrecy, which allows consultants to represent sellers and buyers, hiding both their identities and the source of funds. This creates the conditions for money laundering and sanctions evasion,” commented the chairman of the subcommittee, Republican Senator Rob Portman, as cited by RusLetter.

“It is totally unacceptable that rules designed to prevent money laundering do not apply when someone purchases a multi-million-dollar work of art…  Failure to close such obvious loopholes makes US sanctions – an important national security tool – far less effective than they could have been,” said Democrat Senator Tom Carper, second author of the report.

The report recommends tightening the rules and adding art to the list of business covered by the money laundering rules as well as for more transparency of the identity of the final counterparty in things like public auctions.

In addition, the senators believe that the Office of Foreign Assets Control of the US Treasury Department (OFAC) should issue detailed instructions to auction houses and art dealers, explaining exactly what steps they should take in order to make sure they are not dealing with a sanctioned person.

“I understand that auction houses and dealers do not always want to know who they are selling to, as it helps them earn money, but we are interested in ensuring national security, for sanctions to work,” Portman explained to the Wall Street Journal.

Balzer denied that he was representing the Rotenbergs in comments made via his lawyer to the WSJ.

A representative of Arkady Rotenberg told the Russian newspaper RBK that the businessmen have never laundered money and have not tried to evade sanctions, including through transactions in the art market.

"All transactions with works of art, made by members of the Rotenberg family or on their behalf, have always been carried out openly, exclusively for legal and personal purposes and on market conditions," said a representative of the Rotenbergs.