The list of items reads like the fantasy shopping list of a newly minted billionaire: a Rodin sculpture, a Mercedes Maybach, two Bugatti Veyrons, a dozen Fabergé eggs, Michael Jackson memorabilia and a private jet.
In fact, the list is not fantasy, but actual items seized from Teodorin Obiang, son of Equatorial Guinea’s president, in a high-profile corruption case in 2017. Obiang — who was appointed by his father as the country’s vice president — was subsequently convicted and fined USD$30 million for plundering state resources to purchase cars, furniture, artwork and other luxury goods for personal use.1,2
While corruption cases like Obiang’s are hardly unique, the exploitation of luxury goods for illegal gain appears to be on the uptick as criminal groups play games of cat and mouse with law enforcement that extend beyond traditional money-laundering methods. They are enticed by new and developing flaws in a financial system designed to separate legitimate purchases of a luxury good from transactions potentially involving illicit funds at the point of sale.
The issue is forcing luxury brands and dealers to examine their processes more closely as financial crime regulators simultaneously ramp up scrutiny of their sector.
What’s on a Money Launderer’s Shopping List?
The luxury goods sector is valued at USD$312 billion. Intrinsic characteristics make the following items more attractive for laundering, tax evasion and other criminal activities.
• Watches
• Superyachts
• Luxury cars
• Whiskey
• Fine art
• High-end apparel
Source:
https://www.statista.com/outlook/cmo/luxury-goods/worldwide
Navigating a regulatory patchwork
Three unique elements of the luxury goods sector present challenges for organisations looking to stay ahead of the compliance curve. One is high staff turnover, which often leaves little time to train employees sufficiently before they move on to other opportunities.
Another is the high-touch approach inherent to luxury goods sales themselves, where requests for financial information from customers can be perceived as intrusive. In this instance, a sales associate might be reticent to ask for a customer’s tax information as they are closing a sale for an expensive watch.
Perhaps most challenging is the disparate anti-corruption laws. Typically, laws are enforced at the national or regional level, which creates a fragmented patchwork of inconsistent rules that criminal enterprises understand and actively try to exploit.
Consider anti-money-laundering statutes: Across the European Union, anyone who accepts cash payments of €10,000 or more in exchange for a luxury good is required to register with the appropriate regulator. They must also implement certain policies and procedures, conduct risk assessments and due diligence and report suspicious activities.3 Meanwhile, the threshold in Israel for reporting cash transactions for jewelers and other luxury goods dealers is around €3,100, only about a third of the EU standard.4 And the United Kingdom only recently enacted stringent anti-money-laundering rules that require employees at the country’s luxury goods retailers to verify the source of a client’s wealth during the sales process.5
Complicating matters, luxury brands must comply with evolving and complex sanctions laws and ensure that economic resources are not made available to designated individuals. Brands that run afoul of these laws not only put themselves at financial risk with additional regulatory repercussions, but also jeopardise their reputations.
Protecting brand goodwill
When it comes to luxury goods, reputation is everything. Recent headlines involving Rolls-Royce underscore these reputational risks. The iconic UK manufacturer posted record loses, with shares sliding almost 15 percent, in the wake of news reports that scrutinized its relationship with North Korea’s government and disclosed that it had paid £671 million to settle corruption allegations with U.S. and UK authorities.6,7
With such acute risks, luxury goods brands and dealers must pull off a high wire act, ensuring their control frameworks are airtight while making sure that these often-intrusive efforts do not impinge on long-term relationships with major clients.
Success often hinges on understanding where exposures lie and implementing risk-mitigating controls. However, luxury goods brands and dealers may not have the right compliance processes in place like their financial sector peers, who benefit from many years of close regulatory supervision.
Limiting risks, protecting brands
By understanding the fragmented regulatory patchwork, however, luxury goods organisations can improve their compliance controls without negatively affecting their bottom line. The key is to develop a fit-for-purpose compliance framework that assesses the unique customer base, products, geography and third-party network, including international supply and distribution chains.
Once these risks are identified, a firm can implement proportionate controls. Examples include an anti-money-laundering policy, comprehensive financial crime training for relevant personnel, and point-of-sale procedures such as source-of-wealth checks, third-party due diligence processes, customer screening and governance and monitoring.
Implementing these controls does not have to be onerous. Luxury goods dealers are retailers, not banks, so workflows can be tailored to an organization’s unique sales process. The efforts must be proportionate to the identified risks so that they do not become overly burdensome from a cost or employee time perspective.
By taking a tailored approach to controls, luxury firms can arrive at a solution that satisfies clients, manages increasingly stringent compliance requirements and mitigates against potential reputational risk. Prioritising this effort will prepare businesses for the future as regulations mature, and will position them to fulfill any legitimate fantasy shopping list.
Note: This article is adapted from a previous article by the same authors: “Follow the Treasure Trail: Luxury Goods and Financial Crimes.”
© Copyright 2023. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
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Footnotes:
1: “Teodorin Obiang: French court fines Equatorial Guinea VP.” BBC. Feb. 10, 2020. https://www.bbc.com/news/world-europe-51449951
2: “Son of Equatorial Guinea’s president is convicted of corruption in France.” The Guardian. Oct. 27,2017. https://www.theguardian.com/world/2017/oct/27/son-of-equatorial-guineas-president-convicted-of-corruption-in-france
3: European Commission. https://finance.ec.europa.eu/financial-crime/eu-context-anti-money-laundering-and-countering-financing-terrorism_en
4: “Israel bans use of cash for purchases larger than NIS 6,000.” The Jerusalem Post. July 28, 2022. https://www.jpost.com/business-and-innovation/banking-and-finance/article-713354
5: “Anti-money laundering registration.” UK.gov. https://www.gov.uk/anti-money-laundering-registration
6: “How North Korea’s leader gets his luxury cars.” The New York Times. July 16. 2019. https://www.nytimes.com/2019/07/16/world/asia/north-korea-luxury-goods-sanctions.html
7: “Rolls-Royce to pay £671m over bribery claims.” The Guardian. July 16, 2017. https://www.theguardian.com/business/2017/jan/16/rolls-royce-to-pay-671m-over-bribery-claims
