Transparency Group Calls Out Lack of Due Diligence in Luxury Goods Sales

Luxury goods sellers – from high fashion houses, jewelers and real estate agents to yacht builders and diamond brokers – are doing little to check if their customers are using corrupt money to fund their high-end purchases, according to a new report. In its study, Tainted Treasures: Money laundering risks in luxury markets, Berlin-based Transparency International, a global civil society organization leading the fight against corruption, found that little due diligence exists in connection with the sale of luxury goods, and where there are laws, there is little enforcement.

Transparency International, which was founded in 1993 as a non-governmental agency, is calling for governments in high risk countries – including China, Japan, the US and the UK – to introduce specific laws to mandate due diligence for high-risk luxury goods sales and establish a designated authority to enforce them.

According to Transparency International Chair José Ugaz, “The luxury sector is more than just a money laundering vehicle. The behavior of kleptocrats [government officials who seek status and personal gain at the expense of the governed] who amass millions in properties, sports cars, and art in a short period of time shows that the desire to own luxury can in fact be one of the drivers of corrupt behavior.”

He continued on to note, “The luxury sector has a responsibility to prevent public funds, which could have gone to schools and hospitals, from being splurged on their products even if it means fewer sales.”

The organization’s most recent due diligence data shows a pattern of lax reporting when it comes to corruption. The report states that red flags that point to a risk of money laundering include the widespread use of anonymous shell companies to disguise the ultimate owner of assets in addition to long-standing luxury industry traditions of discretion and confidentiality. Sectors such as precious jewels or luxury accessories also feature high-value goods that are easily transportable, yet anti-money-laundering measures are scant.

Despite these risks, there are limited anti-money obligations in leading luxury markets such as China, Japan and the US, according to Transparency International. In countries where anti-money laundering legislation at least partially applies to luxury dealers, such as France, Germany, Italy and the UK, there is little evidence of effective enforcement of these rules by authorities.

The report makes the following recommendations to address risks of dirty money being used to buy luxury goods and assets: 

Countries that host the largest luxury markets – such as China, France, Germany, Italy, Japan, the UK and the US – should strengthen legislation to ensure dealers in high-value goods and in specific high-risk luxury sectors have customer due diligence and reporting requirements that meet best practice international standards.

Governments should also ensure luxury sectors have a designated authority charged with oversight and regulation. These authorities should have the mandate, resources and independence necessary to effectively carry out their oversight duties, which should include having the ability to sanction non-compliant businesses.

Leading brands and luxury multinationals should establish effective customer due diligence and reporting systems in their retail and customer service chains. These should also be established in countries where they are not yet legally required, in line with the public commitments to ethical behavior and integrity already made by many companies.

As the international standard-setter against money laundering, the Financial Action Task Force should strengthen its recommendations to ensure high-value luxury sectors are adequately covered by global standards.