Time flies when you’re having fun, that’s what they say. It may come as a surprise to learn that more than 18 months have now passed since the UK’s new anti-money laundering (AML) rules came into force. The regulations have imposed significant new AML obligations on art market players (a term that includes those who negotiate or act as an intermediary in the sale and purchase of works of art by worth 10,000 euros or more). By the time the new laws came into force, there was some uncertainty as to how these obligations were to be fulfilled and the real extent of the money laundering risks presented by the UK art market. A year and a half later, are these questions cleared up – and how are art companies doing?
In June 2021, the government released a new AML risk assessment specifically for art market players to support them in identifying key risk indicators in their businesses. This guide provides useful insight into how some of the new anti-money laundering laws are to be applied and how the government currently assesses money laundering risks in the UK art market. Those in the art market would do well to read the short document in its entirety. (Interior designers may be surprised to read that they can also be regulated for the AMLA.)
This orientation follows the UK National Money Laundering and Terrorist Financing Risk Assessment of December 2020 in which the risk posed by art market participants was first assessed and found to be “high”. The same conclusion was also drawn in the latest guidance, which states that it is “too early” for the government to fully assess the impact of the implementation of the new anti-money laundering laws on the art market. Indeed, the guidelines state that “the use of illicit funds to buy and then sell high value goods is one of the oldest and most common elements of money laundering and terrorist financing methodologies.” .
As dealers no doubt now know, generally speaking, new anti-money laundering laws require art market players to perform what is called “customer due diligence”. systems and related controls (including a business risk assessment and AML policy), and train their staff to comply with their legal and regulatory AML responsibilities. By properly fulfilling these obligations, resellers can both reduce the risk of their business being inadvertently involved in money laundering (with the attendant legal and reputational risks) and reduce the risk of being inadvertently involved in money laundering. held responsible for the criminal offense of “non-disclosure” of money laundering.
In recent guidelines, the government highlights another potential reality for anyone inadvertently involved in money laundering. The guide states: “It is essential that [art-market participants] understand and respect their obligations […] to protect themselves, their families and communities against the dangers of infiltration by criminals. Any weakness in the controls used by the company can be exploited by criminals who will seek to use, coerce or control the [art-market participant] to move more of their illicit money. In other words, if you are unlucky enough to be inadvertently involved in a money laundering transaction, you might find yourself under pressure in an ongoing relationship with criminals who are difficult and dangerous to get out of.
Art dealers implementing AML controls for the first time could naturally attempt to reduce the complexity of the legislation into a checkbox exercise. However, a more holistic approach to AML controls is needed for proper implementation. As a lawyer, I encourage my clients to try to understand (conceptually) what money laundering is, to learn to recognize red flags and to think about the potential risks to which their business may be subject. Only then can they properly determine how to perform appropriate customer due diligence in each circumstance. In my opinion, understanding how to conduct a risk assessment is key, not only to properly applying the law, but also to making the process more user-friendly.
Many dealerships have invested in database subscriptions which, to a greater or lesser extent, can aid customer due diligence procedures in terms of verification and monitoring. Some, like Arcarta, operate an online platform that collects documentation from buyers as part of the checkout process. Others, like World-Check, Experian, and Acuris, do extensive database searches. It is important to remember that regardless of such subcontracting, the responsibility for carrying out the appropriate controls rests with the actors of the art market. They should collect the necessary information and verification documents and keep them in their own files for the required period (usually five years). They must also understand each transaction and identify each customer in order to conduct risk assessments and potentially perform ongoing customer due diligence, and identify related transactions. Therefore, full delegation is not an option.
Art dealers should be clear from the outset of any agreement with an outsourced provider as to the extent of the checks they will undertake. For example, do they check politically exposed persons and sanctioned individuals? If so, against which lists and how often will these lists be updated? It would also be wise to ensure that all necessary data protection considerations have been taken into account when purchasing an outsourced customer due diligence service provider.
Art Market Participants are permitted to rely on customer due diligence performed by properly supervised third parties (such as another UK based Art Market Participant) in certain circumstances (see the “confidence procedure” set out in Regulation 39 of the Money Laundering Regulations). However, guidance released in June points out that there has been “some misinterpretation” of the use of trust. With useful clarity, it confirms that the detailed criteria set out in the legislation must be met. This includes the identity requirements of the third party (whether it operates in the UK and is subject to the requirements of anti-money laundering regulations; or, if it operates overseas, that it is subject to equivalent legislation in another country). Actors in the art market must also immediately obtain from the invoked third party all the information necessary to meet the requirements of customer due diligence regulations. A written agreement must be in place that all documents obtained by the third party are provided immediately at the request of the other party. It also confirms that when relying on a third party, you will need to know the identity of the client or beneficial owner (and the level of due diligence that has been exercised on them).
This confirms something that I have found myself explaining to many art dealers over the past year, despite much disbelief: the identity of the principal must be revealed even if the trust procedure is used. Having said that, I have also come across a number of properly put in place trust agreements (backed by strict confidentiality obligations) between UK based companies.
In my anecdotal experience, the art market has approached the new AML regulation responsibly. This is particularly commendable at a time when the market has also had to deal with the challenges of Brexit and Covid-19. Typically, art companies have systems and procedures in place, and they have been willing (although not necessarily willing) to understand their responsibilities when it comes to combating money laundering.
Of course, for some, the sales they make are straightforward and the risks are clearly low. Perhaps the most difficult impact of the new anti-money laundering laws has been on independent traders who occasionally make big sales but don’t feel like big hitters, whose transactions often involve an international chain and practice. has generally dictated that the identity of clients be kept confidential. . They know that their trades can easily fail and that they can be excluded from trading due to the briefest exchange during a chance encounter in the lobby of an auction house. That said, these are clearly the types of transactions that typically present some of the highest money laundering risks and, whether these art dealers like it or not, they need to fully commit to their new obligations in this area. by LBC. When an agent searches for a work on behalf of a client or represents a seller, due diligence with the client would of course also help to reduce the risks associated with provenance and authenticity. Greater use of non-circumvented agreements (containing confidentiality covenants and clear commission terms) might be the answer for those dealers who want assurance that they will be paid on a deal.
The EU, like the UK, has confirmed its commitment to tackling money laundering and terrorist financing, and it won’t be long before the US fully integrates the art market. under their anti-money laundering laws. A broader international focus on AML should facilitate a change in culture and practices.
For all art companies that are still unfamiliar with the new regulations, the latest guidelines can be a red flag. As part of your duty of care towards customers, it indicates that “if you are dealing with another [art-market participant] you need to check on GOV.UK if the company is registered with HMRC for AML supervision. Otherwise, you should not continue to deal with [them]. ‘ He also calls on art market participants to consider reporting this non-registration to HMRC and the National Crime Agency.
Sarah barker is a partner and Head of the Art Group of the law firm Lee & Thompson LLP.
This article does not constitute legal advice and should not be relied upon. If you need legal advice regarding any of the issues raised in this article, specific legal advice should be sought on a case-by-case basis.