The art market and money laundering: the UK’s first year report
What are the implications of anti-money laundering regulations for the UK art market? Kenneth Mullen of Withersworldwide provides the answers
In January 2020, art galleries, dealers, middlemen and other art market participants (“AMPs”) that process works valued at € 10,000 or more became subject to UK regulation on money laundering (“AML”) (implementing the 5th EU Directive on money laundering). Therefore, as regulated businesses, MPAs are legally required to register with the UK regulatory authority for MPAs, HM Revenue and Customs (“HMRC”); as well as the implementation of AML procedures to verify customers and the transactions they facilitate
In June 2021, HMRC released its first risk assessment (“Report”). This identifies the key areas that AMPs should consider when performing regulated activities. The HMRC considers that it is still “too early to fully assess the effectiveness” of the 2020 AML regulation, however, given the UK government’s 2020 “national risk assessment” on money laundering. money and terrorist financing, due to various factors, the HMRC considers the art market to be at “high risk” for money laundering.
Transactional risks for EWS
The report identifies key risk indicators for EWS across the UK arts sector. These include:
• Unusual buying or selling activity: for example, payment terms that do not make commercial sense;
• Anonymity: The Report recognizes that the art market has traditionally operated privately or through third parties to allow anonymity. While accepting that there may be “legitimate reasons” for this, HMRC observes that an anonymous business environment benefits money launderers. Anti-money laundering regulations restrict or prohibit such anonymity, which has changed the way many UK SAPs do business. However, HMRC is clearly concerned that anonymity continues to be a threat.
• Face-to-face sales: HMRC is concerned that sales made online, over the phone or through intermediaries reduce effective customer identification and increase vulnerability to money laundering. Without necessarily explaining why, the report suggests that “high-end, luxury-driven” SAPs are “in an excellent position” to perform effective customer due diligence (CDD) when their business model includes “grow and establish. relationships ”with customers. The report also contains recommendations for online sales (see below)
• High risk jurisdictions: Dealing with clients or counterparties in high risk jurisdictions is more likely to be linked to money laundering and terrorist financing. The report recommends that AMPs carefully consider the purpose and nature of any transactions with companies in a high-risk jurisdiction. The report also highlights that AMPs will need to develop and maintain awareness of high-risk jurisdictions as part of their AML procedures.
• Informal Sales: The report also cautions AMPs against dealing with a company that wishes to deal in cash for “informal” sales.
Regulatory risks for EWS
The report then highlights the risk indicators related to compliance with AML regulations, in particular:
• Dependence on Customer Due Diligence (CDD) of other parties: although it is possible to rely on the CDD of another party (when taking over ‘a new customer or the acceptance of a payment), the report notes’ a misinterpretation of the use of [such] dependence on the art industry ”. The art business whose CDD is claimed must be subject to UK anti-money laundering regulations itself or, if not in the UK, subject to ‘equivalent legislation in another country ” ; the AML must immediately obtain from this party all the information necessary to meet the regulatory requirements for fixed-term contracts; and must always know the identity of the client / beneficial owner; and have an agreement with that third party that CDD documents will be provided immediately upon request (eg copies of identification documents).
• Linked transactions: The Report reminds SAPs that linked transactions cannot be deliberately broken down below the threshold of € 10,000 which triggers the application of the Regulations. For example, a gallery selling three works valued at £ 6,000 by the same artist to the same seller cannot issue three invoices, claiming they were separate sales.
• Data protection: CDD involves the collection of personal data from individual customers and counterparties. The report reminds EWS that this is allowed for the purpose of complying with the Regulations, although the data should not be used for other purposes, unless the law allows it.
• Online Verification: As noted above, HMRC concedes that due to the impact of COVID, sales are frequently done remotely. For these distance sales, although they may receive identity documents, SAPs still need to take additional steps to verify an individual’s identity. The report recommends making a video call to do this.
• Unregistered MPAs: All regulated MPAs in the UK had until June 10, 2021 to register with HMRC. Under the Regulations, AMPs are required to verify whether any other AMPs with which they are dealing is registered with HMRC. If not, the report recommends that this MPA be left unaddressed and that any unregulated activity be reported to the UK National Crime Agency.
• Rental of works of art and interior designers: the report underlines that the rental of works of art for which there is an obligation to purchase at the end of the contract could be subject to the AML regulation. It also notes that some interior designers, when purchasing artwork for their clients, could be regulated by SAPs and be required to disclose the identity of their clients.
While the report is high profile and does not reveal anything fundamentally new in terms of HMRC’s approach to anti-money laundering regulation, it does contain some useful information. This will be a useful additional tool for UK AMPs to read alongside the in-depth guide to UK anti-money laundering regulations released in 2020.
Kenneth Mullen is a partner of the Withersworldwide Intellectual Property and Technology team. He advises on intellectual property, technology, data privacy and regulatory issues in various sectors, with a particular focus on artistic and cultural institutions, design, luxury brands, entertainment and digital media.