Money laundering legislation and the art world

The art world and Art Market Participants (AMPs) will, as part of the Directive, come into line with other regulated sectors such as the banking industry, the legal sector and property professionals. And in so doing, comply with the Money Laundering Regulations (MLR) of 2017. Just to be clear: AMPs are described as a firm or sole practitioner who is either:

• by way of business, trading in, or acting as an intermediary or trades in the sale or purchase of works of art where the value of the transaction (or a series of linked transactions) is €10,000 or more
• the operator of a freeport when it stores works of art in the freeport where the value for a person (or a series of linked persons) is €10,000 or more 

Despite this lengthy notice period, the guidance provided to AMPs by the British Art Market Federation (BAMF) and approved by the Art market AML Supervisor – HMRC – appeared after the legislation had come into force. This left AMPs in a tricky position.

It seems that the initial guidance had been somewhat rushed and an announcement was made shortly afterwards saying that it would need to be updated and greater clarification provided. As we entered 2021, some 12 months after the legislation came into force, there is still no clarification as to when final guidance will be made public.

Since the start of 2020, the UK, like the rest of the world, has had to contend with the COVID-19 and the chaos and confusion brought with it. As a consequence, AMPs, like many other businesses, have pushed AML to the back burner. HMRC has also extended the legal requirement to register until June 2021 – which has meant, for some, pushing compliance even further down the priority list.

Don’t be complacent

With a mass vaccination programme now underway we should – hopefully – be returning to a degree of normality later this year. This means AML compliance will be back on the agenda before too long and AMPs, like all other regulated sectors, will be forced to bring their business up-to-speed in getting and remaining compliant with the MLR 2017.

Delaying acting on your money laundering obligations until updated guidance from BAMF and HMRC is published simply won’t cut it. Remember, what we are waiting for here is just guidance, the regulations are already in place and have been since 10 January 2020. These regulations represent criminal legislation and any business that does not comply is already committing a criminal offence.

Consider your legal obligations now

AMPs need to consider their legal obligations now. The regulations are clear – right now, you must:

• register with HMRC (read our guide)
• put in place written comprehensive AML Policies & Procedures in line with Regulation 19
• undertake an AML Risk Assessment in line with Regulation 18
• provide training to members of staff as set out in Regulation 24

These are legal requirements and will not be subject to change as a result of any future guidance.

One of the issues still under consideration is whether artists themselves are within the scope of the regulations. While this is yet to be decided, any other person or company “concerned” with the sale or acquiring of works of art as defined by s.21 of the Value Added Tax Act 1994, certainly does fall within the legislation.

Learning from others

The art market operates in a similar manner to the housing market, especially that of prime central London. Not least with the involvement of third parties and intermediaries, such as property finders – the parallels are striking. Like estate agents and lawyers, AMPs undertaking a transaction will need to consider exactly who their business relationship is with – and this includes any counterparty – and then determine the extent and level of the due diligence required.

Just as in the property market, an area that is undoubtedly going to problematic for AMPs is the involvement of complex opaque company structures. FCS compliance has seen at first hand how these structures operate in not just the property market, but when carrying out Customer Due Diligence (CDD) for galleries in the art market, too. This sort of corporate structure has been prevalent in the housing market for many years.

Companies are often located offshore, in tax havens or secrecy jurisdictions such as the British Virgin Islands, Panama and closer to home in the Channel Islands. The task of unravelling this type of structure in order to identify the Ultimate Beneficial Owner can be time-consuming and problematic.

UK Government deems the art market at high risk of money laundering

On 17 December 2020 the UK Government, courtesy of HM Treasury and the Home Office, published its latest AML National Risk Assessment, where the art market was specifically referred to for the first time. The report states:

“The UK art market is considered at HIGH risk of money laundering because criminals can conceal the ultimate beneficial owner of art, as well as the source of funds used to purchase art. This can be achieved by using complex layers of UK and offshore companies and trusts, agents or intermediaries, with agents and intermediaries commonly used in the market. Also, the value of art varies greatly, making it attractive to varying levels of criminals, as well as providing options to launder money through a small number of high-value purchases or a large number of low-value purchases. Furthermore, the international nature of parts of the market likely makes art an attractive commodity for money launderers seeking to move illicit finance into or out of the UK.”

The UK art market is estimated to be worth $14 billion and accounts for approximately 20% of all art sales. Already identified by the Government as a high risk in terms of money laundering it is safe to say that as far as compliance is concerned, it is about to come under even closer scrutiny. The time for AMPs to put AML to the bottom of the priority list has therefore now passed.

At the start of 2021, they should be putting in place the framework needed to ensure that their business and employees are protected from all the problems non-compliance brings. Failing to do so comes at a high cost, not just financially but reputationally too. Contact the team via the form below to find out how we can help – we would be delighted to answer any questions or concerns you have.

Jerry Walters, Managing Director, FCS Compliance – January 2021