- October 18, 2022
- Posted by: FCS Compliance
- Category: Blog
By Rena Neville and Paula Trommel – Lead and Senior AML Consultants, FCS Compliance Art Division – September 2022
The original 2020 art market UK Government and British Art Market Federation Guidance was an heroic effort to apply Money Laundering Regulations, initially designed for banks and financial institutions, to the weird and wonderfully unique art market.
The revised 2022 Guidance [1] clarifies and improves the initial Guidance, some of which were covered in the FCS Compliance Summer Newsletter.
Arguably the most significant change in the 2022 Guidance, not fully addressed in the Summer Newsletter, is the effect of the updated definition of ‘customer” and how it may relate to when and how Customer Due Diligence (CDD) is applied.
To quote the new Guidance, for purposes of the UK MLRs, a “customer” is an art market participant (AMP):
“…selling or acting as an intermediary in the sale or purchase of a work of art, [and the Customer] will be whoever is paying the AMP for the artwork, or for services in relation to the transaction.”
As the above quote makes clear, it is possible for there to be more than one customer in a single transaction. The first customer in the transaction might be the collector paying for the work of art. The second customer in the same transaction could well be an art advisor who is being paid solely for their advice and assistance, ie a service.
In these transactions, CDD should be conducted on both Customers, the art advisor and the collector.
In addition to having more than one Customer, another common scenario is having more than one AMP involved in a multi-layered transaction, sometimes called a chain.
In a chain, the AMP ideally prefers to avoid disclosing the identity of their client (whether a seller or buyer) as well as their contacts. One of the most straightforward examples of a transaction chain is helpfully outlined in the most recent Government Guidance. [2]
In this example, AMP One accepts a consignment for the sale of a work of art from a private collector. AMP One mentions the work to AMP Two and AMP Two contacts AMP Three, who has a private client willing to buy the work of art. The transaction then takes place as follows:
- AMP Three pays AMP Two for the work of art and for introducing the sale opportunity to AMP Three.
- AMP Two in turn pays AMP One for the work of art and
- AMP One then remits net proceeds to the original seller, withholding a portion of the sale proceeds as the commission for the service provided.
Remembering that one must do CDD on Customers, the parties being paid for art or for service, the Guidance is clear that:
- AMP One must do CDD on their own private client seller and on AMP Two.
- AMP Two must conduct CDD on both AMP One and AMP Three; and
- AMP Three need only conduct CDD on AMP Three’s own client, the buyer.
For simplicity, in this scenario, assume there are no Red or even Yellow Flags and that all three AMPs are UK AMPs registered with HMRC and in good standing.
Quite helpfully, under this scenario, AMP Three does not need to disclose the identity of their buyer to AMP Two or AMP One. Similarly, AMP One does not need to disclose the identity of their own private seller to AMP Two or AMP Three.
Perhaps more importantly, should there in future turn out to be a money laundering problem with the transaction, the UK Government would be in a position to identify each party in the chain and access the CDD information being stored by the three AMPs as part of their record-keeping obligations.
Unfortunately, neither life, nor transactions are so simple. There are numerous variations on the above, which require the AMP to apply a risk-based approach client by client, transaction by transaction and identify:
- who the customer(s) is/ are and
- the party or parties on whom CDD must be done.
For example, if only one of the AMPs in the above scenario is registered and, in the UK, and the other AMPs are from jurisdictions in which the art market is not subject to ML regulations, the UK AMP may want to do CDD on more parties than identified above.
The scenario becomes yet more complicated if the party in the middle of the chain, AMP Two above, is merely an introducer and therefore not subject to the UK MLRs, or equivalent regulations. In this case, it may be that AMP One does not need to do full CDD on the introducer in the middle, but on AMP Three, who is now the customer.
However, AMP One would still need to identify the introducer and confirm their authority to act. Just to keep everyone on their toes: another possibility is that a party may be an introducer in one transaction, but a customer in the next. There are nearly as many variations on this theme as transactions in the art market. The good news is that the 2022 Guidance offers a variety of helpful examples.
What the 2022 updated Government Guidance has not changed is the necessity of taking a risk-based approach. It is abundantly clear that fulfilling the duties of the MLRs is not a tick-box exercise, but quite the opposite.
Diligently applying a good faith, risk-based approach, client by client, transaction by transaction remains critically important. One of the first steps to this approach is identifying the customer(s). Clearly, in many cases, there will be only one customer, a private collector buying directly from a gallery or auction house. But, in the cases involving a transaction chain or more than one party, it is vital to take the time to identify properly the customer(s) which will guide the decision on what CDD must be done in each case.
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[1] Anti-Money Laundering Guidelines Approved by HM Treasury 30 June 2022, see here.
[2] See Para 5.21, example number Six here.
