- July 14, 2023
- Posted by: FCS Compliance
- Category: Art Market, Blog
Two Common Questions: What is ‘a linked transaction’? and Why should you care?
Written by Paula Trommel, Head Advisor for FCS Compliance – Art Division
It is easier to answer the second question than the first…
Why should an art market participant (AMP) care whether an art market transaction is linked?
Because… failure to detect a linked transaction creates a risk of breaching the UK Money Laundering Regulations and exposes the AMP to fines, penalties, or worse.
In the UK, certain works of art transactions require AMPs to conduct Customer Due Diligence (CDD) checks, including specifically a ‘single transaction or a series of linked transactions’ involving a work(s) of art whose value exceeds €10,000.
But what is a ‘linked transaction’?
Although seemingly straightforward, it is one of the most commonly asked questions we receive. As there is limited formal guidance for what constitutes a ‘linked transaction’ in the art market, let us instead turn to the esteemed Cambridge dictionary. Here, the first definition offered for ‘linked’ is to:
- make a connection between two or more people, things, or ideas:
His Majesty’s Treasury and the British Art Market Federation’s joint Guidance of 2023 does not offer a definition per se of ‘linked’ but it does provide two examples of linked transactions. In para 30 of the Guidance, the first example offered is:
…where the transaction appears to be deliberately broken down into several payments below 10,000 euros.
The second example offered is:
HMRC considers multiple payments against a single invoice, which together exceed the 10,000 euros threshold, to be linked, regardless of how long it takes to make payment.
It would seem reasonable to conclude that the distinction between the two examples is that the first is a transaction made under separate invoices that has the effect of ensuring that each invoice total remains below the €10,000 threshold; and that the second example involves a single invoice whose total exceeds the threshold, but for which payments are made over time such that each individual payment is less than the €10,000 threshold.
The first example appears to focus on sales that are connected, as the Cambridge dictionary definition implies. In other words, the first example seems to involve an agreement for sale that might be expected to result in a single invoice. Certainly, a common-sense conclusion is that items on a single invoice are from a connected, or linked, transaction.
The second example implies the sale is linked/connected as it is on a single invoice but involves extended payment terms in which each payment is less than the €10,000 threshold.
Nowhere in the Guidance is a requirement imposed to add up a single client’s legitimately separate transactions made over time. Nevertheless, we understand some AMPs are choosing to total client transactions over a self-defined period.
Some begin calculating an individual client’s transactions from the date of their first purchase, while others calculate from January 2020. And, most commonly in our experience, others total a client’s transactions over the course of the most recent calendar or financial year. Such AMPs conduct CDD and otherwise apply the UK Money Laundering (ML) Regulations if/when a client’s total purchases in the self-prescribed time period exceed the €10,000 threshold.
It would seem that this is a broader definition of linked than is in the Guidance, and thus may not be strictly required under UK ML regulations. However, some AMPs seem to find it a clear, bright-line test they are able to apply in the absence of any further definitions or guidance from HMRC or HMT.
Conclusion: What is a linked transaction?
It may be too simple to say a linked transaction is a connected transaction, but it seems safe to conclude that linked transactions include at the very least:
- transactions in which the invoice is split to avoid the threshold; and
- an invoice whose total value exceeds the threshold even if payment is made in instalments where each of the payments is less than €10,000.
Conclusion: Why should an AMP care?
Not caring most certainly risks violating the AMP’s obligations under the UK ML Regulations and puts the AMP at risk of civil and criminal consequences. These are consequences that all AMPs will want to avoid!
Published: July 2023