- October 23, 2023
- Posted by: FCS Compliance
- Category: Art Market, News
When is an Art Market Participant (AMP) relieved of conducting Customer Due Diligence?
Written by Rena Neville, Head of FCS Compliance – Art Division
Some AMPs are still under the false impression that they must conduct Customer Due Diligence (CDD) on every party in every qualifying transaction. This, however, is not the case. There are some instances when an AMP may be relieved of the obligation to conduct CDD. To help illustrate these exceptions, we will consider two examples.
First, imagine two UK AMPs, involved in the sale of an Edouard Manet drawing being purchased for £25,000. Specifically, the transaction involves Art Advisor One who is buying for her client a collector, Mrs One. The deal is structured such that Art Advisor One will pay Gallery Two, who is selling the drawing on behalf of a collector, known as Mr Two. In this transaction, who needs to do CDD and on whom?
His Majesty’s Treasury has made clear that an AMP must conduct due diligence on customers: those being paid for art or services in connection with a qualifying art transaction. As both AMPs, Art Advisor One and Gallery Two, are being paid by their respective client for a service and/or for art, each of Art Advisor One and Gallery Two must do CDD on their own client, Mrs One and Mr Two, respectively. Specifically in this example:
- Art Advisor One, is being paid a fee to help Mrs One find her a Manet and must conduct CDD on Mrs One.
- Gallery Two is collecting the purchase price for Mr Two’s Manet and is being paid a fee by Mr Two for assisting in the sale of the Manet, Gallery Two must do CDD on Mr Two.
The next question is whether the two AMPs must disclose the names of their clients to each other to conduct CDD. Specifically, must Art Advisor One allow Gallery Two to do CDD on Mrs One and must Gallery Two allow Art Advisor One to conduct CDD on Mr Two? The simple answer is no.
Both UK based AMPs, Art Advisor One and Gallery Two, are subject to similar AML laws and regulations and both are in good standing and in this case, both are duly registered with HMRC. Thus, neither is obliged to do CDD on the customer of the other. They may both simply do CDD on each other and may keep the identity of their respective collector/ clients confidential. [NB: Thank you British Art Market Federation and His Majesty’s Treasury for allowing the art market this exception to customer disclosure].
Although not strictly required in this situation, a nice “belt and braces” approach is to require the opposite AMP to confirm in writing that they have conducted CDD on their own client and have resolved any red or yellow flags that have arisen. Ideally, the AMP would also confirm that the relevant CDD records will be retained in keeping with GDPR and for the required period of time.
Let us now examine a second scenario. We meet again collector Mrs One, who is so pleased with Art Advisor One having found such a lovely Manet drawing that she enters a contract to pay Art Advisor One to help her further build her collection. Mrs. One agrees to pay Art Advisor One a monthly retainer and a reduced commission on every work she buys over the next year. In this case, Art Advisor One is not required to conduct CDD on every qualifying purchase made for Mrs One; but Art Advisor One must monitor Mrs. One.
The reason CDD is not required on every purchase for Mrs One? Mrs One’s relationship with Art Advisor One qualifies her as a “business relationship client”, as defined in the HMT Art Market Guidance. A business relationship client is one with whom there is an element of duration, such as an immediate expectation of repeat business. The retainer agreement with Mrs One is just such an agreement. Other examples may be contracts for credit, a financing agreement or a loan facility.
In the art world, a business relationship client is more often the exception, rather than the rule, as acknowledged by HMT in its art market guidance. Although AMPs actively cultivate clients to encourage and generate repeat business; this is distinct from a business relationship which includes an element of duration, i.e. an expectation of repeat business.
However, for business relationship clients, there is a duty to monitor them. Monitoring, in a nutshell, has two parts. First, the AMP must rely on their “human” AML skill and remain vigilant to any activity outside of the business relationship client’s “normal” behaviour and patterns. Such monitoring would pick up a change of address, change of business, change of marital status, changes in buying patterns, etc. Second, the AMP must keep the client’s identity information up to date. Thus, if during the course of the contract, the client’s passport expires, the AMP must ask for the updated passport as and when it is available. It is also advisable to review these clients in the annual risk assessment.
Importantly, in both of these scenarios, AMPs must remain vigilant to other legal risks. All transactions, whether or not they trigger compliance with the UK ML Regulations, require the art market to remain alert to the risks of violating laws, such as
- The Proceeds of Crime Act, which covers dealing in stolen property, among other things,
- The Anti Bribery Act, which involves criminal bribery in the form of undisclosed commissions, and/ or
- Violating sanctions, bans and/or anti-terrorist financing laws.
In conclusion, the clear rule is that AMPs must conduct CDD on their customers, those who pay for art or for a service. This rule covers the vast majority of situations. However, it is worth being aware of the few exceptions to the rule when one is not obliged to conduct CDD. It is also critical that AMPs remain vigilant to the risks of breaching other related laws such as: Proceeds of Crime Act, Anti-Bribery Act, Sanctions, Bans and anti-terrorist financing laws.
Article written: October 2023