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 from Withersworldwide provides the answers

In January 2020, art galleries, dealers, intermediaries and other art market participants (‘AMPs’) dealing in works valued at €10,000 or more became subject to UK Anti Money Laundering (‘AML’) Regulations (applying the EU’s 5th Money Laundering Directive). Consequently, as regulated businesses, AMPs are legally obliged to register with the UK regulatory authority for AMPs, HM Revenue and Customs (‘HMRC’); as well as setting up AML procedures to verify clients and the transactions they facilitate

In June 2021, HMRC published its first risk assessment (‘Report’). This identifies key areas for AMPs to consider when carrying out regulated activities. HMRC regards it as still ‘too early to fully assess the effectiveness’ of the 2020 AML Regulations, however, taking account of the UK Government’s 2020 ‘National Risk Assessment’ on money laundering and terrorist financing, due to various factors, HMRC views the art market as being at ‘high risk’ of money laundering.

Transactional risks for AMPs

The Report identifies key risk indicators for AMPs across the UK art sector. These include:

• Unusual sales or purchase activity: for instance, payment arrangements that do not make commercial sense;

• Anonymity: The Report acknowledges that the art market has traditionally operated in private or through third parties to enable anonymity. Whilst accepting that there can be ‘legitimate reasons’ for this, HMRC observes that an anonymous trading environment benefits money launderers. The AML Regulations restrict or prohibit such anonymity which has changed the way many UK AMPs conduct business, however, HMRC is clearly concerned that anonymity continues to pose a threat.

• Face-to-face sales: HMRC is concerned that sales conducted online, phone or through intermediaries decrease effective identification of clients and increases vulnerability to money laundering. Without necessarily explaining why, the Report suggests that ‘high-end, luxury-focused’ AMPs are ‘in an excellent position’ to carry out effective customer due diligence (CDD) where their business model includes ‘cultivating and building relationships’ with customers. The Report also contains recommendations regarding 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 businesses from a high-risk jurisdiction. The Report also points out that AMPs will be expected to develop and maintain awareness around high-risk jurisdictions as part of their AML procedures.

• Off-record sales: The Report also warns AMPs about dealing with a business who want to deal in cash for, what are ‘off the record’ sales.

Regulatory risks for AMPs

The Report goes on to highlight risk indicators relating to compliance with the AML Regulations, including:

• Reliance on other parties’ customer due diligence (CDD): While it is possible to rely on another party’s CDD (when taking on a new client or accepting payment), the Report notes ‘some misinterpretation of the use of [such] reliance in the art industry’. The art business whose CDD is being relied upon must be subject to UK AML regulation itself or, if non-UK, subject to ‘equivalent legislation in another country’; the AML must immediately obtain from that party all the information needed to satisfy regulatory requirements around CDD; and will still need to know the identity of the customer/beneficial owner; and have an agreement with that third party that CDD documents will be provided immediately on request (e.g. copies of identification documents).

• Linked transactions: The Report reminds AMPs that linked transactions cannot be deliberately broken down under the €10,000 threshold that triggers 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 collection of personal data of individual clients and counterparties. The Report reminds AMPs that this is permitted for the purpose of complying with the Regulations although data should not be used for other purposes unless legislation permits.

• Online verification: As noted above, HMRC concedes that, due to the impact of COVID, sales are frequently being conducted remotely. For these remote sales, while they may receive identity documents, AMPs still need to take further steps to verify an individual’s identity. The Report recommends conducting a video call to do this.

• Unregistered AMPs: All UK regulated AMPs had until 10 June 2021 to register with HMRC. Under the Regulations, AMPs are required to check whether another AMP they are dealing with is registered with HMRC. If not, the Report recommends not dealing with that AMP and reporting unregulated activity to the UK National Crime Agency.

• Rental of art and interior designers: The Report points out that rental of art where there’s an obligation to purchase at the contract end could be subject to AML Regulation. It also notes that some interior designers, when buying art for their clients could be regulated AMPs and required to disclose the identity of their clients.

Detailed guidance

While the Report is high-level and does not reveal anything fundamentally new in terms of HMRC’s approach to AML Regulation, it does contain useful information. It will be a worthwhile additional tool for UK AMPs to be read alongside the detailed UK AML Regulation Guidance published in 2020.

Kenneth Mullen is a partner in the Withersworldwide intellectual property and technology team. He advises on IP, technology, data privacy and regulatory issues across a range of sectors, with particular focus on art and cultural institutions, design, luxury brands, entertainment and digital media.

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