Paying for Art With Cryptocurrency

Paying for Art With Cryptocurrency

Art dealers have been asking me whether it is okay to accept cryptocurrencies such as bitcoin as payment for art sales.  Everyone knows it is nigh on impossible to trace bitcoin to an owner and this is understood to be the position for most cryptocurrencies.  It is this feature of ‘pseudonymity’ which makes crypto money attractive to people who wish to engage in illicit activity or avoid financial sanctions regimes.  While every cryptocurrency transaction is immutably recorded on the blockchain to form what some call a ‘fingerprint’, no one can tell who the fingerprint belongs to.  And therein lies the problem.

The art market is now subject to anti-money laundering regulation throughout Europe which means that for regulated art dealers to confidently meet their anti-money laundering obligations, they need to know that the person that they have done their ‘KYC’ checks on is paying for the artwork with their own funds.  The usual way they do this is by checking the sender’s details on the wire transfer notes.

Recently, I bought bitcoin via an app on my phone.  It was a scarily impressive process – checks (including the capture of an image of my driving license, as well as a selfie likeness test) were done via the app, my bank account was linked to my new wallet, and after some tech wizardry that took all of nine minutes, I had bought my little slice of a bitcoin.  It couldn’t have been easier.   

A couple of days ago I had an in-app chat with ‘support’.  It went like this… 

“Can I pay out of my wallet direct to a seller if they accept bitcoin?

“If you want to transfer BTC directly to someone, you can do that from your app”. 

“Thanks, so if I want to transfer BTC to them do they need to also have a BTC wallet? 

“They would need a bitcoin wallet but this wouldn’t need to be with us. They’d be able to see it as soon as it arrived with them!”

“Perfect.  And would they be able to tell the payment came from my wallet?”

 “They wouldn’t, wallets are anonymous with Bitcoin.”

The next thing I did was to ask a couple of super clever friends (who provide tech solutions and code for the leading businesses in the world and who also happen to be hobby cryptocurrency investors) about how to solve this so that art dealers can start accepting bitcoin with impunity.

They thought that in theory it could be done if art dealers define a limited and controlled process for accepting crypto payments.  Dealers might be able to form an agreement with one or two crypto exchanges such as Coinbase, Binance etc. to communicate with them via an API and obtain confirmation of the identity of the wallet holder and that the wallet is linked to their personal bank account.  The API would be necessary because it is impossible to imagine that an exchange would be interested in providing the information manually.

So, while there might be a number of technical and practical hurdles to overcome, including agreements between the art dealer and crypto exchange; the wallet holder and crypto exchange and a change to dealers’ terms and conditions of sale, tracing the payment back to the owner’s bank account is theoretically possible. 

Will I be advising my clients to accept bitcoin?  Not without running the idea past HMRC first!   

Contact me for further advice on +44 7896 205533.

MLROs – Protect Your Assets

MLROs – Protect Your Assets

MLROs of newly regulated art businesses are rightly worrying about the personal risks they face if they fail to ensure compliance with anti-money laundering regulations. They often ask what they can do to protect themselves if things go wrong.

I asked Steven Francis, a Partner at Addleshaw Goddard who advises businesses on ongoing or anticipated regulatory interventions to provide his perspective on the subject. His thoughts and insights are illuminating.
 
RT – Where do MLROs face the greatest personal risks in fulfilling their anti-money
laundering duties?

SF – Bear in mind that the MLRO is not a function created by statute and therefore has no precisely defined role or obligations. The MLRO is often the name often given to the ‘nominated officer’, although the two roles can vary. I see the greatest risks relating the nominated officer’s responsibility, as the person designated by his employer to receive any disclosures (internal suspicious activity reports) made under section 330 of POCA 2002. It is an offence for a nominated officer within the regulated sector to receive a disclosure under section 330 that causes him to know, suspect or have reasonable grounds for suspicion that money laundering is taking place, and then fail to make a disclosure to the National Crime Agency.

RT – That is interesting. Many MLROs have sleepless nights about not making the right judgement call in situations where there is a lot of pressure to get a deal done. What would you say to them?

SF – Commercial pressures are common when in a risk or compliance function. Part of the skill of the MLRO is persuading his/her company to do the right thing and comply with law. But bear in mind that ultimately, if appropriate disclosures are not made, it may be the MLRO that is held accountable.

RT – HMRC have repeatedly reassured art market participants that they will be lenient during the first year of regulation. After this honeymoon period, how likely is it that a nominated officer will be personally framed for a money laundering offence and would it not be so much simpler for HMRC to slap a fine on the company?

SF – Yes, many regulatory authorities give firms time to get their house in order. It is obviously easier for an authority to fine a company. But the current hot regulatory theme is personal responsibility.  There will likely not be many individual cases.  But the authorities will bring a few to set an example to others and to show that the MLRO position is one that carries responsibility and should be taken seriously. There is therefore a risk – probably low, probably very low – that an MLRO could find him/herself the target of an investigation or prosecution. Nonetheless that risk is real.

RT – So what practical advice would you give to MLROs who have nobly stepped into these roles at auction houses, galleries, art advisory businesses etc?

SF – MLROs need the authority to discharge their role.  To be given responsibility without authority is a situation of particular danger. Many MLROs are not members of their firm’s board.  That is fine provided they have sufficient power to make the decisions they need to and they have the full support of the board.

They should also ask the company to indemnify them against legal costs they incur in properly defending themselves against allegations that are made against them in the course of their work. And they should ensure that their company has D&O insurance which can operate for their benefit.

RT – A couple of questions on indemnities – from what I have seen, employers don’t offer these up on a platter. Are indemnities against fines and penalties enforceable? And bearing in mind that less senior members of staff will often find themselves encouraged into MLRO roles, how should they go about convincing employers to provide an indemnity?

SF – There is often confusion here. The company’s article will probably permit the granting of indemnities (the company may indemnify) rather than obligatory (the company shall indemnify). So directors may think they and others are indemnified, but this is not the case. In addition, the articles are deemed to be a binding commitment between a company and its members, and directors and the MLRO will likely not be members (i.e. shareholders). When this is explained, directors will typically see the need for indemnities – to protect themselves as well as the MLRO!

RT – Is D&O insurance an alternative to an indemnity from a company? And is this type of cover available to MLROs who are not statutory directors?

SF – Often the two go hand in hand and provide overlapping and complementary protection. D&O will also indemnify the company if it has to pay out under an indemnity. But it will also indemnify the director or senior manager should the company (for example) be insolvent and be unable to pay.

RT – What does D&O cover?

SF – D&O will indemnify against wrongful acts, for the MLRO the important point will be covering the costs of defending him/ her against what could be a very expensive investigation and legal proceedings. D&O will not cover criminal fines and penalties.

RT – How do you go about getting D&O insurance – it sounds daunting to shop for and possibly expensive. What should one look out for?

SF – MLROs would not buy D&O themselves. They would seek to make sure that their company has the cover and that they can benefit from it.  Some covers protect not just directors and officers but also managers such as MLROs.  The quality of cover varies considerably.  For example, some policies will offer legal costs protection to the individual only when he is charged with an offence.  That will typically be too late, legal advice and support is needed where the individual is first suspected of wrongdoing. The wider the cover the more expensive it is. Premiums will also depend on the nature of the firm, its history and the quality of its systems and controls.  It seems to be the case that D&O is becoming more expensive. There are many reasons for this (COVID, lack of capacity in the insurance market) but a key reason is insurers’ general belief that legal action against individual managers is more likely than it used to be.

RT – To conclude, do you think D&O insurance is pragmatic for a small gallery that is owner managed and employs a few sales assistants?

SF – D&O is not compulsory.  But many non-executive directors would not contemplate being a director of a company that did not have D&O. A company indemnity is important but of little use if the company is insolvent. I would think that many companies already have D&O, and it will just be a case of checking that it covers non-director MLROs.  An MLRO of a company that doesn’t have D&O might just enquire why it is that the other directors do not think it is worth purchasing. A properly phrased enquiry will probably lead to an urgent call to the company’s broker. After all, other directors are likely to be in the firing line too!

Contact me for further advice on +44 7896 205533.

When AML Compliance Transgressions Come Back to Haunt Us

When AML Compliance Transgressions Come Back to Haunt Us

My most animated discussions with clients centre around AML compliance transgressions. Here are
my insights on the three questions that art dealers ask most frequently.

  1. Where are we most at risk of tripping up?

    The most obvious risk comes from basic compliance failures such as not having a written risk assessment, policies and procedures, poor customer due diligence and not keeping records. After 10th January 2021, penalties may also be imposed on dealers who fail to register with HMRC and/or fail to inform them of changes to their business.

    The more insidious risk is unwittingly transacting with persons who are subject to sanctions, criminal investigations etc. The British Art Market Federation’s Guidance for UK art market participants clarifies that for the purposes of the Money Laundering Regulations, the customer is the “purchaser of a work of art, and any broker or agent acting for them”. In a world where art intermediaries abound, it is critically important to know the precise role an intermediary plays in a transaction and the limits of any authority they have, who the ultimate client is and that their source of funds is legitimate.

    There is also the less well known risk of corporate criminal liability for failing to prevent the facilitation of tax evasion. This offence, which carries unlimited fines, can occur if any employee, agent or anyone else acting on behalf of a company, (including a shipper or customs clearer,) knowingly facilitates tax evasion on behalf of another person. The risks of facilitating tax evasion are not always apparent in art deals; they could arise from agreeing to unusual payment arrangements and deal structures or the evasion of customs duties, sales tax etc. If you find yourself being drawn into an over-complicated transaction, you should insist on doing things in the way you understand or seek advice from a tax specialist. Be particularly cautious about the involvement of special purpose vehicles. These may have a legitimate purpose, but they can be used to disguise the identity of the true beneficial owner.
  2. How might we get found out?

    HMRC are empowered, and expected, to carry out inspections of the businesses that they supervise. For the newly regulated art market, most inspections will start out as benign ‘educational’ interventions but could extend into protracted investigations if weaknesses are exposed.

    Transgressions can also come to light as part of an investigation by the authorities into your client. If there is a possibility that you continued to transact with a client in circumstances where you should have filed a suspicious activity report, this may attract unwelcome scrutiny of your control environment and training procedures. Investigations can also come about where concerns are raised by an auditor or where a suspicious activity report is filed by other parties or banks involved in a transaction chain. Finally, concerns can be raised by internal whistleblowers who make an internal disclosure or flag a concern directly with HMRC.
  3. What penalties do we face and where does the buck stop?

    HMRC have made it clear that most breaches will attract civil penalties, but that in more serious cases they will consider criminal prosecution. Penalties will be set by applying principles of fairness, proportionality, deterrence and removal of financial profit. Other than issuing fines, HMRC have powers to
  • refuse or remove approval and/or prohibit individuals from holding a managerial role
  • refuse, suspend or cancel a business’s registration
  • issue public statements naming and censuring a business or person
  • seek a court order to enter a premises or to restrain a person from committing a breach.

Penalties are generally applied to the business, but the buck doesn’t have to stop there. Officers – including the company directors, secretary, chief executives and the nominated officer are also in the frame and anyone who is convicted of one of the three principal money laundering offences could face prison sentence of up to 14 years.

For information contact Rakhi Talwar on +44 7896 205533

Anti-Money Laundering for Dealers In Works of Art

Anti-Money Laundering for Dealers In Works of Art

The Government has now published the amendments to the Money Laundering Regulations that bring ‘art market participants’ in scope for money laundering regulation as from 10th January 2020 http://www.legislation.gov.uk/id/uksi/2019/1511. Here is a summary of what we know.

  1. An art market participant (AMP) is defined as anyone who by way of business trades in, or acts as an intermediary in the sale or purchase or works of art and the value of the transaction or a series of linked transactions amounts to €10,000 or more. AMPs may include art dealers, auction houses and operators of freeports when storing works of art for a person valued at €10,000 or more.
  2. For the purposes of the Money Laundering Regulations, works of art are defined in s21(6) of the VAT Act 1994.
  3. All AMPs will be subject to regulation and supervision by HMRC. Existing obligations under the Proceeds of Crime Act 2002, which require all art dealers to prevent money laundering and report suspicious activity for al transactions, irrespective of value, remain in place.
  4. For those who are now impacted by the regulations, new obligations include:
    – Registration with HMRC after 10th January 2020 and at the latest, before 10th January 2021
    – Conducting an AML Risk Assessment of the extent to which your business is exposed to money laundering risk
    – Writing and implementing policies and procedures
    – Carrying out customer due diligence (CDD) or Know Your Customer (KYC) checks on buyers of works of art
    – Appointing a nominated officer or Money Laundering Reporting Officer (MLRO)
    – Training staff on AML risk and the internal measures designed to manage these risks
    – Reporting suspicious activity to the National Crime Agency
    – Record keeping
  5. Art dealers must also ensure that they do not transact with sanctioned persons and entities.
  6. Your AML policy statement and procedures should reflect the findings of your AML Risk Assessment. The checks and controls which you implement should be proportionate and risk-based.
  7. CDD or KYC checks involve collecting information about the identity of your customer, verifying this information via a reliable independent source, managing the risks of dealing with high risk persons (including persons who are politically exposed) and ensuring that red flags are investigated.
  8. CDD should be completed when the client first approaches you with a transaction in mind. In cases where this is simply not possible, the transaction may be progressed, but should not be concluded until CDD has been completed. In practice, this means that when selling a work of art, it should not be passed to the client until all CDD aspects have been concluded.
  9. If you haven’t already done so, ensure that you allocate time and financial budget for compliance in
  10. HMRC have wide ranging powers to inspect and impose penalties for non-compliance.

For further information please contact Rakhi Talwar on +44 7896 205533

Understanding the Impact of Art Market Regulation

Understanding the Impact of Art Market Regulation

On 10th January 2020, the EU’s Fifth Money Laundering Directive will come into effect in the UK via an amendment to the UK Money Laundering Regulations 2017.

From this date, anyone in the EU who trades in works of art valued at €10,000 or more will be subject to AML regulation and required to take specific steps to detect and prevent money laundering. Failure to do so could result in criminal penalties.

In the UK, the money laundering supervisor for dealers in works of art will be HMRC.

Although there are details yet to be confirmed by the Government, there are several steps that all dealers who fall in scope of regulation will be required to take:

  1. Register with HMRC. Registration will not be possible until January 2020 and the registration process for art market participants is yet to be confirmed. It will likely involve on-line registration through HMRC’s gateway and payment of an initial application fee, annual renewal fees and an approval processing fee to cover the cost of criminal background checks against nominated officers/responsible persons of the company. As an example, estate agents registering with HMRC must pay an initial registration fee of £100 with a £300 (per premises) annual renewal fee and a £40 approval fee per person.
  2. Conduct an AML Risk Assessment. The aim of this is to assess exposures to money laundering, identify what mitigation is in already place and focus appropriate resources to those areas of the business which carry greatest risk. A risk assessment for a small business facing minimal risks would be brief and uncomplicated when compared to that of a larger business with cross-border operations and complex transactions. Relevant considerations for risk assessment would be the size and nature of the business, geographical risk, methods of selling and the types of artwork and services offered. All risk assessments should be documented and periodically revisited.
  3. Document and implement AML Policies, procedures and controls. These should reflect the risks assessed in step 2 and set out in detail, the components of the business’s AML programme.
    Procedures and controls should be proportionate, risk based, and evolve with business and compliance strategy. To be effective, they should be comprehensive and well understood.
  4. Appoint a Nominated Officer. The nominated officer or Money Laundering Reporting Officer (MLRO) is the person with responsibility for overseeing all AML measures as well as determining whether a suspicious activity report should be made to the National Crime Agency – see step 7 below. He/she should be a person of high seniority who reports directly to senior management and would be expected to be based in the UK. In small businesses, the owner or director having day to day control and oversight would by default, be the MLRO.
  5. Conduct customer due diligence. Customer due diligence is a fundamental component of an AML programme. In the context of a typical art transaction, the customer would be either the ultimate beneficial owner of the artwork or the ultimate beneficial owner of the funds used to purchase of the artwork. The requirement to ‘Know Your Customer’ is a familiar concept for regulated businesses, major auction houses and art dealers. For smaller dealers, including those who sell at art fairs, it presents a very new challenge. The identity of private individuals should be verified by means of reliable independent sources such as a passport or driving license and a bank statement or utility bill to confirm residential address. For corporate customers, verification could be achieved by means of checking national corporate registers (if available) and/or collecting incorporation documentation along with details of persons with ownership and/or control. Verification may also be achieved by combining document, electronic and fraud mitigation checks to build a complete profile of the customer. The customer due diligence process also involves screening the customer against official sanctions and politically exposed persons lists.
  6. Train employees. Senior management, the MLRO and all employees who facilitate transactions should be made aware of anti-money laundering and counter-terrorism financing laws and receive appropriate training and support in relation to the AML policies and procedures of the business. In particular, they should be taught how to recognise the ‘red flags’ specific to their business which require investigation.
  7. Report suspicious activity. Under the amended Money Laundering Regulations, art dealers will have reporting obligations additional to those which exist under the Proceeds of Crime Act.
    Where the MLRO has reasonable grounds for knowing or suspecting money laundering, he/she will be required to promptly make a report to the National Crime Agency. Suspicious Activity Reports should be submitted in a prescribed way and contain as much relevant information as possible. Failure to report suspicious activity linked to money laundering or terrorism financing could result in criminal penalties of up to five years imprisonment and/or a fine. It is therefore critical that the MLRO is fully informed of all relevant matters in order to fulfil reporting obligations. It is also important to ensure that ensure that the customer is not informed about a suspicious activity report which has been submitted as this could result in a ‘tipping off’ offence.
  8. Retain records. Businesses will be required to retain records of all due diligence measures undertaken together with supporting documents for a period of 5 years after the business relationship with the customer has ended.

In conjunction with HMRC, the British Art Market Federation (BAMF) is drafting guidelines for the British art market on complying with the new AML obligations. A number of open issues, including the definition of works of art, timing of verification of customers’ identity in the context of the need to provide an immediate/retail service, for example at art fairs, as well as the relevance of certain provisions of the current Money Laundering Regulations to the art business are being discussed with HM Treasury and HMRC. Once the guidelines have been fully developed and formally approved by HM Treasury, they will be taken into account by a court when determining whether a person or business subject to regulation has complied with their AML obligations.

For further information and advice on how to prepare for the new legislation, please get in touch.

Anti-money laundering regulation wraps around the UK art market

Anti-money laundering regulation wraps around the UK art market

On 10th January 2020, the EU’s Fifth Money Laundering Directive will come into effect in the UK via an amendment to the UK Money Laundering Regulations 2017.

From this date, art businesses and individuals who trade or have any financial involvement in an art transaction of a value greater than €10,000, will be subject to AML regulation by HMRC and required, on a risk sensitive basis, to take steps to detect and prevent money laundering. Failure to do so may result in criminal penalties.

While the Proceeds of Crime Act 2002, has always legally obliged persons who know or suspect that they may be involved in facilitating money laundering to report such activity to the appropriate money laundering authorities, formal regulation of the art sector is a game-changer.

Any individuals and businesses trading in works of art valued at €10,000 or more will be obliged to take appropriate measures to:

  • Risk assess their exposure to money laundering
  • Implement an AML policy and appropriate procedures, systems and controls to prevent
    money laundering
  • Identify their customers, including the beneficial owners of works of art and the beneficial
    owners of the funds used for the purchase of works of art
  • Conduct appropriate due diligence on works of art, the customer and the transaction itself
  • Train themselves and staff on AML detection and prevention
  • Report suspicious activity to the National Crime Agency
  • Retain records

The British Art Market Federation is leading an initiative, supported by HM Treasury and HMRC to draft guidelines for the British Art Market on complying with the new AML obligations. Once approved by HM Treasury, compliance with these guidelines will afford businesses with industry focused guidance which will be taken into account by a court when determining whether a person or business subject to regulation has complied with their AML obligations.

Now is the time to start preparing. To understand the impact of the incoming regulations please get
in touch.