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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

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

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.