Reality kicks in as HMRC launches art market ‘interventions’

HMRC have begun conducting ‘interventions’ to ensure that UK art market participants (AMPs) are complying with the Money Laundering Regulations (Regulations).

Currently, HMRC supervise 30,000+ businesses across nine sectors, allocating their resources using a risk-based approach. Individual AMPs are selected for intervention based on risk profiling and other relevant information gathered via the registration process, suspicious activity reports etc.  AMPs that are seen to have a higher risk profile should expect more frequent and intense supervision.

Interventions may be desk-based (conducted by phone and in writing) or face-to-face or both; desk-based interventions may lead to an on-site visit where it becomes apparent that a more in depth investigation is required. In 2019/2020, there were 817 face-to-face and 1,012 desk-based interventions and despite a decline through part of 2020/2021 due to the impact of the pandemic, indications are that 2022 will see a rise in activity.

What to expect

After nearly two years of art market regulation, it would be a mistake for AMPs to treat interventions as light touch ‘educational’ affairs. They are very real.

Prior to an intervention, HMRC will generally call and speak to the Nominated Officer (MLRO) to arrange a convenient time for a meeting which could be an on-site or phone appointment.  This will be followed up with formal written confirmation of the date, time, details of the appointment and contact details of the HMRC Officer in charge.  

HMRC may ask AMPs to provide copies of their AML Risk Assessment, Policies, Controls and Procedures (PCPs) in advance of the first meeting.  PCPs should be in writing, tailored to the business and reflect the current state of play.

During an intervention, in addition to the MLRO, HMRC may ask to speak to ‘responsible persons’ including directors and other staff members engaged in the compliance function. Each of these should be able to demonstrate that they have a sound grasp of the risks, weaknesses and strengths of their business in relation to detecting and preventing money laundering.   

Interventions can be time consuming. A phone meeting may last several hours and in-person visits may take up an entire day.  AMPs may be asked to provide further documents after the first meeting such as evidence of customer due diligence relating to specific transactions as well as training records. In some cases, HMRC may request a further meeting to ensure that they have fully understood the information provided.

In exceptional cases, HMRC may visit AMPs without prior arrangement.  If this happens, the Officer will present their ID card and provide a reason for the unannounced visit. 

Reacting to an intervention

AMPs should be cooperative and forthcoming when providing information to HMRC, being mindful of deadlines but also having regard to the proportionality and fairness of HMRC’s requests.

As a newly regulated sector, it should not be assumed that the Officer will know the ins and outs of an art business; AMPs should be prepared to talk at a very basic level about how an art business works but also be able to explain the specific workings of their business.  Preparation is key – relevant facts should be available to demonstrate compliance with the Regulations and provide assurance that risks have been properly identified and mitigated.  

Customer Due Diligence records

HMRC may check customer due diligence records relating to specific transactions. As responsibility for customer due diligence lies squarely with the AMP conducting the transaction, they must be equipped to demonstrate that appropriate risk-based measures were undertaken in advance of concluding a transaction. In particular, they need to be able to produce evidence that their customers’ identities have been properly and reliably verified. AMPs who use external providers for identity verification and screening/document collection/storage should ensure that they have ready access to underlying identity verification information in a format that is acceptable to HMRC.

Perimeter policing

A focus area for HMRC is ‘perimeter policing’ to identify businesses that are trading while unregistered. Any AMPs that are trading without registration should be aware that upon discovery, they could be subject to a civil penalty and prevented from further trading until approved for supervision. There were 219 perimeter policing cases in 2019/20.

Material changes

A requirement that is sometimes overlooked is the need to inform HMRC about material changes to information supplied during registration.  For instance, a change of nominated officer must be notified within 14 days. Penalties may be payable for each instance of failing to notify HMRC of a material change or inaccuracy within the required period.

Sanctions for non-compliance

Sanctions may take the form of financial penalties on a business or any persons knowingly concerned in the contravention of the Regulations. Enforcement may also include censure statements, cancellation or suspension of business registrations, the suspension or prohibition of management personnel or a criminal prosecution.

In 2019/20, 31 fines were imposed by HMRC with an average value of £290,000.  Notable within these were two significant fines imposed on a Money Services Business (£7.8 million) and an Estate Agent (£1 million).   

Regulation 85 places HMRC under a duty to publish information about penalties and persons prohibited from management on their website. In appropriate cases, publication may be deferred, waived or achieved without revealing the individual’s identity. 

An opportunity and a warning

AMPs that are confident about their PCPs should treat interventions as an opportunity to demonstrate to HMRC how they have prioritised compliance and put in place robust, risk-based AML programmes.

The UK’s third National Risk Assessment (NRA) of Money Laundering and Terrorist Financing (December 2020) scored the UK art market as high risk. The NRA acknowledged that it was too early to fully assess the effectiveness of new mitigations in place by AMPs and did not cite any evidence to support abuse by money launderers within the UK art market, but based the rating on the inherent properties of the UK art market (international in nature, large in size), works of art (wide-ranging values, portability etc.) and “the ability to conceal the beneficial owners and final destination of art”.

This finding, while unfortunate, leaves the door open for down-scoring in coming years; the more that AMPs within the UK can demonstrate, through well implemented PCPs, that they are responsible gatekeepers, the greater the chances of countering widely peddled views that money laundering is rife in the art sector. 

Those AMPs that embraced their AML obligations early on will by now have mature and well embedded AML programmes; others may still be grappling with the basics. AMPs that have neglected to put in place measures to comply with the Regulations should act with urgency to avoid sanctions and, given the symbiotic nature of the art dealing community, to not let their peers down. 

Contact me for further advice on +44 7896 205533.