‘Reliance’ by art market participants on third parties’ customer due diligence checks – use sparingly and correctly!

Anti-money laundering (“AML”) regulations which apply to the UK art market require art dealers and persons who act as intermediaries in the sale or purchase of works of art valued at or above €10,000 (“art market participants”) to comply with the Money Laundering Regulations 2017 as amended (“MLRs”). Guidance produced by the British Art Market Federation (“BAMF Guidance”) for the UK art market, https://tbamf.org.uk/portfolio/anti- money-laundering-guidelines-2023/ explains in detail what is expected from art market participants to meet their obligations under the MLRs.

This article is about ‘reliance’ as permitted by Regulation 39 of the MLRs, a mechanism, which in the context of UK art transactions, is somewhat misunderstood. I often see the term reliance bandied about incorrectly in transactions between one or more UK art market participants (“AMPs”) when it isn’t required at all. The aim here is to show the limited situations where reliance, when properly applied, has some utility and conversely, when it simply isn’t relevant.

What is reliance and how is it achieved?

Reliance is designed to permit a party that is subject to customer due diligence (“CDD”) obligations to rely on the CDD conducted by another party that is subject to equivalent CDD obligations. Reliance does not negate the requirement for the relying party to know the identity of the customer. What is does, is avoid them having to duplicate the CDD efforts of the party that has conducted CDD checks on the customer.

Reliance under Regulation 39 of the MLRs applies if specific conditions are met by the third party performing the CDD. These are usually set out in a reliance letter addressed to the relying party confirming that the party offering to be relied on –

1. is subject to the MLRs or rules of equivalent standard
2. has carried out CDD in accordance with the MLRs or rules of equivalent effect
3. will provide CDD documents to the relying party immediately upon request
4. will retain copies of CDD documentation for a period of 5 years

Regulation 39 prohibits the placement of reliance on any third party established in a high risk third country.

A common example of reliance under Regulation 39

Reliance may come into play when an art collector, having viewed and agreed to buy an artwork from an AMP leaves the AML formalities to their wealth manager. If the wealth manager is subject to equivalent CDD rules, they might offer the AMP a reliance letter in lieu of providing them with the collector’s CDD documentation. While this is neat and convenient, the catch is that the relying AMP remains liable for any failure on the part of
wealth manager to apply CDD measures. It is therefore wise to use reliance in situations where the AML processes of the party providing the reliance letter can be trusted.

Three examples of what is not reliance under Regulation 39

I sometimes see letters offered from one AMP to another AMP when they are transacting with each other to confirm that they are registered for AML supervision and listed as such on HMRC’s register of supervised businesses. Such letters, helpful as they may be, are often wrongly termed reliance letters when their purpose is solely to provide comfort or facilitate simplified (as opposed to standard) due diligence between AMPs.

2. Certain AML service providers refer to reliance in terms of extending assurance that those AMPs that subscribe to their services are in good standing, registered with HMRC, AML compliant etc. Again, this should not be confused with reliance under Regulation 39.
3. Reliance under Regulation 39 does not come into play in a sale from AMP1 to AMP 2 where AMP 2 pays AMP 1 but then sells on to another buyer. In 2022, the BAMF Guidance was updated to clarify who the customer is in art transactions for CDD purposes. The Guidance (Part II, para 5.6) states that “The customer of an AMP who is selling or acting as an intermediary in the sale or purchase of a work of art, will be whoever is paying the AMP for the artwork, or for services in relation to the transaction (see Para 5.21 for examples).” The most relevant example at Para 5.21 is example 6 which illustrates that if AMP1 sells a painting to AMP2 who is then selling the artwork to another buyer, then AMP1 need only do due diligence on AMP2, unless AMP1 is being paid directly by AMP2’s buyer. The rationale for this update was to permit CDD obligations to be divided between regulated AMPs who are subject to the same CDD obligations. It also avoids the unnecessary duplication of CDD efforts and the potential commercial disadvantage of having to reveal the identity of a private collector to competing AMPs in a deal chain. This clear-cut approach of limiting CDD to the paying customer has nothing to do with reliance – in fact, it takes away the need for reliance under Regulation 39.

Reliance aspects aside, at the end of the day, whether an AMP chooses to extend their due diligence to a party beyond the AMP customer that is paying them is a decision that will be based on their risk appetite and internal policies which take account of suspicious activity reporting and sanctions compliance. Of course, red flags, should never be ignored. Listen to what is being said and pay attention equally to what is not being said. At the same time, don’t disregard that in certain situations, there may be legitimate sensitivities around the disclosure of a collector’s identity. Absent red flags, the ideal outcome of a risk-based approach is to find a safe and happy balance that that builds, rather than kills trusted relationships.

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