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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.