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.
- 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.
- 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.
- 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