Nicola Sharp of Rahman Ravelli outlines the money laundering obligations facing those in the art dealing world.
Those working in the art market now have under three months to comply with the Fifth Anti-Money Laundering Directive.
The new rules require galleries, auction houses and other art market participants (AMPs) to register with the government, officially verify the identities of clients and report any suspicious transactions. The original deadline for compliance was January 10, 2021. But this has been extended until June 10, 2021 – a measure that was included in a statutory instrument that updated the enforcement of the rules as a response to problems posed by the Covid-19 pandemic.
The new requirements
While legislation has been in place for many years in relation to money laundering, and some of it – such as the Proceeds of Crime Act 2002 - has been particularly relevant to the art market, the new requirement are aimed specifically at this sector.
The EU Fifth Money Laundering Directive (5MLD) introduced changes that brought AMPs into the scope of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. AMPs who are involved in the sale, purchase and/or storage of works of art (as defined in s21(6) of the VAT Act 1994) are to be subject to obligations that aim to identify and prevent money laundering.
The changes mean that AMPs, as defined in the Regulations, must:
- Register with HM Revenue and Customs before they carry on with their business, where this involves a transaction of 10,000 euros or more, or a series of linked transactions of 10,000 euros or more.
- Carry out a risk assessment of their possible exposure to money laundering.
- Carry out customer due diligence before concluding a transaction.
- Appoint a nominated officer.
- Maintain a prescribed range of policies, controls and procedures.
- Train staff appropriately.
- Report suspicious transactions to the authorities.
- Keep appropriate records of customer due diligence conducted and transactions concluded.
The new requirements have caused a stir among some in the art market. Fears have been expressed that some working in the sector may not be doing all they can to ensure they comply with them.
In some circumstances – such as when an art sale involves a linked chain of parties – the rules allow a business to rely on customer due diligence checks that have been carried out by another party. Some commentators have said that some AMPs may use this reliance option as a means to avoid revealing the identity of their clients to other businesses that they trade with. This approach, it has been argued, could be adopted due to a fear of the disclosure of a client’s identity leading to that client being poached by another dealer.
But the official legislation and advice from the British Art Market Federation make it clear that if a person relies on checks carried out by someone else, that person still has to know the identity of the ultimate beneficial owner and the extent of the customer due diligence that has been carried out. The reliance option can only be used in relation to other UK organisations that are subject to the same money laundering regulations. It will be possible to check this on the UK government website once the June 10 deadline for registration as an AMP has passed.
Businesses are only able to use the reliance option for transactions outside the UK if the other business is subject to the requirements of a money laundering directive that is in force across Europe. It cannot be used when conducting business with US dealers; although this may change, subject to new anti-money laundering regulations being introduced in the US.
All AMPs should, therefore, be putting their efforts into compliance with the new rules rather than looking to the reliance option as a means of sidestepping them.
Looking for more information?Read about Anti-Money Laundering Investigations.