Art market

Art market money laundering crackdown spreads from UK to the US, but what impact is it having and are businesses taking it seriously?

Global inconsistency between regulations makes already complex rules more confusing and while the US is following the EU’s lead, its regulations do not yet include “flat art”—only antiquities

US laws are behind those in the UK and EU when it comes to money-laundering. But things are changing

Photo: Joshua Hoehne

US laws are behind those in the UK and EU when it comes to money-laundering. But things are changing

Photo: Joshua Hoehne

As the global art market continues to grow and innovate, it is attracting increased scrutiny from governments in the UK, Europe and US who see it as vulnerable to money launderers. In spite of a lack of data to evidence this, the market’s traditional preference for discretion fuels the belief that this $50bn dollar global market is routinely used to launder proceeds of crime.

In 2018, well before NFTs and the explosion of online sales, the European Union began regulating the art market and passed the 5th Anti-Money Laundering Directive, which added the art industry to the regulated sector. In 2020, the directive went into effect covering certain art market transactions of €10,000 or more. Each EU country, however, has discretion to implement the directive consistent with its national law, meaning a lack of consistency across EU countries.

In spite of Brexit, the UK committed fully to the directive and implemented it on the January 2020 deadline. The UK’s implementation is the broadest in scope in Europe, and possibly the world. British art dealers, auctioneers and advisors involved in the sale of fine art, photographs, prints and a few other categories are subject to strict money laundering regulations, similar to those governing UK bankers and lawyers. In addition to registering with the UK supervising authority (HMRC), they must satisfy additional obligations, such conducting Know Your Client (KYC) and Customer Due Diligence(CDD) checks, undertaking a risk assessment, adopting an AML policy and the filing of Suspicious Activity Reports with the UK’s National Crime Service, among other duties.

The UK regime also extends beyond its borders and applies to non-UK branches and subsidiaries of UK entities. Moreover, when non-UK art market participants transact in the UK, such as at fairs, those visitors must follow the local regulations. This is no small feat. As the UK’s preeminent international art fairs have thankfully resumed, visiting galleries find themselves subject to regulations that few dealers fully understand. The consequences of non-compliance are serious—those found in breach risk prison and fines.

There are signs, however, that the UK trade is adapting and adjusting. For one, attendance at webinars and training sessions has been high. Hosting many of these are various tech and app providers, designed specifically to assist the art market with KYC, CDD and source of funds checks. According to public records, more than 450 advisors, auction houses and galleries have registered in the UK. It is unclear what the total number should be, but the general consensus is that the majority of those caught by the registration requirement have complied. 

Just short of two years since the regulations went into effect, it is difficult to say how business has been impacted. Anecdotally, with international sales involving US buyers, there is tension as the US trade and art buyers are not comfortable providing personal identity information, as the US does not (yet) require them to do so. In addition, some of the non-UK fair attendees of the recent international London fairs ranged from dismissive of the obligations to confused by them. Some chose to ignore them completely, while others defaulted to simple internet searches to vet new clients. Although internet searches are a step in the right direction, those alone fall woefully short of the regulatory requirements.

The global inconsistency between regulations certainly increases the difficulty of compliance. However, the EU is not alone in regulating the art market. Although the US is following the EU’s lead, the initial scope of the US regulations does not include “flat art”. In January 2021, the US expanded its national anti-money laundering regime to include dealers in antiquities. Moreover, the US Department of the Treasury is actively exploring whether US AML regulations should extend beyond antiquities and if so, to what other types of art and at what price points. Simultaneously, and perhaps in response to the US’s action, the UK has invited public comment on whether it should expand its regulations to include the antiquities sector.

Within weeks, we expect the US to publish regulations governing transactions in antiquities as well as recommendations regarding the possible inclusion of fine art in the national AML regulatory net. Even if the US begins regulating its fine art market, a key open issue is whether the price threshold will be the same as the EU. Indications so far are that the US and UK have very different views on the appropriate threshold. In 2020, the US Office of Foreign Asset Control urged caution for transactions with works of art estimated at $100,000 or more. This is more than ten times the threshold used in the EU Directive, which covers transactions of more than €10,000 (approximately £8,430), but closer to the Swiss threshold of CHF100,000.00 (approximately $108,380).

The UK and US do express similar bases for concern about the risk of money laundering in the art market. The US cites: “a lack of transparency and a high degree of anonymity and confidentiality” as well as the use of “[s]hell companies and intermediaries”. These characteristics are nearly identical to those articulated by the UK as the basis for its high-risk rating of the art market in 2020. The UK says “criminals can conceal the ultimate beneficial owner of art…the source of funds…by using complex layers of UK and offshore companies and trusts, agents or intermediaries.” The fact that neither nation has reliable data on which to base these concerns has not slowed the expansion of regulations. 

Most people predict that the US will nevertheless follow the UK’s lead and expand its regulations to include fine art. Conversely, the UK may well decide to expand the scope of its scheme to include antiquities. One might argue that consistency across two of the leading international art markets is good news. However, more than consistency, one would hope that in the near future the art market AML regulatory schemes are based more on firm facts, and less on firm beliefs.

  • Rena Neville and Paula Trommel are the founder and deputy director of Corinth Consulting, which offers AML compliance advice to art businesses