Why would anyone be a compliance director when the risk of financial and criminal exposure is so high?
As the founding global compliance director of Sotheby’s in 1998 and having watched the explosion of international anti-money laundering regulations recently, I have often wondered this.
From personal experience, it is a virtual certainty that your average Money Laundering Reporting Officer (MLRO) is not paid enough to make the risks worth taking. But while the EU’s 2019 5th Directive on Money Laundering (5AMLD) genuinely improves the situation for MLROs in the art market by sharing the risks more broadly, this is not such good news for “senior management”.
Such “senior management” is defined, simply, as any person with knowledge of the money laundering and terrorist financing risks who has decision making authority in relation to those risks. So, in layman’s terms, it is the top dogs of the art world who are now saddled with the primary exposure, as they are the ones most likely to have the knowledge and decision-making authority. This group includes the senior teams in auction houses and galleries, gallery owners, key directors and/or company secretaries.
What are some of the criminal penalties they face?
For four possible crimes, the prison sentences range from two to 14 years plus the possibility of fines.
• Most serious is the offence of knowing participation in a money laundering transaction or possession of criminal property, such as stolen property. This carries a maximum confinement of 14 years.
• Second, is tipping off—disclosing to someone who is the subject of a Suspicious Activity Report (SAR) that a SAR has been filed and that they or their transaction are or will be the subject of an investigation. This has potential confinement of four years.
• Another offence—and possibly the easiest mistake to make—is failing to report or file a SAR where an art market participant has knowledge, suspicion or reasonable grounds for suspicion of money laundering in connection with a client or transaction. Ascertaining what constitutes “reasonable grounds for suspicion” is not obvious, yet the potential confinement risk is up to two years. The upshot for senior management: if one of their sales team fails to recognise something that should reasonably arouse suspicion and therefore the salesman fails to report it and an SAR is not filed, not only is the employee liable, but the senior management is exposed to imprisonment and fines.
• The fourth offence does not involve confinement but is worrisome nevertheless—failing to establish and implement appropriate policies and procedures under the 5AMLD regulations. For this type of breach, the HMRC may simply impose a fine, or in very serious cases, it may consider criminal prosecution.
However, the true risk of not having a comprehensive AML program is not the fine, but the very real risk of violating one or more of the above offences—and perhaps going to prison. Furthermore, there is the added possibility of reputational harm.
Decisions and processes around whether to file an SAR with the National Crime Agency are perhaps the most prevalent risk area for senior management, specifically situations involving new clients. Not only are clear policies and procedures critical for bringing on new clients, but the staff responsible for opening their accounts must be well versed in how to identify red flags.
Red flags should alert an employee to a risk of money laundering and they should trigger the involvement of the MLRO and further investigation. A non-exhaustive list of red flags includes:
- if the client resides in a country with lax money laundering enforcement
- reluctance to provide identification verification
- odd or forged identification documents
- unusual and unnecessarily complex payment or transaction structures and
- third party payments (those from a person or entity other than the named buyer or to a person or entity other than the named seller)
If the MLRO ultimately determines that there is no suspicion and no need to file an SAR, the business must nevertheless document their reasoning as well as the conclusion. Given the complexity of identifying and assessing red flags—not to mention the risk of a prison sentence—it is critical that staff are fully trained and fluent in the rules.
Risks to senior management extend well beyond red flags. Based on the type and value of their transactions, certain art market participants now qualify as “regulated persons” under the 2019 Regulations. The top brass of these regulated persons are responsible for a host of duties including:
- conducting a risk assessment of the business
- choosing and adequately supporting an appropriate MLRO
- organising policies to protect against the AML risks
- implementing internal policing systems
- training new and existing staff
- monitoring effectiveness of the policies and systems
- ensuring appropriate record keeping
Fortunately less complex (and often smaller) businesses will have lower risk levels. A lower risk business may have fewer clients, who are well known to the dealer and whose transaction and payment structures are straightforward. The AML program for such businesses should be commensurate with the risks they face. But the compliance programmes of more complex businesses, like international galleries and auction houses, must reflect the higher risks they face.
In more burdensome news for senior management, HMRC also has the right to conduct compliance audits. In addition to the results of risk assessments, the audit might include a review of the policies, procedures and training records. A key indicator of a good, solid anti-money laundering culture is the speed and efficiency with which audit materials are produced to HMRC. Fumbling and delay in producing these documents may raise concern that the AML program is mere window dressing, thus reducing the dealer’s credibility in their eyes.
The obligations under 5AMLD for the art world’s top decision makers are extensive, and the stakes high. Some organisations will need to dramatically change their day-to-day work culture. Unless senior management themselves drink the compliance Kool-Aid, there is little or no hope of changing to a “think risk” culture.
Adoption of new compliance practices is difficult in the best of times but in a Covid-19 lockdown world, with many employees working from home, it may be even more challenging. Until and unless the top brass truly “think risk” in all their actions, their business and employees are exposed to the threat of prison sentences, criminal penalties and reputational harm. And I doubt even the most successful art market professionals earn enough to take these risks unprotected.
• Rena Neville is the founder of Corinth Consulting, which offers AML compliance advice to art businesses