Having worked at Sotheby’s for 30 years and been married to an antique dealer for 20, I appreciate how art specialists dread the words “Anti Money Laundering Compliance”.
However, ignoring AML compliance is not an option in the UK and has not been optional since 10th of January 2020. It is just one of those things that must be done, like paying taxes.
It appears the US too will be regulating its art market before too long. A 9 March notice from FinCen, part of the US Treasury Department, makes clear that the Treasury, the FBI and Homeland Security are proceeding with an “art study” on money laundering and “trade in works of art”. Many believe this study will lay the groundwork for the US to regulate its art market in much the same way that the UK has been regulated for the last 15 months.
As far as the UK is concerned, the UK’s implementation of the EU’s 5th Money Laundering Directive is in effect and applies to all qualifying art market participants and transactions. These participants were originally given until January 2021 to register with HMRC as an art market participant. But as a result of the Covid-19 pandemic, the UK government extended the registration deadline to 10 June 2021.
Unfortunately, some in the trade have confused postponement of the HMRC registration deadline with postponement of the effective date of the UK’s AML regime.
This is a seriously dangerous misunderstanding. It is of particular concern as under the new UK AML regime, the government is entitled to conduct AML compliance audits in much the same way as Inland Revenue is entitled to conduct tax audits.
Prepare for a compliance audit
To be prepared for an audit, you must show through your record keeping that you have completed tasks such as:
- Conducting a risk assessment of the business and its clients.
- Have chosen, trained and are supporting a Money Laundering Reporting Officer.
- Trained new and existing staff.
- Created and implemented anti-money laundering policies, controls and procedures in response to the risks uncovered in the assessment.
It would also be wise to establish that for each relevant transaction, one has taken necessary steps to Know Your Client (KYC) and conducted appropriate Client Due Diligence and Client Screening. If these inquiries were to uncover any “Red Flags”, meaning a report or fact that may give rise to suspicion of money laundering, then it would be important to show additional steps. These steps may be necessary to help make a decision about whether or not to file a Suspicious Activity Report with the National Crime Agency. All of these steps should be documented for an audit.
Although there is no generally accepted evidence that a material number of art transactions are in fact connected to money laundering, HM Treasury and the Home Office nevertheless officially consider the art market to be “high risk”.
Thus, the art market ignores these obligations at its peril. The market is exposed to criminal penalties of prison for violating these laws, from two up to 14 years. There are also the civil and reputational risks to consider. However remote the risk may seem to an individual gallery, auction house or art advisor, is it worth the risk of prison?
The news is not all bad. The scope of the law is limited in two key ways. First, by the value of the art market participant’s transactions and second by the types of “works of art” a participant trades. In terms of value, an art market participant may fall outside the scope of the new law if they are:
1. Not trading in or acting as an intermediary involving a “work of art” in a single transaction, or a series of linked transactions of €10,000 or more.
2. Not storing in a freeport “works of art” of €10,000 or more, individually or in a series.
The transaction amount includes all added taxes, commissions, etc.
Definition of a "work of art"
They may also escape the regulatory scheme if the objects they sell fall outside the scope of the definition of “work of art”. For UK AML purposes, a “work of art” is the same as the definition in the Value Added Tax Act. Broadly, the VAT definition includes objects such as paintings and drawings and certain sculptures, ceramics, photographs and enamels on copper. Although a relief for those trading purely in objects such as furniture, keep in mind that if even a small percentage of a gallery or auction house's offerings include “works of art” at a transaction value of €10,000 or more, the duty to comply with the UK’s AML regime is triggered.
More good news: there is technology (existing and pending) to help the art market, such as search services and apps to help with client due diligence and screening. Such tools may relieve certain administrative burdens, but should not be relied upon entirely. Perhaps more importantly, there are specialist art market consultants available to assist with broader obligations, such as an appropriate risk assessment, policy drafting, training and record keeping required for a compliant AML program.
The reason I say AML compliance is not optional is because it is the truth, it is a legal requirement. If history is our teacher, the government may well make an example of a gallery, advisor or auction house that is failing to comply by punishing them with an imprisonment penalty.
So, no matter how much compliance might seem to be a drain on time and money, the risks of non-compliance greatly outweigh the burdens. Once the heavy lifting has been done, maintaining it should be become as routine as filing a tax return.
• Rena Neville is the founder of Corinth Consulting, which offers AML compliance advice to art businesses, www.corinthconsulting.com. This article does not constitute legal advice.