On 28th June, the UK Government published further guidance on the application of anti-money laundering (AML) rules to the UK art trade. As many readers will be aware, since January 2020, anti-money laundering regulations have applied to art market participants, or AMPs (traders or intermediaries involved in the sale or purchase of works of art worth at least 10,000 euros (in single or ‘linked’ transactions) and those who operate freeports where the value of the art stored is 10,000 euros or more). Persons falling within those groups have been obliged to be registered with the relevant supervisory authority, the HMRC, since June of this year (after an extension of the registration period owing to Covid-19).
The new guidance, described as a ‘money laundering risk assessment’ builds on, and is intended to complement the detailed HM Treasury-approved guidance drafted by the British Art Market Federation. It results from the UK’s National Risk Assessment being applied to the art market for the first time in 2020. This assessed art market participants to be “high risk for money laundering and low risk for terrorist financing”.
Much of what is covered by the new guidelines is confirmatory rather than additional to the BAMF document. However, the new guidance contains some useful practical advice to assist AMPs struggling to get to grips with the many new rules and processes to which they are now subject. It emphasises the importance of identifying and documenting risks specific to a trader’s business and implementing policies, procedures and controls to address these.
The guidance lists some fairly predictable risks which might arise for those buying and selling art, including where: payments emanate from a high-risk jurisdiction; a buyer wishes to maintain anonymity; the sale or purchase appears to eschew normal business practices or delivery is unusual or to an address other than that of the customer. As regards high risk jurisdictions, AMPs are advised to “decide their own level of comfort” when assessing the applicable risk and to incorporate awareness of this important topic into their written policies.
The guidance then moves on to consider risks specifically relating to the money laundering regulations, and in doing so, clarifies some of the trickier issues which have been challenging those now applying the rules to their day-to-day business. One such issue is the extent to which an AMP can rely on a third party in carrying out the all-important checks on a customer – or Customer Due Diligence (CDD) as it is commonly known. The guidance notes ‘some misinterpretation’ of the relevant rules in this regard, and clarifies that an AMP will need to comply with the strict criteria applicable on this point. These criteria include that the third party organisation on which the AMP seeks to rely must be conducting business in the UK, in compliance with the requirements of the AML regulations, or conducting business overseas, compliant with equivalent legislation in another country. The AMP must also immediately obtain the relevant information needed to satisfy the CDD requirements with respect to the customer or beneficial owner (or other party acting on the customer’s behalf). This information includes the identity of the aforementioned parties and the level of CDD completed. In addition, the AMP should have an agreement with the third party that they will provide the relevant information immediately upon request. If these criteria are met, the AMP can rely on the checks conducted by the third party.
Another point where further clarity was required was that of ‘linked transactions’. Examples of such transactions would include where deals with a value of over 10,000 euros are broken down into smaller transactions or where several works of art, each costing below 10,000 euros, are combined into a single transaction with an overall value above that threshold. In both situations, the sale would be subject to the AML rules. The guidance provides an illustrative example, advising that if an art gallery customer were to purchase three paintings by the same artist at the same time, costing £6000 each, the AML regulations would apply since the value of the deal should be treated as £18,000, thus above the threshold. It would not be appropriate in such a situation to invoice for each work separately, nor to claim that they were separate transactions.
AMPs need to be vigilant on this point, and to have controls in place to identify any deals to which the ‘linked transactions’ rule might apply. Another area for caution – and one which might not immediately spring to a dealer’s mind in this context – is that of deals involving renting art works. This is not something which previous guidance has addressed so it is useful to understand the regulator’s approach here. Whilst a trader renting a work where there is no obligation to purchase will generally fall outside of the regulations, renting art could become a regulated transaction depending on the particular contractual arrangement (a rental agreement obliging the renter to purchase the work at the end of the rental period would be an obvious candidate).
It goes without saying that the art trade, like so many other industries, has had to adapt to new processes and practices as a result of Covid-19. As physical gallery spaces and auction houses went into lockdown, sales moved online, into an environment which presents additional risk factors. The guidance acknowledges this and warns that identity documents provided online need to be verified, recommending conducting a video call for that purpose.
The implementation of new regulations and their incorporation into daily business practices is rarely straightforward, even in times when business is otherwise stable and thriving. Adopting new processes and procedures during a global pandemic is especially challenging. Guidance on applying the anti-money laundering rules to the art trade is therefore welcomed and it is hoped that it assists AMPs in understanding the risks and putting in place measures to address them.