The latest guidance on the anti-money laundering (AML) regulations as they pertain to the UK art market has finally brought about some much-needed clarification on some aspects of the regulations that had remained up until now somewhat difficult to comprehend and, more importantly, apply to day to day business. There are many aspects of the regulations covered in the 112-page document but our analysis focuses on the three which are the most consequential, particularly as they regard the matter of intermediaries in the art market, the timing of carrying out customer due diligence (CDD) and the ability of parties to rely on others’ CDDs. It is important to bear in mind that this guidance was compiled by BAMF (British Art Market Federation), with the sign off from HMRC. As such, although it is not intended as a replacement for legal advice, it does take into account particularly well how the market operates and what have been the main practical challenges faced by its participants.
The matter of intermediaries
Anyone familiar with the art market will know it operates on the basis of personal relationships. It is a world where who you know can literally make or break a deal. After all, with price points constantly reaching new heights, finding that wealthy collector who is willing to part with their funds for a particular artwork and gaining access to them is not an easy task. Hence an extensive network of contacts who can act as intermediaries can be highly significant. Up until now, there was great uncertainty in the art market as to how to interpret the notion of an ‘intermediary’ for AML purposes. If you merely made an introduction but did not profit from the sale in any way, would that make you an intermediary? Surely not. But what if you were paid an introductory commission when the deal was concluded? What if you were acting as agent, being the go-between for another agent acting for the seller and a third agent acting for the buyer? What if you were an auction house carrying out a private sale? These and many other scenarios were causing serious concern to art market participants as nobody wants to fall foul of the law and yet interpreting to whom the relevant rules apply is difficult in light of such uncertainty.
An ‘intermediary’ will be henceforth defined as someone (whether an individual or a business/legal entity) who “by way of business, actively transacts in the sale or purchase of works or art on behalf of a seller or buyer under whose authority they act” (s. 13 of the guidance).
The guidance would probably have better reached its objective of providing clarity had it not included the term ‘actively’ in combination with ‘transacts’ in the definition above, as the qualification does leave further room for interpretation. Nonetheless, the definition provided seems to comfortably encompass the more obvious example of an art dealer acting as agent, as well as business entities such as art galleries, auction houses or even online sales platforms. The guidance also expressly stipulates that an intermediary will be ‘paid by the seller or buyer for whom they act’ (s. 14) which marks another essential criterion: being remunerated for the would-be intermediation.
One element that is important to highlight is that whilst the definition stipulates someone who “by way of business” is involved in these transactions, the business in question need not be limited exclusively to an art-market related enterprise. For example, an interior designer who sources artworks for a project he or she is working on could also be considered an intermediary for the purposes of AML regulations in some circumstances.
As with any definition, setting out what is not covered is as important as establishing what is. This is why the recent guidelines also expressly exclude the following from being considered intermediaries in any transactions: “framers, shippers, or another person just providing contact information, do not actively participate in purchase/sale transactions” (s. 17), “introducers are only within the scope of the MLRS if they receive a financial value which directly relates to their active participation in the transaction” (s. 18), “artists selling their own work, whether as an individual (…) or through a business they own (…) or by someone employed by the artist” (s. 19), likewise “sales out of an artist’s estate” where the estate itself would not be considered as an intermediary (s. 19).
The timing for customer due diligence (CDD)
One of the main reasons for contention from art market participants to the AML regulations from their inception has been the administrative burden these create when it comes to complying with CDD requirements. Two often-evoked examples of said burden involve (i) the inconvenience to dealers having to screen customers at an art fair on the spot or (ii) an auction house being required to carry out CDD checks on everyone who registers to bid in any given sale. Up until now, much has been said about the requirement to carry out CDD checks before establishing a business relationship or concluding a transaction. But what exactly does it mean to conclude a transaction? Shaking of the hands at the art fair when the sale is agreed? Or is it when the artwork is delivered to the buyer? Or when the funds are transferred? This uncertainty has been crippling to the market, especially because carrying out CDD checks is not only time-consuming but also costly, so it is understandable that art market participants would seek more clarity as to the exact point in time when the requirement arises.
The new guidance clarifies that in the aforementioned scenario of an art fair, “a transaction may be agreed ahead of carrying out all CDD measures, but CDD measures must take place before establishing a business relationship or concluding a transaction, which results in the release of the work of art and the transfer of title” (s. 63). In practical terms, the legal transfer of title in the art market usually takes place at the same time as the funds are transferred, and the work is not physically released before the transfer of funds has taken place. As such, it is all very well for dealers to agree on the sale at the fair without having carried out CDD checks on the spot, so long as they hold on to the artworks and do not receive payment before having completed this step.
Similarly, the auction house in scenario (ii) does not need to carry out CDD on everyone who registers as a bidder but “CDD measures must be applied to the successful bidder prior to completion of the transaction, that is, before the work of art is released to the successful bidder” (s. 63). Again, we note how the physical release of the work is a key element, but so is the moment when the funds are actually transferred. As such, the main takeaways from this piece of the guidance are to not allow funds to be transferred and/or the artwork to be physically handed over before completion of the CDD requirements.
Reliance on others’ CDDs
A thorny challenge in the application of AML rules has always been the opacity that is prevalent in the art market. After all, it is not unheard of for parties to be unaware of the identity of the final buyer or seller in a transaction involving multiple layers of agents and intermediaries. Additionally, for privacy and confidentiality reasons, the parties involved are often reluctant to disclose to others exactly who it is that they represent. It is easy to see how carrying out CDD becomes challenging to say the least when you do not know who the customer is.
The guidance helpfully defines the customer for CDD purposes as “(…) whoever is paying the AMP for the artwork, or for services in relation to the transaction” (s. 56). However, AMPs or art market participants should be cautious of jumping to the conclusion that they only need therefore carry out CDD on one party (being the party directly paying them). The guidance cautions AMPs that “CDD measures should enable AMPs to form a reasonable belief that they know the true identity of each customer and, where relevant, their beneficial owner (that is, the person or entity who owns or exercises ultimate control over the customer, or on whose behalf a transaction is being undertaken)” (s. 53). That said, provided all AMPs involved in a transaction are subject to the same UK AML regulations, parties are permitted to rely on each other’s checks (s. 61). However, if, for example, one of the parties is an overseas dealer not subject to UK regulations, this reliance is not sufficient since the UK AMP cannot be sure the overseas colleague is bound by requirements equivalent to the UK AML regulations. Moreover, it is crucial to bear in mind that even if said reliance is permitted, it does not entail, from a legal point of view, a renunciation of responsibility for compliance with the CDD AML requirements.
It will be interesting to observe over the coming months how market practice will develop and adapt following this guidance and what new challenges may arise, either as a result of the wording of the guidance itself or as new rules or sanctions might come into place. Money laundering is a complex area to regulate and the art market is not a simple creature itself. Regardless of whatever imperfections the latest guidance may prove to have, it is safe to say it is very welcome for market participants.
Update: Since the time of writing, HM Treasury has approved the latest version of this guidance, to include some recent amendments to the law and clarifications on the obligation to report inconsistencies in companies’ information that may come up in the due diligence process. Detailed information on these latest updates has helpfully been provided by BADA (The British Antique Dealers’ Association) on their website here.