It is rare that the somewhat dry and complex topic of anti-money laundering regulation hits the headlines in the art world. Introduce an A-list celebrity and a couple of paintings by names such as Basquiat and Picasso, however, and the stakes are raised. In June 2017 the online forum artnet news reported on an investigation by the US Justice Department into the laundering of billions of dollars embezzled from a Malaysian state development fund when it transpired that actor Leonardo Di Caprio had voluntarily handed over to the FBI two paintings by the aforementioned artists which he had been gifted by one of the individuals caught up in the investigation.
It has long been alleged that the illicit traffic in cultural goods is inextricably linked with the murky and unscrupulous world of money laundering. Cultural artefacts are often highly valuable, eminently portable and frequently traded across international borders. These factors, coupled with the informal and often somewhat covert modus operandi of many art dealers have rendered trades in artworks vulnerable to being used to conceal the proceeds of crime. Increasingly in recent decades, links between the ‘black market’ for art and antiquities and terrorist financing have also been established, and are now recognised in international initiatives as well as local laws. Though the extent of such links is a matter of debate, and hard, empirical evidence is generally difficult to come by, the connections, even if anecdotal in nature, are too frequent and too widespread to be purely coincidental. On the rare occasions when stolen art is recovered and the perpetrators are traced, these individuals are rarely one-off offenders and are very frequently found to be involved in wider criminal behaviour.
Despite these connections, the art trade has been somewhat reticent in calling out any potentially suspicious activity. There are obligations under UK law for certain categories of persons to make disclosures to the relevant authorities (the National Crime Agency) about situations where the discloser knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering (s. 330, Proceeds of Crime Act 2002). The ‘regulated sector’ to which these disclosure obligations apply covers professionals such as financial institutions, auditors and estate agents, but it also includes traders dealing in cash for transactions worth €10,000 or more (in a single deal, or a series of linked transactions – the so-called ‘High Value Dealers’). One might imagine that this provision would have subjected quite a number of art dealers to the regime’s requirements. The level of reporting from the sector has been extremely low, however. A report produced by Transparency International in November 2015 stated that in 2013/4, only 0.004% of art deals were reported (15 in total), despite the particular risks for the sector, which it considered presented “relatively easy opportunities to launder large sums of cash, since few art dealers and auctioneers seem equipped to deal with the risk of their businesses being used to launder the proceeds of corruption”.
This is not to say that the risks for the sector, and the regulations to address them, have entirely escaped the art trade. Indeed, as early as 1996, the Council for the Prevention of Art Theft (CoPAT) published a due diligence policy drawing attention to the regulations and the British Art Market Federation has its own, admirably thorough guide. A notable self-regulation initiative of more recent origin is the Responsible Art Market project which aims to raise awareness of the risks and to provide practical guidance on best practice. Its detailed guidelines on a number of risk areas for the trade include a useful suite of country-specific guides on money laundering.
Compliance with best practice guidelines will become somewhat more pressing for the sector over the coming months as the art trade prepares itself for the introduction of a more rigorous legislative regime. In April 2018, the European Parliament adopted the Fifth Anti-Money Laundering Directive which must be implemented by Member States by 10 January 2020. For the first time, this legislation specifically incorporates the art trade (including galleries and auction houses) into the ‘regulated sector’ in respect of transactions or series of linked transactions worth €10,000 or more, irrespective of the payment method. Once the Directive is implemented, in addition to the reporting obligations mentioned above, traders falling within this category will be bound by the stringent ‘client due diligence’ obligations required of regulated businesses (for which, see regulation 28 of the UK’s current Anti-Money Laundering Regulation 2017, SI 2017 No. 692). These involve, amongst other matters, checking the identity of those with whom traders deal, conducting risk assessments and ongoing monitoring of business relationships.
The new Directive has sparked concern amongst art traders on a number of fronts. The prospect of quizzing prospective purchasers of high value artworks on their credentials and the source of their funds before clinching a deal is not one which most dealers relish. Won’t such bureaucracy seriously dampen a purchaser’s ardour, and eliminate entirely the chance of an impulse buy? A buyer keen to get his hands on the object of his artistic passion might just think again if he has to wait for days or even weeks while the necessary paperwork is checked. How will a ‘series of linked transactions’ be assessed, and doesn’t this concept make the €10,000 threshold unmanageably low? What about internet sales: how will identity checks work in the online environment? Will the new regime draw a coach and horses through the ethos of confidentiality so culturally engrained in the art world? And what of the costs required to implement the new regime? Whilst larger operations might be able to absorb this, its impact on smaller businesses will probably be disproportionately harsh.
Whilst the current uncertainties entailed by ongoing Brexit negotiations muddy the waters a little, it seems unlikely that UK dealers will escape the claws of the new Directive. Arguably, the new measures will strengthen the UK art market over the longer term, not only by ensuring it keeps pace with its European neighbours from a legislative perspective, but also by providing the transparency and confidence required to ensure its continued growth in the current climate. It is interesting to note that 75 per cent of wealth managers surveyed by Deloitte for its 2017 Art and Finance Report expressed concern about lack of transparency in the art market. A similar proportion also considered that the sector’s business practices required modernisation to meet the standards expected of a trustworthy and developed market place, with money laundering risks being raised as a particular concern in that regard.
There is little room for the trade to bury its head in the sand. Resistance to the new Directive’s principles would most likely be counter-productive at best and dangerous at worst. The sooner dealers are able to give serious thought to business practices which might require tweaking to meet the new requirements, the smoother the transition to the new regime is likely to be.
For those interested (or concerned) in the new Anti-Money Laundering Regulations and their impact in the UK and elsewhere, we are honoured to be hosting a talk on the matter from Professor Janet Ulph of Leicester University during our Study Forum on Saturday, 23 February 2019 in London If you’re interested in attending, book soon because places are filling up fast.