The highly anticipated guidance on implementing and complying with the new anti-money laundering rules for the art trade was finally released a few weeks ago. The lengthy document, which totals over 100 pages, was in fact prepared by the British Art Market Federation (BAMF), and has received formal approval by the HMRC. As such, it is alert to the particularities of the art market, and is designed to assist its participants to navigate the somewhat complex regulations which came into force on 10 January this year. In case you have not yet braced yourself for the lengthy read, we present our first impressions and main findings below.
First and foremost, with regards to the nature of the objects covered, the definition of works of art used in the guidance is that also used for VAT purposes, namely s21 of the Value Added Tax Act 1994, whereby ‘[i]t should be noted that antiques (such as furniture, early automobiles etc.) and collectors’ items (such as coins, ethnographic items and stamp collections) are not within this definition.’ (guidance, p. 6). Additionally, with regards to the transactions’ value threshold, the general rule is that art market participants ‘must carry out due diligence on all customers to whom they sell works of art at 10,000 euros or above, and must meet the other obligations imposed on the sector under the ML Regulations.’ (p. 8) The guidance now clarifies that the €10,000 minimum applies to the final invoiced value, meaning that commissions, taxes and any other ancillary costs are also taken into account when determining whether the relevant threshold has been reached (p. 8).
Moreover, the guidance stresses the practical elements of implementing the regulations, such as what steps businesses should follow – starting with the much discussed risk assessment embedded in the ‘think risk’ approach, which entails ascertaining what level of risk the business in question is exposed to with regards to money laundering and terrorist financing activities given its profile of transactions, clients, jurisdictions it operates in, etc. To quote an example from the guidance (p. 30), ‘an AMP selling contemporary photography with an average value of 5,000 euros (but occasionally over 10,000 euros) from their gallery in Brighton to a south of England customer base would have a very simple risk assessment, compared to an auction house based in London selling paintings with an average value of 50,000 euros or more to an international customer base who frequently transact via agents/proxies.’
Another compliance factor that is stressed throughout the guidance is staff training and the business’s internal (written) policies for recognising ‘red flags’ and adequately dealing with them. Staff members can be held personally liable in some instances (p.48), for example, for committing a ‘tipping off’ offence (p. 14). The Nominated Officer, who must be appointed by every organisation, will bear responsibility for filing SARs (Suspicious Activity Reports) to the NCA (National Crime Agency). This officer’s role involves overseeing the business’s internal systems and policies on money laundering and terrorist financing. Furthermore, he or she will also be the port of call for other members of staff to report suspicious activities, on the basis of which the N.O. must decide whether it is appropriate to file a SAR.
Additionally, the guidance offers answers to some of the burning questions emanating from the art trade. For example, with regards to CDD (Customer Due Diligence) requirements, it has been established that whilst an art market participant may rely on third parties to carry out those checks on his/her behalf, liability ultimately rests with the participant him/herself. As such, in the case of a transaction involving multiple layers of agents and intermediaries where the ultimate seller and buyer wish to remain anonymous, an art dealer would be able to choose whether to rely on the information conveyed to him by an agent, provided the agent meets certain criteria (p. 92), without carrying out his/her own checks (pp. 91-95). However, should things go awry, the dealer will remain liable if a money laundering offence was committed, as the regulations do not allow for the transfer of liability for one’s CDD duties onto another (p. 92). In this regard, it will boil down to how much the art dealer in question is willing to trust the agent.
Further clarification was also provided on the meaning of ‘business relationships’. The two main components of such a relationship are (i) an element of duration – it must stretch over a period of time – and (ii) some obligation or commitment on some level – even if not legal or contractual – on the customer to use services or buy goods in an ongoing basis. As such, the guidance concludes that ‘[t]he majority of transactions in the art market are, however, likely to be occasional’ and it also emphasises that ‘[r]eceiving marketing materials or attending events, such as gallery openings does not constitute a “business relationship” for ML Regulation purposes.’ (p. 13). This is an important distinction a market participant needs to make between his/her clients as there are additional obligations where ‘business relationship’ customers are concerned, which entail monitoring their activities and keeping their information up to date (pp. 13-14).
Another burning question that has been dealt with by the guidelines concerns the timing of the checks. The trade had been concerned about potential sales falling through because of the additional delay required in order to carry out CDD checks, especially in an art fair scenario where the potential buyer would therefore lose interest and move on to another stand. The guidance’s answer to this is that the checks must be carried out before establishing a business relationship with the client or concluding a transaction, with the caveat that ‘before concluding a transaction’ in this context is understood to mean ‘before release of the art work to the customer’ (p. 60). In practice, this would enable a dealer to “close the deal”, shake hands (or hopefully put things in writing), thereby entering into a sale agreement with the customer, and only prior to delivery of the goods carry out the checks required. This is a point that deserves careful consideration as it can give rise to delicate situations.
In principle, if all the formative elements to that contract have already been agreed between the two parties, it would logically follow that they have entered into a binding legal contract whereby the buyer is entitled to call for delivery of the work. One potential solution to such a situation would be for any such contract to contain a clear condition precedent to the effect that should the client not be approved during the CDD checks, for whatever reason, the contract will not come into force. This would avoid the art trader being contractually bound to follow through with a sale in a situation which would put him in breach of the AML regulations. It would, however, require careful drafting and negotiation, and may not entirely avoid the difficulties the art market fears in terms of customer relationships.
Ultimately, compliance is very much a matter of adopting a ‘risk-based approach’ and the art market participants themselves are perhaps the best judges of this, for their own businesses. There is no substitute for reading – and more importantly – actively implementing the guidance in its entirety and following its useful recommendations. Those looking to turn straight to the highlights, however, would be well served by taking on board the very conveniently provided table (pp. 56-60). This presents different scenarios and types of transactions, spelling out who should conduct CDD checks and who is understood to be the ‘customer’ in each case. Given that the new rules are already in force, there is no time like the present to familiarise oneself with them and ensure one’s compliance.
Update: In case you would like to read more on the anti-money laundering regime in the UK and the recent developments, Emily Gould and Julia Rodrigues Casella Hommes have recently published an article on the subject in the Financial Crime Digest of Aperio Intelligence. Click here to access it (pp. 12-18).
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