In the circus year that was 2020, the UK took front and center on the world stage. This act was one of balance – involving a tightrope Brexit transition while firming the sudden blow of Covid-related business closures. But the final surprise that would serve as a pre-warning to our fellow international onlookers [coughs: U.S.] was the rather creeping realisation that the art market, as we know it – shrouded in secrecy and money laundering accusations – is becoming more regulated and even more curtailed when it comes to what knowledge can stay highly confidential.
Up until 10 January 2020, the UK art market did not have to operate under the purview of regulators in the same way as other financial gatekeepers such as bankers, brokers and realtors. Buyer and seller identities are often concealed – although not in the eyes of the law, considering a recent case – and assets are susceptible to fluctuating and subjective valuations. Since that date however, the EU’s 5th Anti-Money Laundering (AML) Directive – specifically amending the UK’s Money Laundering and Terrorist Financing Regulations 2019 – mandates that art market participants carry out checks on all, including linked, transactions valued at €10,000 (approx. £9,000) or more to prevent their use as conduits of financial crime.
The directive defines art market participants (“AMPs”) as someone or some business who either trades in the sale or purchase of work(s) of art that amount to €10,000 or more in value or, are the operator(s) of a freeport and stores works of art for a person or business at a value of €10,000 or more. This sum of €10,000 applies to the final invoiced value, and thus includes commissions and taxes.
As a consequence of the directive, AMPs are now required to register with HM Revenue & Customs (“HMRC”) by 10 June 2021 (an extension from January 2021 as a result of the Covid-19 pandemic), ”but the temporary reprieve should not be used as an excuse to de-prioritize becoming compliant” warns Susan Mumford, CEO of ArtAML. AMPs will also be obligated to carry out due diligence on their clients which includes considering the nature of transactions, obtaining information about ownership and ensuring that all those they employ are also trained to comply with the regulations.
The impact of AML on the art market will implement new procedures and best practice for businesses across thesector in order to comply with the new rules. This may well be met with hostility by clients as the art world is known for its secretiveness, as well as for being largely based on trust and long-standing relationships. And, given the relatively low threshold of €10,000, it is likely that all aspects of the art market, from dealers to auction houses, will be in some way affected.
In an article for Lexology, lawyers from Forsters LLP explained that there are a number of steps that those affected must now take. These include registering with HMRC, carrying out internal risk assessments, establishing an AML policy, carrying out client due diligence and reporting and archiving transactions. The article also explains that the exercise of carrying out client due diligence includes verifying documents and identities, keeping records and understanding the source of funds being used in transactions, something which may be costly and time consuming, especially for smaller businesses that have not carried out similar procedures previously.
This client due diligence must be carried out in relation to all parties involved in a transaction, thus would include the ultimate buyer, as well as agents and advisors who are often reluctant to disclose the identities of their clients. Importantly, it must be noted that while businesses are entitled to enlist other agencies to carry out this client due diligence on their behalf, the responsibility to comply with these regulations rests with the conductor of the sale, who will ultimately be liable for any failure to adhere to obligations.
Writing in The Art Newspaper, Rena Neville – who was the founding global compliance director of Sotheby’s in 1998, and is now the director at Corinth Consulting – explains that possible red flags concerning the risk of money laundering include (to name but a few) reluctance to provide identification verification, unusual transaction structures and third party payments. She also explains that HMRC has the right to conduct compliance audits which may include the review of policies and procedures that an art business may have implemented.
But how will the new AML rules work in practice? Client due diligence checks are time-consuming and cumbersome, and may well have a real detriment to business operations such as making sales at short-term events like art fairs that usually run for only a few days. However, there does seem to be a silver lining as while artworks may not be released until all AML procedures have been completed, transactions may be agreed subject to client due diligence. That said, as Julia Rodrigues Casella Hommes writes for the Institute of Art and Law, this may cause issues concerning the formation of sale agreements with clients, where the buyer is entitled to call for delivery of the artwork. She suggests that a solution may be for any such future sales contracts to include a clear condition that should the buyer not be approved by client due diligence checks, the contract will not come into force. This is necessary to allow the seller not to be in breach of AML regulations if they are contractually bound to follow through with a sale. However, it goes without saying, that should such a situation arise, it would be detrimental for client relationships.
It is worth noting too, that while the new AML rules have been met with concern by UK art businesses, the rules do also apply across the European Union and will have the same implications across the continent. In addition, the AML regulations will also apply to overseas dealers who wish to sell artwork in the UK, meaning that any gallerists seeking to do business in the UK will also need to register with HMRC. This means that the UK will not be disadvantaged in comparison to other major art hubs like Paris and Berlin. The recently passed National Defense Authorization Act in the U.S. has, for the first time, removed antiquities dealers’ current exemption from standard AML law and regulations under the U.S. Bank Secrecy Act..
While the new AML rules seem onerous, prevention is better than cure: the consequences of non-compliance include financial penalties of up to €5 million or 10% of annual turnover, conviction or even a custodial sentence, not to mention reputational damage. Although the UK is no longer part of the EU, both have expressed their future intention in cooperating and tackling AML terrorist financing, as reflected in the UK-EU Political Declaration published in October 2019. That said, as the deadline for registration has been extended, it is not known what the real impacts of the new obligations will be. However, it may well provide an opportunity for the art market to rid itself of mystery, dirty deals and handshake agreements.
The British Art Market Federation has produced guidance on Anti Money Laundering for UK Art Market Participants that you can read here
There is also guidance on the UK government website here
Draft Statutory Instrument updating details of the new law here