Business,  Law

The UK’s AML Supervisor for the Art Market Is Dishing Out Fines and Government Audits

HM Revenue and Customs, one of the 25 anti-money laundering (AML) supervisors in the UK, has started penalising art market participants (i.e. those dealing in the sale or purchase works of art worth EUR 10,000 or more) who are found to be trading without registering with HMRC first, as required by recent AML Regulations .

Last year, HMRC revamped and improved its ‘perimeter policing’ process which is used to identify businesses that are trading while unregistered. As of the new financial year on 6 April 2022, art market participants (AMPs) that are found to be trading without registration, or late to register, will be deemed in breach of the AML regulations and individuals may be fined £5,000 for every quarter that they failed to register, capped at £100,000, or prevented from further trading until approved for supervision.

Over 50 AMP registrations with HMRC have been made between January and April this year, despite the June 2021 deadline, according to The Art Newspaper. While this data may be slightly inaccurate, given that HMRC takes roughly 45 days to process registrations, there is reason to believe that “a lack of awareness from art market participants continues to be the key explanation for lack of registration”.

However, partial reprieve may be available for those with good reason (and a prudent approach). If an AMP who is in breach voluntarily declares that they were trading while unregistered, HMRC could reduce the fine by 50% or by 25% if the fine is paid within 30 days.

Even still, further sanctions may be incurred where AMPs fail to advise HMRC immediately of any changes to the information provided in their application after registration – for example, a change of nominated officer must be notified within 14 days. In 2019 to 2020 the government department issued approximately 30 sanctions to businesses who did not provide this information.

The list of companies and individuals receiving fines will not be publicly available (via the government’s website) until later this year. However, HMRC’s enforcement powers are not limited to fines for failing to register and interventions. It remains to be seen how the supervisor will demonstrate its authority, which includes the ability to issue censures, suspend registrations and business operations, as well as in more extreme cases to refer matters for criminal investigation and prosecution.

Interventions Provide a Dose of Reality

HMRC have also begun conducting and storing records of government audits – or ‘interventions’ – to ensure that AMPs are complying with Money Laundering Regulations. The government department currently supervises 30,000 businesses across nine sectors using a risk-based approach, including High Value Dealers, Estate Agency Businesses, Money Service Businesses and AMPs. Individual AMPs are therefore selected for intervention based on risk profiling and other relevant information gathered via the registration process or suspicious activity reports, which will “determine the frequency and intensity of onsite and offsite supervision” according to HMRC.

“After nearly two years of art market regulation, it would be a mistake for AMPs to treat interventions as light touch ‘educational affairs’. They are very real” warns lawyer and AML compliance expert for the art market, Rakhi Talwar.

Audits may be conducted in person (i.e. by phone and in writing) or remotely, with or without notice. The interventions allow HMRC to “test and challenge” whether the AMP understands the risks of their business as well as their AML compliance obligations.

As part of the process, HMRC may ask to speak to ‘responsible persons’ including directors, Nominated Officers (MLROs) and compliance-facing employees, or to see copies of key documents including the original and updated risk assessment policy, controls and procedures, the content of training carried out, as well as client due diligence records and the risk-based measures that were taken in advance of concluding the related transaction(s).

HMRC may also ask AMPs questions to find out if the AMP understands practices such as when and how to report suspicious transactions, how to apply customer due diligence, and how to identify beneficial owners.

In responding to these check-ups, Talwar advises AMPs that “preparation is key – relevant facts should be available to demonstrate compliance with the Regulations and provide assurance that risks have been properly identified and mitigated.” In addition, as a newly regulated sector AMPs should be “prepared to talk at a very basic level about how an art business works but also be able to explain the specific workings of their business”.

The AML Regulations bring the art market into the purview of financial regulators and highlight the increased scrutiny of the sector. The UK art market has been identified as highly attractive for money laundering because of the ability to conceal the art’s beneficial owners, the final destination of art, the wide-ranging values involved, and the size and international nature of the market.

In other AML related news, the Economic Crime Levy is now in play and introduces significant costs for medium to large art market participants.