The art market has come under increased scrutiny as a vehicle by which criminal and terrorist activities may be funded through the sale and purchase of artworks. Transactions involving artworks are frequently high value, cross-jurisdictional, and involve multiple parties, many of whom are unknown to each other. The buyer or seller may use an offshore entity to hold artworks, adding another layer of complexity. These features, which are the fundamental nature of art transactions, are a key reason why the art world is considered by many to be conducive to money laundering.
There are several laws and regulations which govern anti-money laundering (AML) in the UK. The two most important are the Proceeds of Crime Act 2002 (POCA) and the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR). Another key piece of legislation is the EU Anti-Money Laundering Directive, recently enacted in its fifth iteration (the 5th Directive), which is set to increase the burden on art professionals to assess AML risks arising from a transaction.
The current position
POCA applies broadly to anyone who knows or suspects that they are or may be involved with the transfer or acquisition of criminal property, or that they are facilitating such an arrangement. Under POCA, there is an obligation to report any such activity to the appropriate authorities. Failure to do so constitutes a criminal offence.
Under MLR, regulated industries such as banks and solicitors have strict duties to have systems and controls in place to detect and deter money laundering. Regulated sectors are required to conduct ongoing risk-based due diligence on their clients. This includes verification of the client's identity, assessment of any irregularities in the client's instructions, and understanding fully the source of the client's money. Where a company is the client, this includes determining who the ultimate beneficial owner of the company is. There are also obligations in relation to record keeping and staff training for AML.
There is an extensive list of factors designated under MLR as "high-risk" which should be taken into account when carrying out a risk-based assessment. Examples of high-risk factors which trigger enhanced due diligence include: arrangements where an entity holds personal assets (such as an offshore trust); transactions that promote the anonymity of the parties involved and which are not conducted face-to-face; payments received from unknown third parties; and parties which are located in countries considered to have high levels of corruption, criminal or terrorist activity.
Currently, these obligations apply to the art world when a dealer accepts payments in cash of €10,000 or more. However, given the wide application of POCA and the nature of art transactions, it is best practice to keep careful records which demonstrate that an art professional has attempted to make enquiries relating to the client, the nature of the transaction, the goods being transacted, and the locations of the parties involved.
Going forward: The 5th Directive
Once the 5th Directive is implemented in January 2020, the position for all art professionals will change significantly throughout Europe. The most important change is that anyone trading or acting as an intermediary in an art transaction, where the value of the transaction is greater than €10,000 (irrespective of method of payment), will be subject to the same strict duties of risk-based assessment described above.
This means that dealers and intermediaries will be compelled to establish the identity of their client (including beneficial ownership where the client is a company), obtain documentation supporting the identification, and consider whether any factors relating to a transaction could potentially promote risks of money laundering. If the dealer is receiving instructions from a person who purports to act on behalf of a client, then the identity of the agent and evidence of their authority to act must also be verified. It may be possible to conduct these checks through the parties' legal advisors.
It seems likely that MLR will be updated to include the changes under the 5th Directive, regardless of the UK's position post-Brexit. Art professionals will need to tread carefully once the legislation is in place and ought to start planning ahead and seeking advice to understand their obligations.
This article was originally published in The Society of London Art Dealers' newsletter in October 2018.