Money laundering in the art market

On 20 December 2019 the UK government passed The Money Laundering, Terrorist Financing (Amendment) Regulations 2019. The Regulations transpose the EU's Fifth Money Laundering Directive (5 MLD) into English law and brings "art market participants" within the regulated sector for anti-money laundering purposes.

The Regulations came into force on 10 January 2020 giving "art market participants" just 10 working days to familiarise themselves with the new rules and implement them. Whilst the Treasury consulted on 5 MLD in April 2019, it has not published any response to the consultation exercise.  HMRC, the supervisory body for "art market participants" has yet to publish its guidance on the Regulations.

The new provisions apply, regardless of the size of a business, to any entity that "trades in or acts as an intermediary in the sale or purchase of works of art where the value of the transaction or a series of linked transactions is €10,000 or more".

Works of art are defined in the Value Added Tax Act 1994 to include:

• painting, drawings, collages and decorative plaques executed by hand;
• Limited edition prints;
• Original sculpture or statuary and limited edition sculpture casts;
• Handmade limited edition tapestries and hangings;
• Signed ceramics executed by an individual;
• Signed limited edition enamels on copper (not comprised in an article of jewellery); and
• Signed limited edition photographs.

Whilst antiques and jewellery would seem to be just as susceptible to money laundering, traders in these goods do not fall within the scope of the Regulations (and are not otherwise regulated unless they accept payment in cash of €10,000 or more). 

Art dealers and auction houses "trade" in works of art and are therefore "art market participants" for the purpose of the Regulations.  Whilst it is unlikely that 5 MLD was intended to catch artists, the Regulations, in the absence of any guidance, suggest that an artist who sells a work for €10,000 or more must register with HMRC as an art market participant and carry out CDD procedures on the purchaser.  The term "intermediary" is not defined and it is unclear whether those who advise on art sales fall within scope of the Regulations.

Amongst other things art market participants must:

• Register with HMRC and seek approval for their managers and beneficial owners;
• Appoint a board member or senior manager to be responsible for compliance;
• Carry out a risk assessment of their business;
• Develop policies, controls and procedures to ensure compliance with the Regulations;
• Train staff on money laundering and terrorist financing;
• Carry out customer due diligence (CDD) procedures on its customers to ascertain their identity and source of funds in advance of any transaction; and
• Appoint a "nominated officer" to consider internal reports and to submit 'suspicious activity reports' (SAR) where there are reasonable grounds to suspect money laundering.

Breach of the Regulations is a criminal offence with a maximum sentence of up to two years   imprisonment.  Failure to submit a SAR, in circumstances where there are reasonable grounds to know or suspect money laundering, could result in a prosecution under Section 330 of the Proceeds of Crime Act 2002. This offence carries a maximum sentence of five years imprisonment.

Whilst art market participants have a period of 12 months to register with HMRC and seek approval for their beneficial owners and managers, many obligations, including the requirement to carry out CDD, began on 10^th January. 

Art market participants are required to take into account the information provided by HMRC, as the supervisory body, for the art market when developing policies and procedures appropriate to their businesses.  The failure of HMRC to publish guidance is unfortunate, not only because most art market participants tend to be small businesses with little in the way of back office support, but also because anonymity has been essential to the operation of the market.  In the absence of proper guidance an art dealer may not, for example, appreciate that:

• When accepting works on consignment they will be required to carry out CDD not only on a purchaser but also on the consignor and ultimate beneficial owner. 

• If approached by an agent who wishes to purchase a work for a client it will be necessary to carry out CDD on both the agent and the purchaser.  An agent may resist a request for information on the identity of its client, as it may expose the agent to competition from the dealer or simply because the client wishes to remain anonymous.   Whilst a dealer is entitled to rely on CDD carried out by the agent (provided that that agent is also regulated for money laundering purposes), the dealer will be liable for any failure on the part of the agent to properly apply CDD measures.  In these circumstances the dealer would be taking a significant risk if he or she did not review the documents relied on by the agent before the sale takes place.

• A qualifying sale made at an art fair abroad will require the dealer to conduct CDD on the purchaser, even if that purchaser has no connection to the UK. 

• A foreign art dealer who makes a qualifying sale in the UK must register with HMRC and conduct CDD on the purchaser.

The British art market is, after the USA, the second largest in the world and the UK is by far the biggest trader of art in Europe. According to the British Art Market Federation's 2017 Economic Survey, 41,700 people were directly employed in the industry with an estimated 94,710 further jobs dependant on the arts market.  The requirement to conduct CDD on foreign buyers, sellers and their agents is likely to reduce the attractiveness of the UK art market. 

It is disappointing that, at precisely the time that the UK is preparing to leave the EU, the slapdash approach to implementing 5 MLD has caused confusion and burdened art market participants with needless administrative costs.  It is to be hoped that HMRC will publish its guidance without further delay and that this will provide advice that takes proper account of unique circumstances of the art market rather than generic information on money laundering risks.  In the meantime, the art market must trust HMRC to stand by its promise to "take into account the short lead time businesses have been given to implement all of the new requirements in assessing the response to any non-compliance".