Lacking transparency, the international art market is considered the largest unregulated industry in the world besides guns and drugs. One of its main rules is an almost pathological level of discretion, making it an exclusive business that has thrived in part thanks to the ability of buyers and sellers to maintain their anonymity. However, this anonymity in art transactions has facilitated a range of scandals, including the forgery scheme that took down the Knoedler Gallery.
Britain’s embattled art trade is bracing for new rules intended to tackle money laundering and terrorism financing that some fear could further hamstring dealers in the country. On the last working day before Christmas, amid the Brexit deal/no deal frenzy, the United Kingdom Parliament implemented the European Union's stringent 5th Money Laundering Directive, a regulation that took effect on January 10th, 2020. Bringing major consequences for UK art market players, it has been predicted that these regulations will be the biggest legal change ever to affect the UK art market.
What do the new UK money laundering regulations cover exactly?
In July 2018, the 5th Anti-Money Laundering Directive (MLD5) was adopted by the EU as part of the Juncker Commission’s response to the terrorist attacks in Paris in 2015 and Brussels in 2016, the Panama Papers scandal, and increased scrutiny of freeports following the Yves Bouvier affair.
The UK, which has the largest art market on the continent, according to the 2019 edition of the Art Basel and UBS Global Art Market Report, now introduced the European Union directive without modification, updating and extending the current UK Money Laundering Regulations 2017. The UK is rumored to be the money laundering capital of the world.
Before the regulation took effect, high-value dealers (those art dealers accepting cash payments above a certain value) have been the only art-market players within the regulated sector. Widening the regulatory net considerably, the regulation now applies to all "art participants", defined as a firm or individual who " by way of business trades in, or acts as an intermediary in the sale or purchase of works of art" or is the operator of a freeport used to store works of art.
Basically, the regulation obliges all market participants in Britain to register with the government’s tax agency, and dealers and auctioneers must establish the identity of the “ultimate beneficial owner” before entering a transaction. It is applicable when the value of the art stored, or the transaction (or a series of linked transactions) amounts to €10,000 or more. At the heart of the new legislation is a requirement that art market participants must be able to answer who exactly they are dealing with.
Kenneth Mullen, a partner at the London-based law firm Withers, describes the changes as serious, as it could "potentially change commonly accepted market practices." "Due diligence is going to be fundamental. It does seem to mark a shift toward a more regulated industry," he says.
The failure to comply with these requirements could carry a penalty of two years’ imprisonment, a fine, or both. For this reason, art market participants should have certain systems and controls in place to combat money laundering and terrorist financing, including undertaking an internal risk assessment and creating an internal AML policy; undertaking initial and ongoing client due diligence; documenting client due diligence carefully and maintaining records; training staff; and appointing a nominated officer to make reports to the National Crime Agency. This means that clients need to be identified through legally certified photographic ID with a date of birth and recent proof of the client’s residential address, and that these identities must be verified using independent documentation, such as relevant watch or sanction lists.
The rule is supposed to eliminate intermediaries and other practices that have been used to obscure the true owners of artworks. At the same time, if a person working in a business in the regulated sector knows or suspects or has reasonable grounds for knowing or suspecting that another person is engaged in money laundering and fails to disclose that to the National Crime Agency, then they can be held to have committed a crime.
The legislation left many in the British art-community frustrated at the last-minute change, while many dealers and auction house officials are unsure of how the new rules will affect them. Mullen explained that sellers might not be aware of the new changes, as "everyone was expecting some guidance, and it didn’t happen."
In conversation with ARTNews, Christopher Battiscombe, the Director-General of the Society of London Art Dealers, fears that not everyone will understand precisely what they have to do, as the guidance running to well over 100 pages is quite a lot to get the heads around.
There are quite a lot of obligations to members, the form that needs to be drawn up; report suspicious transactions, and you have got to get all these details right. The thing has been a little bit rushed through in a sense.
The anti money laundering regulations might also complicate sales at the European fairs, as the American exhibitors at such events may be unaware that they may now be legally obligated to ask buyers for ID. Some fear that asking all these questions to the client could feel like an invasion of privacy, for which they could lose them.
It seems that the greatest challenge would be artfully bringing these regulations in a natural process. It is not yet known whether HMRC, the supervisory body for the newly regulated art-market participants, will provide a "grace period" for relevant parties to become compliant.
For The Art Newspaper, Mullen drew a list of some of the actions that should help the art market participants grapple with the new regulation - for example, they need to draw up a checklist of documents and procedures they need to verify client identity, not accept money from new clients before conducting appropriate due diligence, setting up a chain of responsibility for AML compliance in their business, undertake a risk assessment for existing clients to consider whether the information they hold on their identity is sufficient and up to date; among other things.
UPDATE August 25, 2020: The UK government has extended the deadline for galleries, auction houses, and other art market participants to register their businesses under the new anti-money laundering regulations. The original deadline of January 10, 2021 has been delayed until June 10, 2021.
Featured image: Money Laundering, via taxrebate.org.uk.