Many art dealers, galleries and auction houses are now subject to the UK’s anti-money laundering regime and are defined as art market participants (AMPs) - see our related blog The compulsory embrace of the art market by the UK's Anti-Money Laundering regime. On 28 June HMRC published its first assessment of the key areas that AMPs should consider when conducting their own assessments of the risk of money laundering and terrorist financing to which their business is subject.
As the supervisor for AMPs, HMRC is obliged to share up-to-date information on money laundering with AMPs including information from its own risk assessment where appropriate, any indicators of money laundering and details of circumstances which HMRC considers to be at high risk of money laundering. This information is provided in order to inform and assist AMPs to meet their obligations under the Money Laundering Regulations and must be considered alongside the Treasury approved British Art Market Federation Guidance and other relevant documents, such as the National Risk Assessment 2020 and guidance produced by the Financial Action Task Force (FATF).
In its first risk assessment, HMRC has identified the key areas where AMPs are most at risk of becoming involved in money laundering and also where they are at risk of breaching the Money Laundering Regulations, as set out below.
RISKS COMMON TO ALL AMPS
A potential sale or purchase of art which does not appear to be normal business practice, have a valid commercial reason or makes no economic sense.
Areas of concern may include unusual delivery or payment requests or a proposed transaction involving a work of art the business does not normally trade in.
Anonymity with the buying and selling of artwork
The desire to remain anonymous does not of itself equate to money laundering as it is clearly a facet of the art world, however anonymity can allow art to be purchased with the proceeds of crime or by criminals and it can be used to hide beneficial ownership and therefore evade tax.
Payment from high-risk jurisdictions
These are jurisdictions which are considered to be at high risk of money laundering because they may have high levels of bribery and corruption and other offences and they do not have adequate AML and CTF measures. AMPs should take care in respect of any transaction involving a high risk jurisdiction.
Remote sales compared with other sales
Sales conducted online, over the telephone or via an intermediary make it harder to effectively identify the customer.
Criminals take advantage of unwitting legitimate businesses
The reason for a transaction should be discussed with the customer in order to determine if it is legitimate.
The customer asks for the art to be delivered in an unusual manner or to an address that is not their own
As above it is important to discuss with the customer the reasons for any unusual requests in order to understand if there is a legitimate reason.
A business wants to conduct a sale or purchase of art in cash for an ‘off the record sale’
This request is likely to be made in order to avoid paying tax or detection and so the transaction must be considered high risk.
A new customer with little or no trading history and no trade references
An AMP should take care to conduct thorough CDD to understand that a customer with no trading history or trade references is not just a front for money laundering or other unlawful activity.
RISKS RELATING TO THE MONEY LAUNDERING REGULATIONS
Customer Due diligence
AMPs are allowed to rely on customer due diligence (CDD) conducted by another regulated entity but this provision has been misinterpreted by some. If an AMP relies on another’s CDD then they must ensure they immediately obtain from the other entity all the information they need to satisfy their CDD obligations.
Art and linked transactions
A transaction may be deliberately broken down into smaller payments or separate invoices in order to avoid passing the threshold for an AMP of 10,000 euros but these will be linked transactions and so subject to the Money Laundering Regulations.
AMPs must ensure they only process the personal data they obtain for their CDD for the prevention of money laundering and terrorist financing unless the data is allowed by other legislation.
Dealing with an unregistered AMP
AMPs should only deal with other AMPs which are registered with HMRC and should consider reporting unregistered AMPs to the National Crime Agency (using a Suspicious Activity Report) and to HMRC. Note that the deadline for registration was 10 June and that it may take several weeks for the application to be processed and the AMP to show as registered.
Online sales verification
Many sales are now conducted remotely and an AMP should consider conducting a video call when dealing with an online transaction in order to verify the customer’s identity.
Renting of art
If you rent art out you may fall within the scope of the Money Laundering Regulations. Much will depend on the terms of the rental contract and whether there is an obligation to buy at the end of the rental period. If the rental amount is inflated in order to reduce the final sale amount then HMRC could view this as a way to avoid being regulated.
An interior designer may be an AMP if they act as an intermediary and it will depend on the agreement with the customer.
IMPACT OF THE RISK ASSESSMENT
The art market has been regulated for almost 18 months and so HMRC is now able to better assess the areas where AMPs are at risk of falling foul of the UK’s anti-money laundering regime. Its understanding of the scale of the risks in the art market will also continue to improve now that the deadline for registration has passed and further guidance is likely to be forthcoming.
HMRC warns that AMPs must understand and comply with their obligations in order ‘to protect themselves, their families and their communities from the dangers of infiltration by criminals’ and this risk assessment will put sole practitioners and businesses on guard to an even greater extent to prevent money laundering. It also flags up for the first time that businesses in the art rental market and interior designers may find themselves within the regulated sector. This will undoubtedly come as a shock to many.
How can we help?
We regularly provide money laundering training and conduct anti-money laundering audits for individuals and corporate entities and advise on prevention measures and compliance requirements. For further information, please contact one of our specialist AML lawyers.
About the author
Nicola Finnerty is a Partner in our Criminal Litigation team and a leading expert in white collar and business crime, proceeds of crime & asset forfeiture. Over the last 25 years she has been involved in many of the most high-profile, complex criminal and regulatory investigations and prosecutions, both in the UK and in matters which span multiple jurisdictions. Her expertise includes money laundering, fraud & bribery and corruption along with being regularly consulted by individuals and institutions in the regulated sector in respect of the Money Laundering Regulations 2017. Nicola represents high net worth individuals, multi nation corporate clients, financial institutions and professional firms in investigations and proceedings brought by UK enforcement agencies. She is Kingsley Napley’s deputy Money Laundering Reporting Officer.