AML for the art trade: how not to go to jail under the 5th Directive
The 5th EU Anti-Money Laundering Directive (5AMLD) is due to be implemented into UK law by 10th January 2020. The good news for art dealers and intermediaries is that they have nearly a year to prepare. The bad news is that Brexit is unlikely to interfere and that, as matters stand, the UK will still implement 5AMLD after leaving the EU. Like it or not, the art trade will face an increase in regulation and bureaucracy that may at first feel alien and inquisitorial. It will affect non-European buyers who seek to purchase artworks in galleries, at fairs or at auction in the UK as much as non-European dealers who transact as buyers and sellers in the London market, whether in person or online.
While the financial and legal sectors, and estate agents, have grown used to concepts such as ‘know your client’ and regularly undertake enhanced customer due diligence and ID checks, these practices have so far largely bypassed the art trade. Whereas, traditionally, dealers and intermediaries may have met face-to-face and built personal and professional relationships with the majority of their clients, now they may never meet them in person as business becomes transacted increasingly through online and other means of distance communication. As a result of those changes in market practices, the art trade will now be obliged by 5AMLD to find out who their clients are by asking for photo identity, birth dates and information about their business activities and source of wealth, in a way that will come as a shock to many in the market and as an intrusion in personal affairs. The trade’s due diligence obligations in relation to corporate, foundation or trust clients will include potentially navigating complex offshore structures to verify their client’s identity, structure of control and ultimate beneficial ownership, a process that will take time and administrative capability.
Although the domestic regulations that will implement 5AMLD in the UK will not be finalised for some time, and there is no confirmation yet of what demands will be placed on art dealers, auction houses and other agents, the basic framework is set out in the European legislation and there are a number of changes that we can be certain will arrive.
5AMLD does not stand alone but rather amends the current 4th EU Anti-Money Laundering Directive (4AMLD) which has been implemented into UK law by The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. The definition of “obliged entities” under 4AMLD has been expanded to include “persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amounts to EUR 10,000 or more”. The important features to note are, first, that several small transactions that are linked will quickly reach the threshold when viewed together; and, secondly, that the requirement for customer verification which previously only applied to transactions in cash will extend to all payments irrespective of how they are made.
Art dealers and intermediaries who engage in transactions meeting the threshold will need to conduct ongoing risk-based due diligence on their clients. The due diligence required includes verifying the client’s identity and source of funds and being able to identify and scrutinise any irregularities in instructions received from a client.
The approach is “risk-based”, which means that the dealer must identify and understand the level of risk imposed by the client and the type of transaction entered into and assess the corresponding level of client due diligence that is necessary. Enhanced due diligence will be required for “high-risk” transactions which include inter alia those that relate to “cultural artefacts and other items of archaeological, historical, cultural and religious importance…”. This means that dealers will need to have a greater awareness of the background and purpose to such transactions and monitor whether any activities are suspicious.
While large international art businesses and auction houses will be able to adapt to the changes in the law relatively seamlessly, small businesses and sole traders that do not have the same resources at their disposal are likely to find compliance more of an administrative and technical burden.
However, help is available. Organisations such as the Responsible Art Market Initiative (RAM), a cross-industry initiative based in Geneva, have sought to assist the trade with risk management including by publishing an “Art Transaction Due Diligence Toolkit”, which provides a straightforward set of steps to follow in order to comply with due diligence obligations, and their “Guidelines on combatting Money Laundering and Terrorist Financing”, which further assists the trade in implementing risk-based measures and identifying indicators of suspicious activity or “red flags”. The due diligence toolkit includes three types of checklists for clients, artworks and transactions. Each checklist is followed by a set of “example red flag situations”. RAM has also produced a user-friendly quick reference guide which highlights ten guidelines for undertaking effective anti-money laundering measures. There is also an emerging service industry of companies that offer payment solutions that include compliance checks, although using such services will not absolve members of the trade from taking responsibility for verifying their client’s identity and source of funds.
In order to comply their obligations under 5AMLD, members of the art trade will need to start putting in place procedures for dealing with client due diligence, risk assessment and record keeping and would be well advised to do so sooner rather than later. Traders will certainly need to hold on to much more client and transaction documentation than may previously have been the case. Given that this will include personal data, the requirements of 5AMLD will have other legal implications and knock-on effects, e.g., with regard to data protection and compliance with the requirements of the General Data Protection Regulation (GDPR) and will generate the need to have the requisite procedures and policies in place to process that data.
 The 2017 Regulations sit alongside the Proceeds of Crime Act 2002 and the Terrorism Act 2000, which set out the primary money laundering offences and terrorist financing offences, respectively, and the Criminal Finances Act 2017.
Gregor Kleinknecht and Petra Warrington
This article was originally published in the ABA’s Art & Cultural Heritage Law newsletter.