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What We’ve Learned from the BAMF Guidance on Anti-Money Laundering: Ten Questions and Answers

  • March 09, 2020
  • By Gregor Kleinknecht, Partner and Petra Warrington, Senior Associate

The British Art Market Federation (“BAMF”) has now published its eagerly awaited guidance on the new anti-money laundering legislation aimed at art market participants (“AMP”s).  The guidance, launched on 24th January 2020, has been approved by HM Treasury and is addressed to all AMPs as defined in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the “Regulations”).

By way of reminder, the Regulations implement the Fifth Anti-Money Laundering Directive and entered into force on 10 January 2020.  They expand the anti-money laundering compliance requirements for AMPs who transact in art works valued at more than EUR 10,000 either individually or in a series of linked transactions. See our previous articles for further background here and here.

The BAMF guidance is not a substitute for legal advice but represents industry good practice and provides an overview of the legislation as it applies to AMPs with helpful analysis, explanations of key principles, and practical worked examples, to assist AMPs in complying with their legal obligations.

Below we highlight the BAMF guidance response to some key questions for the art trade which had been left unanswered by the Regulations.

 

  1. Do I need to register with HMRC for occasional high value transactions?

The BAMF guidance confirms that, in the case of an AMP who does not usually deal in works of art exceeding the EUR 10,000 threshold, if a transaction unexpectedly brings the AMP within the scope of the Regulations, the AMP should apply for registration with HMRC “as soon as practicable” after the relevant transaction occurred. The AMP should seek the advice of HMRC immediately on effecting an occasional or unexpected high value transaction and, in the meantime, should adhere to the BAMF guidance. Overseas dealers that sell high value works of art in the UK even on a temporary basis will need to register with HMRC.

 

  1. How is the EUR 10,000 value calculated?

The BAMF guidance confirms that the EUR 10,000 value threshold for works of art includes taxes, commission and ancillary costs. If shipping a work of art or other fees such as buyer’s premium and taxes bring the value of a transaction over the EUR 10,000 threshold, the transaction will be a regulated one and the AMP must carry out an appropriate level of risk- based due diligence and comply with the Regulations.

 

  1. What is a linked transaction?

The BAMF guidance explains that multiple payments made by a customer against one invoice amounting to more than EUR 10,000 are regarded by HMRC as linked regardless of how long it takes to make payment of the full amount. The guidance states that where a transaction appears to be deliberately broken down into several payments below the EUR 10,000 value threshold, the payments will also be viewed as linked. It does not, however, indicate that several distinct transactions involving the same customer over a short period of time will be regarded as linked.

 

  1. When do I need to conduct customer due diligence?

The BAMF guidance states that customer due diligence (“CDD”) must be carried out when the AMP establishes a business relationship with a customer; carries out an occasional transaction; or suspects money laundering. CDD must be completed prior to the completion of a transaction. “Completion” is taken to occur, in most cases, when the work of art is delivered to or collected by a buyer rather than when the sale contract is completed.

The Guidance explains that, in the context of a sale by a dealer at an art fair, this means that the transaction can be agreed prior to CDD being undertaken, but that CDD needs to be in place before the work of art is released to a client. In the context of an auction sale, CDD measures should be completed prior to releasing the work of art to the successful bidder. Based on this guidance, AMPs should consider making completion of their sale contracts conditional on the satisfactory conclusion of CDD.

 

  1. What is a “business relationship” or “occasional transaction”?

A “business relationship” for the purpose of conducting CDD on a customer is “a business, professional or commercial relationship between an AMP (and a sole trader) and a customer, involving transactions amounting to EUR 10,000 or more, which is connected to the business of the AMP, and is expected by the AMP at the time when contact is established to have an element of duration.” Sending clients invitations to events or marketing materials does not, in itself, constitute a business relationship.

An “occasional transaction” is one carried out other than in the course of a business relationship that amounts to EUR 10,000 or more (whether as a single transaction or multiple linked transaction). The BAMF guidance states that, in the art market, the majority of transactions are likely to be occasional ones, where a customer makes a one-off purchase or sale and there is “no certainty of repeat custom”.

 

  1. Who is my “customer” for CDD purposes?

The BAMF guidance explains that the identity of the “customer” will depend on the AMP’s business model. If a dealer is selling a work of art, his/her customer will be the purchaser of that work of art and any broker or agent acting for the purchaser. If the AMP is acting on the seller’s behalf, it will be the seller and any agent or broker acting on behalf of the seller. In situations where an AMP is selling on consignment and is taking commission from the seller, the AMP will need to conduct CDD on both seller and buyer. CDD must further be carried out on any agents or brokers involved in a transaction as well as the ultimate customer and verify the agent’s authority to act for the ultimate customer.

 

  1. What is a Work of Art?

The BAMF Guidance confirms that the definition applied to a work of art for the purpose of the Regulations is the same as applies in VAT legislation. This means that works of art exclude antiques, such as furniture and clocks, and collectors’ items, such as coins and ethnographic items, but include conceptual works of art.

 

  1. What ID is required for standard CDD on an individual customer?

The BAMF guidance gives a detailed explanation of the requirement to “identify” customers and “verify” their identity. In relation to private individuals, the guidance states that AMPs should obtain the full name, residential address and date of birth of the customer for the purpose of identifying the customer.

Verification of the identity information involves relying on sources that are independent of the customer.  These will be document or electronic checks (or both).  The guidance presents a hierarchy of documents that are regarded as suitable forms of verification, the most reliable being government-issued documents such as a valid passport or valid photocard driving licence. The guidance states that “for face-to-face verification, production of a valid passport or photocard driving licence (so long as the photograph is in date) should enable most individuals to meet the identification requirements”.

 

  1. Can I rely on electronic checks?

The BAMF guidance recognises that AMPs may use electronic/digital checks for identifying and verifying the identity of customers and they may be relied on either on their own or to support documentary evidence. The guidance explains that there are a wide variety of electronic data services available and that they access many data sources. The guidance advises AMPs to understand what type of source material is used and satisfy themselves that the information supplied by the data provider is “sufficiently extensive, reliable and accurate, and independent of the customer”. As with all aspects of compliance with the Regulations, deciding whether and to what extent to rely on electronic identity checks is a matter of judgment and AMPs must make risk-based decisions.

 

  1. Do international branches of my business need to comply with the Regulations?

The BAMF guidance explains that if an AMP has several branches, its policies, controls and procedures must also be communicated to all branches of a business, within or outside of the UK. If the AMP is a parent undertaking, it must ensure that its subsidiaries and non-UK branches comply with all its policies, controls and procedures and, if any subsidiary or branch is established in a country with a less rigorous anti-money laundering regime, it must apply measures equivalent to those under the Regulations. If a foreign subsidiary or branch is prevented by law from applying equivalent measures, the AMP must inform HMRC and undertake additional anti-money laundering measures.

If you would like to discuss anti-money laundering compliance and your particular circumstances with us, please contact Gregor Kleinknecht (gregor.kleinknecht@hunterslaw.com) or Petra Warrington(petra.warrington@hunterslaw.com)

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