In late Spring 2019, HM Treasury, as the UK governmental authority tasked with drafting legislation to implement the EU’s Fifth Money Laundering Directive with a deadline of 10th January 2020, conducted a Consultation on the transposition of the Directive into UK law.
Having started work in September 2018 for a technology-based solution that is specific to the art market, ArtAML™ Co-Founders Susan J Mumford and Dr. Chris E. King participated in Treasury’s Consultation.
This provided an opportunity for ArtAML™ to 1) ascertain how the UK government expected the new legislation to be applied to the art market, and 2) provide insight on how the art market operates at all levels. At this early stage, the latter played a bigger role; it was crucial that governmental officials attained key insight about how the art market operates in order to create legislation that facilitates ongoing trade, as much as possible.
See HM Treasury’s original Consultation document (art market focus: pages 21-25; parts 2.43-2.59)
published April 2019
(Review original Consultation document here)
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See HM Treasury’s Summary of Consultation Responses (art market focus: pages 11-13; parts 2.26-2.33)
published January 2020
(Review Summary of Consultation Responses document here)
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ArtAML’s Response to the Consultation – in two parts
11th June and 13th June 2019
ArtAML™ response to HM Treasury Consultation re: Transposition of AMLD5 into UK Law
11th June 2019 | By Susan J Mumford & Dr. Chris E. King
Our focus for the HMT consultation on the Transposition of the Fifth Money Laundering Directive is to provide input on the mechanics of applying the legislation, and the particular challenges that will be faced by dealers.
Points not directly covered in the consultation document.
Art Market Participants (AMPs)
From our understanding, the consultation vis-à-vis the art market has been very focused on what could be seen as a traditional view of ‘art dealers’ and intermediaries. However, there are many living artists whose work sells for €10,000 and above, and who will be selling artwork directly to buyers. We have been asked a number of times if there is any intention that artists will have to register as art market participants? Guidance either way will be helpful.
Is there a threshold for the number of transactions (over some time period) over €10,000 that will require the dealer to register as an AMP? Linked transactions will obviously have to be considered.
Geographical scope
In recent forums addressing the upcoming legislation we have heard a number of suggestions about how the location of a transaction will affect the CDD requirements. Examples – the CDD requirements will be those of the country where the transaction is taking place, or will follow similar rules to VAT MOSS, or will be the same as the rules for the Artist’s Resale Right. Given the importance of international art fairs, and the increasing importance of transactions over the internet, this needs clear guidance.
Box 2.D
28. How should a ‘work of art’ be defined?
The definition as provided in s.21 of the VAT Act 1994 is appropriate for AML/CTF purposes.
31. Should the threshold be lowered?
We suggest that the threshold of 10,000 Euros is not lowered.
The lower end of the art market sees small operations that are only able to handle a limited amount of paperwork and many are already overwhelmed. Furthermore, as the typical transactional value by a business decreases, so does available resourcing to reasonably comply.
33. What are the main costs of complying with the MLRs?
– Staff training
– Time and financial costs of verifying identity, PEP check, sanctioned individual checks, keeping up with changes to sanction lists, etc.
– CDD checks for legal entities are likely to be very time consuming and costly.
– Record keeping, coupled with GDPR requirements.
– Potential loss of business due to buyers annoyed with checks.
Chapter 4 – CDD
Background
The inclusion of art sales into 5AML is arguably the first intrusion of AML into a retail market. Currently, AML checks are required for “necessity” transactions, such as the purchase of property, or for the opening of a bank account. Such checks are seen by the customer as annoying but necessary, and generally take a few hours or days. Additionally, the majority of customers checked are likely to be UK or EU citizens. Art sales are “emotional” transactions, and will make sales harder for dealers.
The mechanics of verifying the identity of an art buying individual, never mind a legal entity or trust, are likely to be more difficult. A dealer at an international art fair is likely to be presented with identity documents in a format they have never seen before, and in languages they cannot read. Valid proofs of address are also complicated – we have heard a number of discussions where “utility bills” of foreign nationals are mentioned, without the understanding that the use of such bills as a proof of address is UK-specific. Technology can help with these issues, but the burden of ID&V checks for individual buyers will be considerable.
Box 4.A
44/45 More clarification will be useful, whether in the regulations or via guidance. This is particularly the case where identity has to be established for an internet-based transaction.
46 Clarification would certainly help update of electronic means of identification. CK has experience of moving bank onboarding from paper-based systems to electronic ones, and the time taken can be reduced from many weeks to a small number of days, in best circumstances. For elements of the art market that are working in a more retail environment, such as galleries and art fairs, ID would ideally be verified in minutes.
Box 4.B
47 CDD on legal entities can be complex, time consuming and expensive. For UK/EU companies, this information is much more likely to be readily available, so perhaps removing “reasonable measures” for such entities would be a compromise. Companies in other jurisdictions are likely to require EDD anyway.
Box 5.A
53 Placing the onus on the customer is a good approach. Companies House data is helpful, but can be inaccurate (mechanisms in Chapter 8 will be important).
Box 5.B
54/55. For situations where AMPs are dealing with each other, a registry where AMPs can upload their information securely would provide considerable advantages. This would also make ongoing CDD easier, as the customer would only have to upload their information once.
Box 6.A
57 Banks and other financial institutions find EDD complex, difficult and expensive. Art dealers are likely to find these steps very difficult.
Box 8.A
61. In addition to discrepancies of beneficial ownership information, there are numerous discrepancies and errors in Companies House data that could be corrected, if noticed by the obliged entity. Examples can be provided.
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ArtAML follow-up response to HM Treasury Consultation re: Transposition of AMLD5 into UK Law
13th June 2019 | By Susan J Mumford & Dr. Chris E. King
Terminology
You provided some very useful clarity about high value dealers. For background – at a number of the panel discussions and other industry-related events we have attended, the legislation has been framed as bringing dealers into the category of HVDs, which we now understand not to be true. Instead, dealers and others will now become “obliged entities”. This new category of art-related obliged entities is what is being called “art market participants”. It’s important that this distinction is made in any guidance.
Dealers
We would like to expand upon our discussion about who is a “dealer”. The majority of galleries are simply shops or traders (without retail premises) that happen to be selling works of art.
In the course of running a trade association, Susan has encountered individuals who exhibit and sell art, perhaps in cafes or from their home, and who don’t describe themselves as “art dealers”, despite that fact that they are selling art. They might say “I have a gallery on the High Street”, but not see themselves as an “art dealer”, because in their minds an “art dealer” is someone dealing in old masters or buying and selling works at Sotheby’s.
We would also suggest that a significant number of dealers are not members of any of the dealer-specific associations of the kind that BAMF represents. A gallery in Manchester or Glasgow is unlikely to be a member of SLAD or LAPADA, given the London-based focus of those trade associations.
Whilst the majority of these smaller dealers are unlikely to be commonly selling works above the threshold, those that do (via the sale of a single art work, or more likely, through a number of works to the same buyer) are much less likely to be aware of their obligations.
Conditional Contracts
We were initially puzzled by your comments about the importance of conditional contracts in art sales. On reflection, these are going to be of importance in very high value sales, where there are multiple intermediaries involved in a transaction. Bearing in mind our observations above about galleries being shops, we suggest that many transactions are the same as buying any item from a shop. You can walk into a jewellers, and walk out with a ring costing £10,000, no contract necessary. The same is true with art for the majority of dealers.
Making dealers aware
We raised the possibility of making people aware of their AML obligations via Companies House, but it has occurred to us that a much better solution would be via VAT-related information, since anyone transacting at or above the threshold is likely to be VAT-registered, and has regular contact with the HMRC.
The definition of a ‘work of art’
We also returned to the definition of a ‘work of art’ according to the VAT Margin Scheme and noticed that it doesn’t incorporate ‘video art’. There are also the more recent digital art forms, such as ‘virtual reality art’ and ‘augmented reality art’, which may or may not be considered sub-categories of ‘video art’. They’re all examples of ‘works of art’ sold within the art market, so should surely be included within the definition of ‘works of art’, particularly as the existing definition is quite specific about the medium of the artwork (paper, ceramic, etc). These digital art forms are sold at art fairs and galleries, and could form part of ML associated transactions.
Impact Assessment
In regards to the Impact Assessment, we’ve reviewed this once more (as you’ll recall that we initially provided a cursory outline) and identified wider impact on art industry suppliers. Here’s a starting list of professions that could be impacted by the legislation. More research into this would provide useful numbers for impact on the wider economy.
– Shippers & couriers
– Storage companies
– Foreign Exchange brokers
– Insurance brokers
– Insurance companies
– Lawyers
– Accountants
– Retail banks
– Framers
– Artists
– Material suppliers
– Dealers
– Valuators / Appraisers
– Conservators / Restorers
– Online marketplaces
– E-commerce backend solutions
– Technology companies specifically supporting dealers (inventory management, provenance, etc)
– Art fairs
Geography and ML risks.
Further to our questions about geography, asking how UK dealers will have to handle checks when outside the UK, or over the internet, there is another scenario to consider, which is that art dealers from countries outside the EU participate in UK art fairs. Dealers from outside the EU won’t be obliged to carry out the checks, so they surely represent a way to launder UK funds via art. To give you an example, examination of the listings for the last London Art Fair in January 2018 gives the number of dealers per country as follows:
102 UK
4 France
2 South Korea
2 Portugal
2 Netherlands
2 Italy
2 Ireland
2 Germany
1 Spain
1 Russia
1 Puerto Rico
1 Lithuania
1 Japan
1 Canada
1 Brazil
1 Argentina
Art fairs
The legislation is going to present a significant challenge to art fairs. We hope that some have been involved in the consultation.
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To see more information on the transposition of the EU’s Fifth Money Laundering Directive into UK, visit https://www.gov.uk/government/consultations/transposition-of-the-fifth-money-laundering-directive .