As a stakeholder for AML in the art market, ArtAML was invited to respond to two consultations with HM Treasury in autumn 2021 that look at developments in the Money Laundering Regulations as well as the Supervisory Regime. In addition to our official responses, we took part in a Stakeholder Engagement Session.
This article provides overviews of our responses – separated into two parts for each consultation, with available PDF downloads to view full responses.
Consultation 1/2: Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017
Statutory Instrument 2022
The Money Laundering Regulations (MLRs) aim to detect and prevent money laundering and terrorist financing before it occurs. Over time, the MLRs have evolved in line with international standards set by the FATF. The most substantial recent revision was in June 2017, transposing the European Fourth Money Laundering Directive and the Funds Transfer Regulation.
Since 2017, the MLRs have been amended, most significantly through the transposition of the Fifth Money Laundering Directive in January 2020. Through these revisions, the MLRs have expanded in scope, bringing in new sectors outside of the original financial industry focus, and extending the requirements falling on those in scope to ensure an understanding of the beneficial ownership structure of those involved in transactions.
The aim of the consultation was to allow HM Treasury to make time-sensitive updates to the MLRs, to provide clarity on how the AML regime operates, and ensure that the UK continues to meet international standards, following feedback from industry and supervisors on the implementation of the Money Laundering and Terrorist Financing (Amendment)(EU Exit) Regulations 2020, through relatively minor proposals for change.
KEY POINTS FROM OUR RESPONSE:
Having played an active role in sector discussions and consultations since the transposition of 5MLD into UK law, and as the founders of a software platform specifically designed to help the art market with their obligations, we drafted a response based on our experience from the industry so far.
The impact of the exclusion of artists
We believe that there is insufficient drafting to clarify the exemption of such AMPs from the definition, and that the estimated number of individuals to fall under scope has been grossly underestimated.
Proposed further amendments to incorporate those trading in digital art
We agree that further amendments should be considered to bring those trading in digital art into scope, and that close attention be paid to the definition.
We also agree with the overarching approach of tailoring the provisions of the FTR to the cryptoasset sector. Given the close link between the digital art works and cryptocurrencies and trading via NFTs, we believe this presents a huge risk of money laundering.
Access by AML/CFT supervisors to the content of SARs
We agree that some access to SARs is necessary for the purposes of assisting supervised populations, and suggest the content should be anonymised to protect the sensitive and confidential information within.
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Consultation 2/2: Call for Evidence: Review of the UK’s AML / CFT regulatory and supervisory regime
The National Risk Assessment of Money Laundering and terrorist financing 2015 highlighted scope for improvement across the UK’s AML/CFT supervisory regime. This was also a deficiency identified in the UK’s 2018 Mutual Evaluation Report by FATF. This call for evidence supports the review which will aim to assess the UK’s AML/CFT regulatory and supervisory regimes.
The intention was to do this by looking at three themes specifically:
1. The overall effectiveness of the regimes and their extent (i.e. the sectors in scope as relevant entities).
2. Whether key elements of the current regulations are operating as intended.
3. The structure of the supervisory regime including the work of OPBAS to improve effectiveness and consistency of PBS supervision.
KEY POINTS FROM OUR RESPONSE:
Given our day-to-day dealings helping AMPs of all sizes and specialities with their AML obligations, the majority of ArtAML’s answers relate specifically to what we are seeing from the industry in this newly regulated sector.
Extent of the regulated sector
We suggest that more businesses that could potentially sit in the high-risk category where ML is concerned, such as those dealing in jewellery, furniture and decorative art, be considered for inclusion of the regulated sector. It is too early to say whether the current application of enforcement powers are sufficiently dissuasive, or proportionate to the breaches they are used against.
Barriers to the risk-based approach
We see evidence of a number of barriers to pursuing a risk-based approach, owing largely, we feel, to the lack of clear and concrete examples of actual risks in their sector. We believe it is too early to make an assessment as to whether supervisors allow for businesses to demonstrate their risk-based approach and take account of the discretion allowed by the MLRs.
Application of EDD, SDD and reliances
We agree that the requirements for choosing to apply enhanced and simplified due diligence are appropriate and sufficient to counter the higher risk of ML/TF, but suggest that small businesses are not necessarily equipped to do so. We also believe there are a number of factors that prevent the correct utilisation of reliance within the sector.
We believe that enhancing the role of supervisors to bring the consideration of SARs and assessment of the quality within the supervisor regime would provide an understanding of reporting numbers and quality of submissions, but suggest the information remain confidential and generic in nature. To improve the quality of SARs submitted, we suggest having an API available to make the process less manual.
Our experience suggests that the current guidance is not sufficient to support relevant persons in their obligations under the MLRs. While the 2020 BAMF guidance is a good attempt to cover the complexities of the art market, we feel it misses a number of significant areas and fails to address compliance challenges faced by many AMPs on a day-to-day basis.
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