This article aims to update Art Market Participants (“AMPs”) on key updates and clarifications, explain a shift in emphasis to take a risk-based approach, and to help industry players understand what is legally required to meet compliance requirements.
While the British Art Market Federation (“BAMF”) Guidance is specific to the UK, the points are informative to all art businesses regulated for AML: Not only is the UK established as global leader for anti-money laundering regimes, this updated document reflects active engagement with the sector to understand the challenges faced by art businesses, providing important clarity for the newly regulated sector so that compliance requirements are workable for art businesses.
For UK businesses (or those with a UK base)*, it’s paramount to understand the legal role played by the Guidance:
*skip these two paragraphs if you’re not in the UK
“74. The Proceeds of Crime Act (POCA), the Terrorism Act 2000 and the MLRs all provide that when deciding whether a person or firm has committed an offence under the relevant law or regulation, a court must decide whether that person or firm followed relevant Treasury- approved industry guidance.
“75. These guidelines, approved by a Treasury Minister, therefore provide a sound basis for AMPs in the UK art market to meet their legislative and regulatory obligations, when applied by them to their particular business risk profile. Following the guidance offered is not mandatory, although departures from these guidelines, and the rationale for so doing, should be documented, and AMPs may have to stand prepared to justify departures, for example to HMRC and the courts.”
This statement from the Introduction highlights the careful balance being struck by governments to stop and/or identify financial crime while enabling art businesses to continue with business:
“Commercial and personal confidentiality are an important feature of the art market, and for good and valid reasons. However, these new rules are designed to limit the risk of confidentiality being abused in order to hide illicit activity. While confidentiality and discretion will continue to be a feature of the art market, the changes introduced by the new regulations may in some cases result in a degree of increased transparency between art market participants.“
In our view, there are two fundamental changes to obligations for carrying out Customer Due Diligence:
1. Who is your ‘customer’ for the purposes of Customer Due Diligence.
This has been updated to reflect the challenges of conducting CDD in multi-AMP transactions. Clause 5.5 (Guidance part 2) states: “The “customer” for the purpose of the MLRs will vary, depending on the AMP’s business model, and the role it plays in a transaction.” Clause 5.6 (Guidance part 2) adds: “The customer of an AMP who is selling or acting as an intermediary in the sale or purchase of a work of art, will be whoever is paying the AMP for the artwork, or for services in relation to the transaction.”
If you’re an AMP selling to a private client, the buyer is a ‘customer’ for CDD. However if you’re an intermediary or working with one, it’s your responsibility to determine who is your customer, and, based on the BAMF Guidance, that might be the legal person (private individual, company, etc) who pays for the art or for service in relation to the transaction. Do you need to identify the Ultimate Beneficial Owner (UBO)? That’s for you to determine and document, taking a risk-based approach.
Example: A New York art advisor (not regulated for AML) approaches a London art dealer (regulated for AML) to make an acquisition. It is the art advisor who will be paying for the piece and the London dealer might deem the advisor to be their customer. In this case, and providing it is the AMP’s business making the purchase, both the business and UBO/s will be identified and verified (KYC) and checked for AML, constituting the full CDD process.
There is a twist that presents a challenge: With the changed and changing sanctions environment, including the Luxury Goods Ban, it might it be critical that you determine the UBO – for instance, behind the advisor in Example 1. With the Luxury Goods Ban, it is against the law to sell most art if its final destination is Russia or Belarus. In the case of UK-based AMP businesses, the ban also applies to persons “connected with Russia”. Therefore, you might deem it necessary to identify the UBO, regardless of being regulated for AML (as Sanctions and the Luxury Goods Ban applies in jurisdictions not yet regulated for AML, such as the U.S.).
2. CDD is to be applied to both buyers and sellers / consignors.
While the Money Laundering Regulations (“MLRs”) as applicable to the art market originally focused on buyers and the Proceeds of Crime Act (“PoCA”) applied to sellers / consignors, the updated BAMF Guidance makes it clear that the MLRs are to look in both directions of a transaction.
Clause 56 (Guidance part 1) starts similarly to the above and is then expanded with examples:
“The customer of an AMP who is selling or acting as an intermediary in the sale or purchase of a work of art, will be whoever is paying the AMP for the artwork, or for services in relation to the transaction (see examples in Part II, paragraph 5.21). In a transaction involving an AMP who is an art dealer
– when the dealer is selling their own stock the dealer’s customer will be the person, or other AMP, who is paying the dealer for the work of art.
– when taking a work of art for sale on consignment, the dealer’s customers will be both the seller and the buyer.
“For an AMP who is an auction house, the customer will be:
– the seller of a work of art, or other AMP, who has paid the auction house, to auction the work of art
– the purchaser, or other AMP, who has paid the auction house for the work of art”
What if your consignors are low-risk contemporary artists? You might consider applying simplified due diligence.
Not only is AML new to the art market, the situation is changing around the world for countries regulated and unregulated for AML alike, following the Russian invasion of Ukraine. Determining who is your customer is an important step that might be more complex than first meets the eye when learning about AML responsibilities. Once you’ve decided who this is, it’s key that you document why someone is your customer, and conduct as well as record all accompanying Customer Due Diligence.
This is a prime example of why it’s important to keep AML Training up-to-date, as it’s easy to fall behind when your primary focus is selling art and related objects or services.
HMRC’s message to Art Market Participants: Key changes in the updated BAMF Guidance (2022)