Art market participants: seven steps to AML compliance
This summer the UK published a new AML risk assessment, detailing the key risks and regulatory expectations for art market participants (AMPs), including how the new requirements should be implemented, providing some much needed support for a newly regulated sector.
Similarly, to the UK’s National Risk Assessment of Money Laundering and Terrorist Financing published in December 2020, the guidance assessed risks posed by AMPs as high.
The regulations came into force in January 2020, however AMPs were given until 10th June this year to register with HMRC and comply. Six months after the deadline, and almost two years since the updated Money Laundering Regulations came into force, we revisit how AMPs are complying with the ‘new’ regulatory requirements.
Based on our experience AMPs are still struggling to grasp their roles, responsibilities and risks relating to their activities. We see many firms struggling to implement the fundamental regulatory requirements. While there is a significant proportion of firms doing basic internet searches on customers, they still fall short of the detailed requirements set out by HMRC.
Further to this there are areas and types of art where it is unclear if they are caught by the regulations, for example with non-fungible tokens (NFTs) (an NFT, in simple terms, is where blockchain technology is used as a public proof of ownership for digital works of art).
Who is currently caught by the regulations:
AMPs are defined as a firm or an individual who trades in, or acts as an intermediary in the sale or purchase of artwork where the transaction is higher than €10,000 (approx. £8,500), including auction houses, art dealers, brokers, etc. It also includes freeport operators used to store works of art where the value is also higher than €10,000. The definition of what a work of art actually is, in the regulations, relies on the lengthy definition contained within the Value Added Tax Act of 1994. This is not always particularly helpful or practical for AMPs who buy and sell a huge variety of different items.
What AMPs actually need to do right now and how:
AMPs must register with HMRC prior to the commencement of a business relationship and must comply with the following requirements:
Appoint a Nominated Officer (NO): Someone who is responsible for interacting with the relevant supervisory authorities and receiving internal suspicious transactions. NOs can also be responsible for overseeing the AMP’s AML systems and control.
Assess your risks: Ensure a business wide risk assessment is conducted and that it takes into account risks associated with customers and their underlying beneficial owners, transactions, geographical exposure (incl. customers associated with high-risk countries), services provided and delivery channel (e.g., private sale, online auction, etc.).
Have policies, procedures and controls: These should be proportionate to your business and money laundering/terrorist financing risks. These must include details relating to the customer risk assessment (CRA), risk based due diligence requirements, controls for third-party payments and suspicious activity reporting (SAR) processes and ongoing monitoring requirements.
Customer due diligence (CDD) checks: These must be conducted on customers before a transaction is concluded. Checks will differ based on the risk with higher risk relationships / transactions subject to Enhanced Due Diligence (EDD).
Train staff: Train on a regular basis to help staff identify ML/TF related risks dependent on their exposure and customer types.
Report suspicious transactions: Report to the authorities i.e., the NCA.
Record keeping: Ensure appropriate CDD and transactional records are kept.
Failure to comply with the MLRs and the requirements above is a criminal offence and can severely impact firms. For example, AMPs who do not comply with record keeping requirements are open to prosecution, including imprisonment for up to two years and/or a fine, or regulatory censure.
Why this is important and some emerging risks
Economic sanctions - Frequent use of intermediaries and offshore structures in the art market promotes a culture of secrecy and anonymity as the buyer and seller often do not know each other. This has attracted sanctioned/designated individuals to the art market, as examined by the US Senate Permanent Subcommittee on Investigations. The committee stated some transactions benefitted from the secrecy and anonymity of the art market indicating the intermediaries and auction houses involved were aware of the identity of the sanctioned individuals but exploited loopholes and the opaqueness of the sector.
Emerging technology - Art purchases and sales using NFTs and blockchain technology is another area that can be exploited by criminals. NFTs are essentially a digital ownership certificate to which any digital file (e.g., a song, photograph, etc.) can be attached. However, it is unclear on whether any such works of art would be caught by the regulations. Any such activity could arguably be supervised by the FCA or HMRC. We would imagine there are some firms who are not registered with either. Knowing which supervisory authority AMPs can turn to for support and guidance will go a long way to help a relatively newly regulated sector comply.
How we can help and our work in the sector:
Art market participants are advised to familiarise themselves with the aforementioned AML risk assessment and regulatory requirements to ensure compliance with the MLRs. Interior designers for example, may fall under the MLR scope if they act as an intermediary (i.e., buying art as part of a project). We have extensive experience dealing with HMRC supervised entities and understand the challenges of operating in an industry that is newly regulated. We have delivered the following engagements for HMRC supervised firms:
preparation for a regulatory visit
conducting AML audits
risk assessment
drafting and strengthening policies and procedures
CDD file reviews
training.
