What are the issues?
Auction houses and art dealers are, like many other sectors, responding to the COVID-19 crisis by shifting operations online. The increased use of digitalised sales platforms has opened up art sales to a greater number of potential buyers across the globe. However, art market participants must be mindful of the recent moves by the authorities looking to clamp down on the use of the art market as a conduit for money laundering. Failure to adhere to relevant laws may result in criminal liability and hefty fines.
In 2019, 58 anti-money laundering penalties were handed down across the globe, with fines totalling USD 8.14 billion. The largest fine issued by the Financial Conduct Authority in the UK was for £102 million to Standard Chartered Bank. The potential size of these penalties means that art market cannot afford to bury its head in the sand. Participants need to take responsibility for satisfying their compliance obligations and must remember that they are not able to rely on the KYC and customer due diligence carried out by third parties, such as their banks or suppliers. Ignorance of the rules is also not a defence under law.
In Europe, art market participants now must comply with the EU’s 5th anti-money laundering (AML) directive1 (the AML Directive). All EU member states were required to transpose the AML Directive into their national laws by January 2020. The UK has implemented the AML Directive into UK law that will remain effective post the expiry of the Brexit transition period.
Broadly, the AML laws in Europe now apply to the art world and require art participants to establish comprehensive compliance programs to prevent and report illicit activities by their counterparties including both customers and suppliers. Art market participants have become regulated entities who are required to carry out AML checks on their customers in relation to all transactions, or a series of linked transactions, for a value of €10,000 or more (roughly £9,000 or $11,000). Transaction monitoring and suspicious activity reporting is also required.
Whilst there is currently no equivalent legislation in the U.S., there are indications of a move towards the new European system. There are calls for increased transparency and perceived bipartisan support for the extension of the Bank Secrecy Act to the art market.
The sanctions authorities are also clamping down on the misuse of the art market. In December last year, the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) designated Nazem Said Ahmad, who laundered money through an art gallery in Beirut and provided financial support to Hezbollah.
U.S. Deputy Secretary of the Treasury Justin G. Muzinich warned that “art and luxury goods dealers should be on alert to the schemes of money launderers who hide personal funds in high-value assets in an attempt to mitigate the effects of U.S. sanctions.”
In conjunction with the designation, OFAC released compliance guidance for art market participants. The key points of note for those in the art market are:
- Art market participants are prohibited from engaging in transactions with sanctioned individuals and entities.
- Actors should develop a tailored, risk-based compliance program.
- Both U.S. and non-U.S. persons who engage in prohibited transactions may be subject to civil or criminal penalties and run the risk of being sanctioned themselves.
What should art market participants be doing?
It is imperative that those in the art market are aware of their compliance obligations and the increasing scrutiny on this previously unfettered industry. Art market participants must therefore ensure their AML processes and procedures are fit for purpose. The following steps are recommended:
- Customer due diligence: Firms should perform appropriate due diligence checks on their customers to verify the identity of the customer and the purpose of the transaction. This investigation should include sanctions list screening or other appropriate measures. Firms should consider whether enhanced customer due diligence is required in respect of more complex transactions. This standard applies across the supply chain from verifying the provenance of artworks through to their ultimate buyer.
- AML processes: Firms must establish and maintain anti-money laundering policies, controls and procedures dealing, in particular, with customer due diligence (described above), reporting, record-keeping, risk assessment and identifying and investigating “red flags.” Systems should also be established to ensure appropriate training of staff and monitoring of the ongoing client relationships. AML programmes must be effective, scalable and flexible.
- Ultimate beneficial owner issues: The intention of the increased scrutiny is to ensure transparency. A key part of this is establishing ultimate beneficial ownership (i.e., who is the individual at the centre of a multi-layered ownership structure). It is common in the art world for buyers to look to maintain their anonymity, and the use of third-party intermediaries and the increased use of online sales make this a challenge. However, firms need to satisfy themselves that they know who they are doing business with.
In general, art market participants need to take appropriate steps to identify and assess the risks of money laundering on their business. The increasing use of online sales puts the art market at greater risk of breaching its compliance requirements. Participants should ensure that they have appropriate policies and procedures in place to manage and mitigate those risks effectively. As mentioned, whilst firms operating in the U.S. are currently not legally obliged to perform the full gamut of compliance checks, as a matter of good practice this should nonetheless become the norm. Moreover, it will stand them in good stead if the U.S. does, as predicted, follow suit.
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1. Directive (EU) 2018/843 of the European Parliament and of the Council dated 30 May 2018