UK regulations take aim at money laundering in art

Auction houses and art dealers are famously protective of their customers’ privacy. At auctions, it is not unusual for anonymous sellers to sell pieces worth millions of pounds to anonymous buyers.

Following the transposition of the EU’s Fifth Anti-Money Laundering Directive into English law, the UK government is cracking down on potential money laundering in the art sector. For the first time, art dealers and auction houses must verify their customers’ real identities and take other steps to prevent the use of the art sector for criminal purposes.

In a sector that has historically been subject to limited regulation, how effectively these new rules are implemented remains to be seen.

The new regulations

The relevant amendments to the UK Money Laundering Regulations (the “Amendments”) implement the EU’s Fifth Anti-Money Laundering Directive. The Amendments put art market participants (“AMPs”), who include art dealers, auction houses and operators of freeports, in the same category as financial institutions and estate agents. AMPs now must take a risk-based approach to transactions to prevent money laundering. For all transactions over £10,000, AMPs are now required to verify their customers’ identities, train their staff to recognise money laundering and register their business with HMRC, among other things.

AMPs have been required to comply with most of the new requirements since they came into force in January 2020, although they have until 10 June 2021 to register their business with HMRC.

An appealing asset for money launderers

Before the Amendments, art could be considered the ideal asset for a money launderer in the UK. Limited identity checks were required to make purchases and assets could be extremely high value.

Limited identity checks

Although auction houses stringently test artworks for authenticity, the identity of customers was historically less important. Compared to real estate, for example, purchasers of art were subject to far fewer identity checks.

Since 2003, AMPs that participate in transactions worth more than €10,000 have been required by the Proceeds of Crime Act to report any person that they know or suspect is engaged in money laundering. However, the Proceeds of Crime Act does not require AMPs to systematically check customers’ identities. Before the Amendments, the stringency of identity checks was a matter for the AMP.

High-value assets

The sums spent on high-value art are increasingly enormous. Da Vinci’s Salvator Mundi broke records as the most expensive painting ever sold at $450m in 2017. Hockney’s Portrait of an Artist was the most expensive painting ever sold by a living artist at $90m in 2018.

The liquidity of high-value artworks also makes them appealing. A piece by Hockney can almost be guaranteed to be snapped up at an auction. Previously, the auction house and buyer may have asked little about its seller.

Recent cases

The Panama Papers drew connections between art and money laundering by revealing a number of suspicious shell companies that were investing in high-value art. Further recent cases of money launderers purchasing art have included London art dealer Matthew Green, who is defending a case in the USA for attempting to launder over $9m through the proposed sale of a Picasso painting. The leaked FinCEN Files show that a company owned by the Rotenberg brothers purchased a $7.5m René Magritte painting to evade UK sanctions. Meanwhile, it is suspected that ISIS has raised substantial funds through the sale of looted antiquities from the Middle East.

What AMPs must do now

Customer Due Diligence

The Amendments require AMPs to take reasonable steps to identify the real identity of their customers. “Customers” can be individuals or companies and include:

• the buyer or seller of the art
• any brokers or agents, and
• the ultimate beneficial owners of the art.

Individuals’ identities can be verified by examining passports or identity documents. For companies, AMPs must check the identification of the person or persons that control the company, including any beneficial owners.

Additional obligations

Additional obligations for AMPs under the Amendments include:

• appointing a nominated money laundering officer
• preparing policies and procedures on anti-money laundering 
• reporting suspicions of money laundering to the National Crime Agency
• training all staff on anti-money laundering rules, and
• registering their business with HMRC (the regulator of AMPs under the new regulations). 

HMRC can impose a fine on AMPs if they breach these obligations. If a company officer consented to, or negligently failed to prevent a breach, they can be prosecuted personally. In serious cases, a person found guilty of breaching the regulations can sentenced to two years’ imprisonment.

Comment

AMPs’ compliance with the Amendments will be regulated and enforced by HMRC. Commentators have voiced concerns about whether, given limited funding and the large number of sectors it already has to regulate, HMRC will be able to effectively monitor AMPs’ compliance. However, and although there is a chance that enforcement may be patchy, AMPs will still need to comply with the Amendments and adapt their internal processes to ensure they can do so. Just as banks had to adapt to increased regulation after the 2008 financial crisis, AMPs must adapt to a more regulated environment. High-profile auction houses Christie’s and Sotheby’s have already put anti-money laundering training in place for employees. This should help to lead the way for smaller AMPs.

It may be considered appropriate that AMPs help ensure investors’ legitimacy, given that they have benefitted from increased investor appetite for art in recent years. As well as the EU Directive, legislation is moving through the US Congress to prevent money laundering in the art sector. Having long been viewed as an ideal asset type for money laundering, it appears that AMPs will need to get used to increased regulation – and the risk of enforcement – on both sides of the Atlantic.