Laundering

On 10 January 2020 new anti-money laundering laws came into force in the UK that have wide-ranging, game-changing and undoubtedly controversial implications for the art market. The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 are aimed at curbing the washing of dirty money used to buy and sell work in the UK’s art market. From the same date similar regulations were introduced into the laws of all other member states of the EU, responding to the UK’s drive in recent years to tackle this serious problem on an EU-wide basis.

Latest credible statistics for global public art auction and private art dealer sales report that around $67bn was spent in 2018, the UK being the second largest art trading country after the US. In recent years art-market professionals worldwide have increasingly commented that the absence of a regulatory framework (ensuring transparency of art sales transactions) has undermined the integrity and reputation of the professional art trade; some say that the art trade is akin to ‘the Wild West: there is no law’ while others claim that London is ‘the money laundering capital of the world’. Perhaps. But despite such candid views and observations by many art market professionals, they have not so far reached consensus on realistic solutions. Hence the unprecedented intervention by the EU/UK in order to tackle issues involved and arising (from the absence of self-regulation by the art-market) via legislation.

Launderers typically wash dirty money by purchasing legitimate tangible and moveable assets, like art, that can be transported around the world and resold/liquidated in exchange for clean money. Money is labelled by law enforcement agencies as being ‘dirty’ when it is evidently the proceeds of criminal activity, such as illegal drugs/firearms/human trafficking/vice/terrorism dealings, which criminals ‘place’ (use) to buy a clean asset such as art. The criminal then possesses and owns a ‘clean’ asset (art), instead of dirty money.

The next laundering step is likely to be for criminals to distance themselves from evident legal ownership of their art asset by selling or transferring ownership to a so-called ‘shell’ corporation, which is usually a separate legal entity such as a private limited-liability company, perhaps registered in a small off-shore island country. Such entities would be created to be at arm’s length from the criminals for the sole purpose of the entity’s owning and then re-selling the art asset to further ‘shell’ companies. Eventually, a re-sale is made through this process to a final purchaser, acting in good faith and unaware of the art asset’s nefarious provenance. This whole process is known as ‘layering’ the dirty money/asset. Shell entities typically use the proceeds of re-sales to buy further art assets, using clean money from additional good-faith purchasers, and so the cycle is perpetuated.

Such typical money-laundering processes rely on the professional art market’s prevalent and notorious opacity and the secrecy of art transactions. Astonishingly, sometimes tens of millions of US dollars will change hands without formal documentation, because – as an art-market trial judge recently remarked – some ‘rapacious dealers want to make a quick turn’. The situation is further exacerbated by increasing use in such laundering processes of encrypted digital technology and cryptocurrency. At the same time, high-end art trading is now a global activity, while law enforcement still operates mostly within national borders.

But the UK/EU’s new anti-money laundering regulations are not confined to high-end art sales prices, in recognition that the vast majority of art-market sales in recent times are for prices below $50,000. The new regulations start applying to art-market sales of €10,000 or more and tackle the endemic problem of traders failing to conduct due diligence. Art-market traders are now required to interrogate the true identity of buyers and/or sellers before transacting, and must generate and keep documentary evidence of their having done so. All in all, the new regulations require a seismic shift in art-market trade practices throughout the EU, with non-compliance attracting criminal law prosecutions, financial or custodial penalties.

The new provisions apply to ‘art -market participants’ who, by way of business, trade in or act as an intermediary in the sale or purchase of works of art, where the value of the transaction, or a series of linked transactions, amounts to €10,000 or more; or who is the operator of a freeport when it, or any other firm or sole practitioner, by way of business, stores works of art and the value of the works of art so stored for a person, or a series of linked persons, amounts to €10,000 or more. This means that dealers, agents and auction houses involved in selling or buying art for €10,000 or more for a single work, or for a series of linked purchases (each for less than, but in total amounting to, €10,000 or more) are required to comply with anti-money laundering regulations; as must operators of a ‘storage facility within an area designated by the UK Treasury as a special area for customs purposes’.

Such art-market participants must from 10 January 2020 and thereafter check the true identity of their client-customers, and the true ownership of money or assets with which they plan to trade – in the same way that such checks have been carried out for many years by legal and finance sectors before handling client money. If such due diligence cannot be satisfactorily completed, the transaction must be discontinued and a ‘suspicious activity report’ filed with the National Crime Agency. Criminal offences include money-laundering itself, failing to report suspicion of such, and tipping-off a suspected money-launderer.

A Joint Money Laundering Steering Group (approved by HM Treasury) has published guidance to art-market participants to inform and facilitate this compliance. A key recommendation is to recognise and understand that the new regulations adopt a ‘risk-based approach to compliance’. This means that art-market participants are required not only to comply, but also to prove that they comply, by promulgating and maintaining ‘written policies and procedures; good records of obligations performed, training, compliance monitoring; and taking steps to remedy gaps or failings identified’.

HM Revenue & Customs (HMRC) is the government body responsible for overseeing this whole process, and art-market participants are required to comply with the requirements as from 10 January 2020 and to register with HMRC within 12 months. HMRC intends to publish its own guidance for compliance in the near future.
Unsurprisingly, many art-market professionals have voiced concerns about the regulations, but wise heads have suggested that the provisions may in fact ‘save the art market’ in the EU/UK from sliding into disrepute and inevitable failure.

© Henry Lydiate 2020

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This article is from the Artlaw Archive of Henry Lydiate's columns published in Art Monthly since 1976, and may contain out of date material. The article is for information only, and not for the purpose of providing legal advice. Readers should consult a solicitor for legal advice on specific matters. Artists can get free online legal information from Artquest.