Today the EU's Fifth Money Laundering Directive (“5MLD”) takes effect in the United Kingdom.
For the first time, the art market has become a “regulated” sector across Europe for anti-money laundering (“AML”) purposes. Crucially this means that all art market participants who, from today, are involved in transactions worth €10,000 EUR or more must carry out satisfactory "know your client" (“KYC”) and customer due diligence (“CDD”) checks before completing such transactions.
In May 2019, based on a Treasury Consultation Paper published in April 2019, we explained in detail how 5MLD will affect the art market and the changes required in 2020 to comply. Our previous e-alert on the subject can be found here.
On 20 December 2019, the Government passed The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (“2019 Regulations”). These Amendment Regulations, as we expected, amended the Money Laundering Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“the Money Laundering Regulations”) to extend the scope of anti-money laundering regulation to the art market.
Despite the Treasury’s consultation closing in June, and 5MLD now being in effect, there had been very little guidance on how art market participants are expected to apply the Money Laundering Regulations.
However, from the detail of the 2019 Regulations, and other information we have been able to ascertain from HMRC and HM Treasury, the following pointers have emerged:
Guidance from the Government “imminent”
Although the Treasury published a Consultation Paper in April 2019 inviting discussion from the UK art sector, final guidance on the new policy did not materialise at the end of the year. We have however been told this will be published “imminently”.
Definition of “works of art” for the purposes of the Money Laundering Regulations
HMRC has confirmed that the definition of “works of art” covered by the 2019 Regulations will be the same as in current VAT legislation.
This means transactions involving antique furniture, porcelain and clocks are not covered by the Money Laundering Regulations. Works of art that do fall within scope are:
- Paintings, drawings or collages executed by hand;
- Limited edition engravings, lithographs and prints;
- Original sculpture or statuary;
- Limited edition sculpture casts;
- Limited edition tapestries;
- Signed limited edition ceramics;
- Signed limited edition enamels on copped (excluding jewellery); and
- Signed limited edition photographs.
Timeline and necessary steps for dealers
Although we have been told that HMRC “will take into account the short lead-in time businesses have been given to implement all the new requirements in assessing the response to non-compliance”, it has also been made clear that HMRC expect art market participants to be compliant with the Money Laundering Regulations from today. It is certain that art market participants, if not already, should urgently be gearing up to implement measures and become compliant ready.
In practice, this means adopting a meticulous risk-based approach and putting in place the following:
AML Risk Assessment
Regulation 18 of the Money Laundering Regulations requires firms to conduct a Money Laundering Risk Assessment (“Risk Assessment”), which considers specific heads of risk – customer, geographic, products, transactions and delivery channels – when carrying out the Risk Assessment.
Once drafted, the Money Laundering Regulations envisage the Risk Assessment as fundamental to day–to-day conduct of a “risk based approach” to compliance. Regulation 19 of the Money Laundering Regulations clearly envisages that AML policies and procedures will be drafted with reference to the Risk Assessment.
Customer Due Diligence Checks
When entering into a relationship / transaction, CDD must be conducted to identify the customer. Enhanced Due Diligence (“EDD”) checks are required in certain circumstances, including where the customer is “established in a high risk jurisdiction” and / or is a “Politically Exposed Person” (“PEP”).
The Money Laundering Regulations create an obligation on firms to conduct initial and periodic training on AML regulations.
Revised Terms of Business
The Money Laundering Regulations state that verification of the customer’s identity must take place “before…the carrying out of the transaction”. In other words, all agreements to sell are conditional on the satisfactory completion of KYC and CDD checks. Terms of business should be amended to reflect this new reality.
Dealer Registration with HMRC
HMRC have confirmed to us that they will be the AML supervisor for art market participants.
That means that alongside risk-assessing their business and putting policies and procedures in place, all art market participants, as well as beneficial owners, officers and managers, within the scope of the Money Laundering Regulations will have to register with HMRC by 10 January 2021.
Registration for supervision is now available on the website here.
On registration, HMRC has told us that:
“Due to the volume of new registrations expected, we will adopt a staggered approach to the registration of art market participants”.
We do not know what a “staggered approach” means, but expect clarification in the “imminent” guidance.
We have advised a number of clients in the art market and created policies and procedures to ensure businesses fulfil their regulatory requirements.
If you have any queries or concerns about your obligations, or if we can be of assistance with regard to your compliance programme, please do not hesitate to get in touch.