New UK anti-money laundering regulations introduced for Art Market Participants

A new EU directive significantly increases anti-money laundering and compliance obligations for EU-based art dealers auction houses and galleries known collectively as Art Market Participants (AMPs).

James Barber-Lomax Director of PraxisIFM Corporate Services (UK) explores what this means for the Art sector.

AMPs have been subject to general proceeds of crime regulations for many years¹ however the latest regulations² in the form of the EU's Fifth Anti-Money Laundering Directive (5AMLD) introduced formal anti-money laundering processes specifically for AMPs.

The directive which was incorporated into UK domestic law and came into force on 10 January 2020 includes a requirement for UK-based AMPs to register with HMRC by 10 June 2021.

What does this mean for the art market?

Over the past few years the EU and OECD have spearheaded a global program to remove anonymity associated with high value transactions and structures. While it is widely accepted that anonymity may be required for many bona fide reasons such as security there is greater concern that it can also be used to conceal the true nature of a transaction involving illicit funds or persons who may be linked to money laundering and/or terrorist financing.

AMPs are often dealing in high value transactions for single items that can be easily transported around the world so the potential for this industry to be knowingly or unknowingly dealing with the proceeds of crime is considerable. The new regulations attempt to combat that risk and it is expected to see similar regulations released in the US later this year.

In summary the regulations require all AMPs to register with HMRC and collate due diligence information on the person(s) connected to a transaction worth more than 10000. Where an AMP is selling a piece of art they must identify all relevant persons who are supplying the funds for the acquisition as well as those who assist in the transaction. There are several example transactions within the HMRC guidance paper which help identify who the AMP should hold due diligence information on.

You will find some guidance on these new regulations in this note. The full guidance notes issued by the British Art Market Federation and approved by HMRC can be found here.

Who is affected?

An 'art market participant' is defined as a firm or sole practitioner who trades or acts as an intermediary in the sale or purchase of works of art and the value of the transaction amounts to 10000 or more.

A non-UK subsidiary company of a UK company that is classified as an AMP will also be subject to the new regulations which make it the responsibility of all everyone connected to a transaction(s) and business operations i.e. directors company secretary administration agents and senior managers to ensure that anti-money laundering compliance is upheld.

What is a 'transaction'?

A transaction is a single or series of linked transactions that amounts to 10000 or more. The transaction is deemed to have taken place at the time that title transfers and therefore it may well be that deals agreed prior to the enactment date of the regulations are still caught if the transaction has not yet completed. The sales price of a work of art sold at auction is the hammer price plus any commissions and tax.

What is a 'work of Art'?

For the purposes of these regulations the definition of a work of Art is common with the VAT Act 1994. The full definition can be found within the Regulations however in summary it is any:

• Painting drawing collage decorative plaque executed by hand
• Limited edition engravings lithograph and prints
• Original sculpture or statuary in any material
• Limited edition sculpture casts
• Limited edition handmade tapestries or other hanging
• Signed ceramics
• Handmade and signed enamel on copper excluding jewellery produced by goldsmiths or silversmiths
• Limited edition and signed photographs

Who is the 'Customer'?

The AMP is required to identify the 'customer' in all transactions which can often be more than one person. In a simple transaction where an AMP sells a work of art to a private individual the AMP is required to collect due diligence information on that individual assuming that individual is using their own funds to acquire the work. However in more cases than not the transaction is more complicated and requires additional consideration. We have included some examples (below) of who the Customer is and who an AMP should request customer due diligence (CDD) on.

What do AMPs need to do?

AMPs must follow a few important steps in order to meet the compliance requirements under the regulations as listed below. HMRC has the power to request evidence of compliance with these regulations and may well perform spot checks as with all regulated sectors.

i) Register with HMRC

ii) Undertake a risk assessment of the business

iii) Appoint a compliance officer and/or a nominated officer

iv) Set policies controls procedures and staff training

v) Collate asses and store CDD where necessary

i) Register with HMRC

By 10 June 2021 all AMPs who meet the definition must have registered with HMRC.

Registration is now open on HMRC's website. The AMP will need to provide details of all premises from which they operate if they provide services from multiple locations. There is a registration and annual fee of 300 per premise. If the applicant does not currently meet the definition of an AMP they are not required to register with HMRC however if they later meet this threshold on any single or linked series of transactions they will be required to register immediately.

ii) Undertake a risk assessment of the business

AMPs must undertake a risk assessment of their business to assess the level of money laundering and terrorist financing risk. Through this assessment the AMP should identify what procedures will be put in place to combat these risks and who will be responsible within the organisation for upholding and reviewing these standards. Relevant considerations for the assessment will be the size and nature of the business linked to the geographical areas it deals in its clients nature of those clients (i.e. private sales third party agents corporate sales) method (i.e. face to face virtual auction) and value.

The OECD publishes a public list of deemed 'high risk' jurisdictions that should be taken into consideration for AMPs. If they deal regularly with persons or companies connected to these high-risk jurisdictions they should consider how they intend to collate the necessary due diligence information to remain compliant.

This risk assessment should be reviewed at least once a year or in line with any new markets that the AMP might venture into. This document must be available upon request for inspection by HMRC.

iii) Appoint a compliance officer (CO) and/or a nominated officer (NO)

Each AMP will be required to appoint a suitably senior UK resident 'nominated officer' to receive all reports of suspicious activity. The nominated officer must have unfettered access to the company records sales ledgers sales processes and personnel. Where there is more than one employee there should also be deputy to act in the absence of the NO and where there is only one employee that individual will by default be named the NO. For larger more complex firms who might operate from multiple locations or who have a large volume of foreign customers or intermediaries they should also appoint a CO.

The CO is responsible for making sure that the AMP is compliant with the regulations and the policy and procedures identified under the risk assessment.

iv) Set policies controls procedures and staff training

As part of the risk assessment the AMP must identify the areas of risk for the business and install suitable anti-money laundering policies and procedures. All staff involved with the transactions of the AMP must receive anti-money laundering training have access to the specific policies and procedures for the AMP and know who to contact if they suspect money laundering. The NO or CO should keep a log of all staff training which can be at different levels linked to the involvement of the member of staff to the areas identified in the business risk assessment.

The policies and procedures should cover:

• The risks of money laundering and terrorist financing identified in the AMP's risk assessment
• The responsibilities and identification of senior management and all employees in relation to anti-money laundering compliance
• CDD measures
• Suspicious activity reporting procedures
• Internal control procedures
• Use of outsourcing arrangements
• Ongoing monitoring activities.

v) Collate asses and store customer due diligence or enhanced CDD where necessary.

For any transaction meeting the thresholds the AMP is required to collate CDD information on all 'customers' related to the transaction. The AMP's procedures manual and staff training should inform staff who they should request CDD on what CDD is required linked to the customer's classification when enhanced CDD should be obtained who can certify the CDD and how it should be stored.

The Regulations specifies what CDD should be held which is usually proof of the customer's identity and a separate document to evidence proof of address. In certain circumstances enhanced CDD will need to be obtained which may require the customer to disclose further information on their source of wealth and source of funds used in the transaction. If the customer is classified as a Politically Exposed Person (PEP) then enhanced-CDD must be obtained.

The CDD or enhanced-CDD must be stored electronically or in paper form and be ready for inspection should HMRC undertake a spot-check or be required to assist the authorities in an investigation.

What to report and to whom?

All staff and third parties associated with a transaction and the business affairs of the AMP should be trained to understand what money laundering is and the impact it has. Through this training they should also learn what to be cautious of and how to identify possible money laundering. On identifying possible money laundering the member of staff should report their findings to the NO or CO without delay.

A staff member in receipt of any information related to a transaction has a duty to report any suspicions if they know suspect or have reasonable grounds to suspect possible money laundering. Failure to report suspicions can hold sever penalties and could lead to a criminal conviction.

Once a report has been made it is then the responsibility of the NO or CO to take matters forward. They will investigate the claim before passing on any relevant findings to the National Crime Agency. It is imperative that no one 'tips off' the suspected money launderer to the fact that they are under investigation and this would amount to be a serious breach of the regulations.

How can Praxis help?

We work with many AMPs in London EU and Asia providing a range services including:

• company formation
• provision of a registered office
• provision of a company secretary
• accounts and VAT filing
• payroll administration
• banking administration
• stock book management
• consultancy services.

This niche area has very particular and complicated demands which often involve the AMP working across multiple locations and undertaking high value transactions in a variety of currencies.

Praxis can assist AMPs to review their business for risk assessment purposes provide commentary on appropriate compliance policies and procedures provide anti-money laundering training for staff provide a secure database for customer due diligence and general consultancy services to help AMPs get ready for the changes.

To discuss further please contact James at james.bl@praxisgroup.com or +44 7477 853309.

The contents of this article constitutes neither professional advice nor a binding offer by us to provide professional services. Any engagement in respect of our professional services is subject to our standard terms and conditions of business and the provision of all necessary due diligence.

Footnotes 1. Proceeds of Crime Act 20022. Money Laundering and Terrorist Financing (Amendment) Regulations 2019