Money Laundering and the Art Market: Recent Developments

Sarah Barker

In 2016, the Director of Transparency International UK stated that it seems likely that in terms of money laundering going through the UK system every year, it is at least £100 billion”.  This figure is twice the size of Panama’s whole economy.

 

What is Money Laundering, and what, if anything, has it got to do with the Art Market?

Money laundering is passing funds derived from criminal activities (such as people trafficking, drugs dealing, illegal arms dealing, fraud and tax evasion) through offshore entities, businesses, bank accounts and/or assets in order to disguise their true origins.

Money laundering can take many forms, but in the art and antiques sector it can involve, for example, exchanging “tainted” funds for high value assets that are then returned and “clean” funds refunded, borrowing “clean” money using art purchased with proceeds of crime as collateral, and purchasing high value items that can be easily transferred and sold on anonymously, sometimes at a loss.

It is said that the art sector could be a fertile ground for money laundering due to the extremely high values of some artworks, the inherent portability of artworks, and the secrecy that is customary in the industry.  About 50% of all art transactions are said to be private deals.  The use of art agents and intermediaries, offshore companies and freeports can lend itself to the creation and preservation of secrecy.  This secrecy can be for entirely legitimate reasons.  However, it is also helpful to those who may have more nefarious intentions.  This seems to be how the European Commission saw it after the Panama Papers leak.

UK Anti-Money Laundering Laws: The current regime

In the UK, the Proceeds of Crime Act 2002 (“POCA”) broadly applies to anyone who knows or suspects that they are or may be involved with the transfer or acquisition of criminal property, or that they are facilitating such an arrangement.

The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (“MLRs”) impose certain additional obligations upon those deemed to be part of the “regulated sector” (such as banks and lawyers). Currently, “High Value Dealers” (those art dealers accepting cash payments above a certain value) are the only art market participants within the “regulated sector” under the MLRs.

 

Developments in European Laws

In July 2018 the 5th Anti-Money Laundering Directive (2018/843/EU) (“MLD5”) was adopted by the EU as part of the Junker Commission’s response to the terrorist attacks in Paris and Belgium in 2015 and the Panama papers affair of 2016.  EU member states have until 10 January 2020 to transpose MLD5 into national law.  It is highly likely that the UK will implement MLD5 despite Brexit.

MLD5 has extended the scope of the existing legislation to certain art market participants who will, when MLD5 is implemented by the UK, become part of the “regulated sector”.  These are persons trading or acting as intermediaries in the trade of works of art, and persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by freeports.  In each case there is a threshold for applicability, where the value of the transaction (or a series of linked transactions) amounts to EUR 10,000 or more (irrespective of payment method).

 

Practical Impact of MLD5

Based upon the current obligations upon regulated sector players, the impact for art market participants is likely to be significant.

Art market participants carrying on business in the UK that fall within the remit of the new laws will be required to have certain systems and controls in place to combat money laundering. Failure to comply with these requirements could carry a maximum penalty of two years’ imprisonment, a fine or both. Systems and controls will likely include:

  • undertaking initial and ongoing Client Due Diligence: this means identifying clients (including beneficial owners of corporate clients) using independent and/or verifiable documentation, and fully understanding the transaction and source of funds;
  • documenting it all carefully and keeping records;
  • undertaking an internal Risk Assessment and creating an Internal AML Policy;
  • training staff; and
  • appointing a Nominated Officer

It is also possible that supervisors will have to approve the beneficial owners of, and managers or officers of, art market participants.

Additionally, under POCA, if a person working in a business in the regulated sector knows or suspects, or has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering, but fails to disclose that knowledge or suspicion to the Nominated Officer/National Crime Agency (as applicable), then they can commit a crime.  This failure to disclose offence could attract 5 years in prison and/or a fine.  A person in the regulated sector can also be guilty of various secondary offences including a tipping off offence.

 

Conclusion

Art market participants should plan ahead now by educating themselves and their staff in respect of the law and their enhanced duties, putting in place new processes and procedures, and adopting AML Policies.

Putting in place new systems and controls may be burdensome for the art market in the short term, but given the wider implication of the existing legal regime under POCA, and the nature of art transactions, we would argue that – even before the new laws are implemented – it is best practice for art market participants to keep careful records which demonstrate that they have made appropriate enquiries.

 

If you would like to speak about any of the issues raised in this article – or you have any other legal issues – please feel free to contact Sarah Barker.