We have been writing a lot recently about trends in the global market for fine art. One specific area that deserves attention is steps taken to stamp out laundering illicit funds via the art market, such as through auctions and private sales.
The article below is written by Lindsey Cullen, a lawyer at (FATF) report has once again underlined the risks of money laundering in the art market. In 2022, global art sales were valued at approximately $68 billion, 18 percent of which took place in the UK. By sales volume, this places the UK’s art market second only to the US1. Given the high value of this market and certain characteristics that make it a particular target for money launderers (a desire for privacy, high value assets, cross-border trade), it’s surprising that there has only recently been an increased international focus on anti-money laundering rules as they relate to the sale of art.
Since 2022, art market participants (buyers, sellers or intermediaries in the sale of art, known as AMPs) in the UK have been required to comply with extensive AML rules. Recently FATF released a report highlighting the global money laundering and terrorist financing risks in the art market, and how to address them2. FATF is a well-respected international body; it sets international standards on AML that more than 200 countries and jurisdictions are committed to implementing. FATF’s report is a useful prompt for AMPs in the UK to reassess their standard of AML compliance.
FATF Report: Key AML challenges in the art market
One of the most significant AML challenges is an expectation from art sales customers of privacy and discretion. Globally, regulatory frameworks do not always require AMPs to undertake due diligence on their customers. In some cases, even customer identification information need not be collected, meaning that criminals can easily convert illicit cash into art, and then resell to launder money.
FATF highlights that while some jurisdictions have assessed money laundering and terrorist financing risks in their domestic art markets, these risk assessments have reached varied conclusions, and they are still relatively few in number. This can make it difficult for AMPs to effectively build their own understanding of risks involved in their transactions. FATF notes that reporting suspicious transactions by AMPs is low, even in jurisdictions such as the UK where AMPs are required to undertake due diligence on their customers and report any concerns. Low reporting figures may be down to a lack of understanding of the extent of AML risks within the art market.
As well as prevention, there are specific difficulties with investigating art market money laundering. Money laundering is sometimes a low priority for law enforcement because, according to FATF, agencies tend to focus on recovering stolen and looted art, but after these objects are recovered, they may not examine the financial aspects of the offence. The specialist knowledge required to value and identify art also makes enforcement difficult: agencies may have a limited understanding of both the peculiarities of the market and the seriousness of money laundering offences. Sales are often cross-border, which can lead to tricky tracing and identification issues and AML enforcement requires international co-operation.
AML rules for the UK art market
The UK has long been ahead of the international norm in its AML regulation of the art market. Criminal offences relating to money laundering have applied to AMPs since 2002, under the Proceeds of Crime Act (POCA). And, since January 2022, AMPs in the UK who trade in, or act as intermediaries in, the sale or purchase of art worth €10,000 ($10,987) or more have been required to take additional steps to prevent money laundering3. The six most important obligations on AMPs are:
1. Registration with HM Revenue & Customs (HMRC)
In-scope AMPs were required to register with HMRC before 10 June 2021. If AMPs are brought within the scope of the AMP rules after this deadline (i.e., if they complete an unexpectedly large transaction), they must register as soon as possible. Last year, HMRC issued its first fine (£7,500) ($9,312) to an AMP for failing to register in time.
2. Customer due diligence
AMPs must undertake customer due diligence that allows the AMP to form a reasonable belief that they know the true identity of each customer and, where relevant, the person or entity who owns or exercises ultimate control over the customer. Taking the example of an auction house, its customer could be an individual, a company or another AMP. The auction house must verify the identity of its customer, for example by checking identification documents in the case of an individual or checking ownership details in the case of a company. The AMP must also assess the purpose and intended nature of each transaction. Due diligence undertaken should be recorded, along with transaction records.
3. Risk assessment
AMPs must assess their level of exposure to money laundering risk by virtue of the nature of their business. An auction house, for example, could consider whether its customers are individuals or companies; whether they are linked to any high-risk jurisdictions; whether it makes sales online, in person, or another way; and whether it uses intermediaries. After the risk assessment is complete, the AMP should consider what steps it can take to mitigate risks, for example requiring additional checks on sources of funds. The risk assessment and mitigation must be documented and updated at least annually: HMRC will typically ask to see copies of these.
4. Policies, procedures and controls
Written AML policies and procedures must be in place at all AMPs. These should be informed by the results of risk assessments. The length and comprehensiveness of policies should be relevant and proportionate to the size and nature of the AMP’s business.
5. Nominated officer and training
AMPs must appoint an internal nominated officer to receive reports of suspicious activity from staff; this nominated officer is responsible for reporting suspicions reported to them to the UK National Crime Agency (NCA), if appropriate. Staff must also be trained on how to recognise and report money-laundering risks, as well as how to carry out due diligence.
6. Reporting suspicious transactions
AMPs must report to the National Crime Agency any information that comes to them in the course of their business where they know, suspect, or have reasonable grounds for knowing or suspecting that a person is engaged in, or attempting, money laundering or terrorist financing. This obligation applies even where no transaction goes ahead. This reporting is called a “suspicious activity report” or “SAR.” AMPs must avoid ‘tipping off’ customers that are suspected of money laundering: to do this is a criminal offence.
Organisations in many different regulated sectors are required to submit SARs, not just AMPs. The NCA’s latest statistics show that only 52 SARs were submitted by auction houses in 2021 to 2022, an increase from 33 the previous year4. This compares with over half a million SARs submitted by banks, and over 3,000 submitted by bookmakers. Although auction houses undertake far fewer transactions than banks and bookmakers, the number of auction house SARs still seems low when the inherent risks of money laundering in the art market are considered. This aligns with FATF’s view that AMPs may be under-reporting suspicious transactions.
Consequences of non-compliance
At present, UK regulators are trying to work collaboratively with AMPs in relation to AML requirements. When the new AML rules were introduced in 2022, the UK Treasury in conjunction with the British Art Market Federation, prepared a comprehensive guide explaining money-laundering risks in the art market and how AMPs can comply with AML rules5. It seems that the NCA is also trying to work with AMPs in relation to SARs: in 2022, it held its first working group with attendees from many major auction houses in the UK, to encourage and share best practices for operating SARs6.
This collaborative approach will not last forever, and the NCA has indicated that it is now targeting and investigating auction houses. Last summer, it arrested at least 10 individuals who it suspected of helping others evade sanctions. When discussing these arrests, an NCA spokesperson singled out auction houses as a particular area of interest, describing how some had issued loans to their sanctioned clients that were secured against high-value artworks. In December 2022, the NCA arrested a further three individuals suspected of money laundering and, in a statement related to the arrest, highlighted that it had been “targeting less conventional routes used to disguise movements of significant wealth, such as high-value asset sales via auction houses”7.
The penalties for money laundering are serious: those involved can face a prison sentence of up to 14 years and significant fines. Additionally, employees of AMPs face criminal prosecution if they fail to report to their nominated officer any suspicions of money laundering – this offence carries a prison sentence of up to five years, or a fine. AMPs therefore need to be confident in their ability to recognise and understand money laundering. This will allow them to report any suspicions to the NCA and mitigate any criminal enforcement risk. Civil penalties can also be avoided if AMPs understand the AML rules they need to follow: HMRC has stated that it will not normally impose a penalty where it is satisfied that the AMP took all reasonable steps to comply with AML requirements8. If AMPs have any doubt about how to comply with their obligations, they should seek specialist legal advice.
1 Art Basel & UBS Report, “The Art Market 2023” available athttps://cdn.sanity.io/files/lvzckgdl/production/609618d93c005a5387de7049cd2ccac65c01c064.pdf.
2 FATF Report, “Money Laundering and Terrorist Financing in the Art and Antiquities Market, February 2023", available at file:///C:/Users/32064/Downloads/Money-Laundering-Terrorist-Financing-Art-Antiquities-Market%20(1).pdf.
3 The EU Fifth Money Laundering Directive introduced changes that bring AMPs into the scope of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
4 NCA UK Financial Intelligence Unit, SARS Annual Report 2022, available athttps://www.nationalcrimeagency.gov.uk/who-we-are/publications/629-2022-annexes-sars-annual-report/file.
5 British Art Market Federation Guidance on Anti Money Laundering for UK Art Market Participants, 6 February 2023,available at https://tbamf.org.uk/wp-content/uploads/2023/02/BAMF-AML-Guidelines-February-6th-2023.pdf.
6 NCA UK Financial Intelligence Unit, SARS in Action Issue 17, October 2022, available athttps://www.nationalcrimeagency.gov.uk/who-we-are/publications/616-sars-in-action-october-2022/file.
7 NCA Statement, December 2022, available at https://www.nationalcrimeagency.gov.uk/news/wealthy-russian-businessman-arrested-on-suspicion-of-multiple-offences.
8 HMRC Guidance on Civil Measures for Money Laundering Supervision, 9 November 2020, available athttps://www.gov.uk/government/publications/money-laundering-supervision-enforcement-measures/money-laundering-supervision-civil-measures.
