Prior to the UK transposing the EU 5th Money Laundering Directive in The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (SI 2019/1511), a joint report from Art Basel and UBS estimated that the global art market for 2018 alone totalled $67.4billion, which was a sharp increase from the $39.5 million market estimation in recession-era of 2009.
According to this report, the US sustained its position as the world’s largest art market, accounting for (44%) of sales by value – or a total of $29.9 billion, the highest recorded level to-date.
The UK regained its position as the second-largest market at (21%). Sales rose by (8%) to just under $14 billion.
China was the third largest market at (19%), with sales reaching $12.9 billion.
The rise in the value of assets in the art industry has attracted criminal activity to this market. The high value of these items combined with the previous lack of AML controls, means that the sector is vulnerable to money laundering. Art is an attractive vehicle to launder money, as it can be hidden for years, and even smuggled. Transactions often are private, cash heavy and prices can be subject to taste / modes, can be high or manipulated.
Of particular significance is the large number of looted artworks and antiquities that were sold to fund the rise of the Islamic state during the mid-2010s, as reported by FATF:
‘The financing for the buying and selling of tainted antiquities can be disrupted as auction houses, financial institutions, and other legitimate businesses involved in the antiquities trade, by urging these institutions to adopt or implement policies that require clear, certified documentation that identifies the origin of the artefacts. Banks should refrain from processing transactions for antiquities that originate in Iraq or Syria. Steps could be taken to ensure that private sector actors have a better understanding of the sites in Iraq and Syria that are being plundered and of the routes that are being used. In addition, dealers in the antiquities realm could be urged to report suspicious behaviour, fraudulent paperwork or knowledge of stolen artefact circulation’.
As a result, art dealers and auction houses are now included in the UK regulations as ‘relevant persons’ or ‘obliged entities’, driven by an acknowledgement of the risks of money laundering and terrorist financing in the sector, and must follow a Risk Based Approach. As obliged entities, art dealers who transact in deals over €10,000 are subject to similar regulation as the financial service industry in relation to AML controls which include undertaking customer due diligence.
The scope for conducting the due diligence now includes:
Persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transactions or a series of linked transactions amounts to €10,000 or more.
Persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transactions or a series of links transactions amounts to €10,000 or more.
The amended UK regulation also stipulate that enhanced due diligence (EDD) is required on transactions related to “cultural artefacts and other items of archaeological, cultural and religious importance.”
What is a Free Port and what is the relation to art?
Freeports are defined in the Customs and Excise Management Act 1979, and the BBC reported plans to HM Government to create up to ten freeports in the UK post Brexit. A lot of the art bought at auctions goes to freeports. These are ultra-secure warehouses for the art collections of high net worth individuals and may also include assets such as luxury cars and fine wine.
The freeports located in Switzerland, Luxembourg and Singapore offer a variety of tax advantages because the goods stored in them are technically in transit. The UK Economist magazine reported that the freeport near the Geneva airport alone is thought to hold US$100 billion in art.
Once inside the freeport, the art can be sold privately and anonymously to other buyers. The art need never leave the warehouse after the private sale is completed.
The new legislation will have significant implications across the entire sector given the focus required for identifying the customer and any intermediaries involved in the sale of art. Furthermore the €10,000 threshold is not specific to a single payment type, but instead encompasses cash, cheque, bank transfer or otherwise. Art dealers regardless of the whether they are considered a “high value dealer” or not, are now required to report any suspicious activity reports to the National Crime Agency, or otherwise face criminal liability for money laundering.
Despite the new legislation, it is apparent that some problems may arise with the implementation of The Money Laundering and Terrorist Financing (Amendment) Regulations 2019;
The implementation of the new legislation now means that skilled staff will be required to carry out risk assessments, and all of the other components of the framework.
Often art sales take place over the internet as opposed to dealers and auction houses. As a result, the intermediary may never meet the buyer in person which can give rise to nonface-to face identity verification risks.
By Gregory Collis, Junior Consultant at Lysis Group