Focusing on the Anti-Money Laundering regulations for the art market participants in the UK 

By Poppy Kemp

In April of 2022, Her Majesty’s Revenue and Customs (‘HMRC’) commenced fining Art Market Participants under the UK’s Art Anti-Money Laundering (‘AML’) regulations.^[1] The highest fine assessed so far is £52,000, while the lowest is £1,250.^[2] These regulations enacted the European Union’s (‘EU’) Fifth AML Directive (‘the Directive’) into British law and aim to break the cycle between money laundering and terrorist financing.

After exploring the background to the UK’s Art AML law and summarizing its provisions, this article concludes that the indiscriminate nature of the regulation places too onerous a burden on the smallest art market participants. Further, their efficacy is limited as they do not apply to the digital art market. To remedy these issues, different degrees of compliance should be required depending on the size of the art market participant and the regulations should apply to digital assets.

EU 5^th AML Directive

The EU has had regulations in place to prevent anti-money laundering since 1990. However, its concern with thwarting money laundering in the art market only emerged in the past decade. This change was motivated by two factors. The first is ‘recurring financial scandals’^[3] which exposed the art market’s secrecy as a potential vehicle for money laundering. For instance, the 2016 Panama papers revealed the huge amounts of art hidden behind veils, suggesting webs of tax evasion and money laundering. The second is the link between money laundering and the spate of terrorist attacks faced by EU member states in the 2010s.

In response, in June 2018, the EU enacted its 5^th AML Directive which brought the art market under its regulatory purview. Member states had to transpose the directive into its own law by 10^th January 2020. Despite the UK ending it’s EU membership in December 2020, the obligations imposed by the 5th EU Directive were incorporated into the UK legislation. Under the 5th Directive, art market participants are obligated to conducted due diligence on the ultimate beneficiaries of art market transactions that exceed 10,000 Euros.

Implementation of the 5th AML Directive coincided with the spread of the Covid pandemic and different countries have chosen to follow different schedules to enact the Directive.^[4] Still, members of the trade, had to scramble to prepare for the newly-imposed regulations for compliance and lawful business practices. Members of the British art trade received helpful guidance from the British Art Market Federation (‘BAMF’),^[5] which explained the expectations and spelled out what art dealers would have to do to avoid fines and criminal liability. Finally, after some delays in 2022, ^[6] the UK appeared to be the first country to begin enforcing the new regulations. 

The UK’s AML Regulations

The threshold criteria

An individual or organization must satisfy three threshold criteria to fall under the UK law:^[7]

(1)   They must be an ‘art market participant’ by way of a business trading in or acting as an intermediary or trades in the sale or purchase of

(2)   ‘works of art’

(3)  Where the value of the transaction is over €10,000.

As to (1), those who fall under the definition of an ‘art market participant’ include high value dealers, auction houses and potentially interior designers and art advisors/consultants whose commission falls under €10,000. The UK government has also clarified that artists and their estates are not included within the definition.^[8] Thus, even if criteria (2) and (3) are satisfied, if an artist is selling a ‘work of art’ over €10,000, they will not have to comply with the regulations.

Works of art (2) have a strict meaning. A ‘work of art’ is defined in the defined in the Value Added Tax (‘VAT’) Act 1994 section 21(6) to (6B) for the purpose of section 21(5)(a) of that Act.^[9] This is summarized as:

• –   a painting, drawing, collage, decorative plaque or similar picture
• –   an original engraving, lithograph or other print
• –   an original sculpture or statuary
• –   a sculpture cast
• –   a tapestry or other hanging
• –   a ceramic
• –   an enamel on copper
• –   a photograph

but does not include:

• –   a technical drawing, map or plan
• –   any picture comprised in a manufactured article that has been hand-decorated
• –   scenery (including backcloths)

Since the VAT Act was enacted long before crypto and other forms of electric currency were in existence, art market participants who transact using these assets, perhaps with NFTs, are excluded from the regulations. Individuals ‘exchanging’ Cryptoassets are separately regulated under the same anti-money laundering legislation as art market participants. As Katie Fry-Paul notes for Taylor Wessing,^[10] in some circumstances, NFTs may not fall under the definition of a ‘crypto asset business’ and so will not be regulated under either regime.

(3) is construed very broadly. Hence, if a transaction is split up into amounts smaller than €10,000 but their total exceeds that amount, it will fall under the regulations provided criteria (1) and (2) are met. Moreover, if a payment is made in several parts over time, all transactions added together amount to one transaction.

Consequences for non-compliance

If an individual or organization satisfies these three threshold criteria, namely they are an art dealer specializing in works of art and a value of transaction with individual buyer are in the excess of 10,000 Euros, they must:

• Register with HMRC (existing art market participants had to register by 10^th June 2021)
• Have an AML policy in place
• Appoint a Nominated Officer and Compliance Officer
• Conduct AML trainings
• Conduct risk assessments on the extent to which they are exposed to money laundering
• Conduct customer due diligence on all transactions
• Submit Suspicious Activity reports to the National Crime Agency if the art market participant deals with unregistered participants.

Failure to comply with these regulations can result in unlimited fines, prohibitions on managing the business and even criminal prosecution with custodial sentences of up to 14 years.

In fact, since 6^th April 2022, HMRC has been began issuing such fines to non-compliant entities. In May, EstateAgent Today reported that ‘more than 30 agents and property firms such as auction houses and valuers were reprimanded by HMRC for anti-money laundering breaches last year’.^[11] Most fines appeared to result from failure to register with HMRC in time, rather than explicit examples of money laundering. Moreover, the majority of fines appeared to be less than £5,000. However, HMRC did fine £52,000 against Bond Wolf Auctions for ‘failing to apply for registration at the required time’.^[12] These large amounts highlight how seriously the UK is taking AML within this sector and perhaps serve as an incentive to currently non-complying AMPs: they could face serious repercussions.

Criticisms of the Law and Potential Reforms

Criticisms

These requirements are arguably onerous: registering with HMRC (for a one-off £300 registration fee), drafting an AML policy, conducting trainings, undertaking due diligence for every transaction over €10,000 takes time and money. Thus, it is unsurprising that they have attracted censure from the art market. Robert Payne and Rebecca Welman, senior associates at Forsters LLP note, while for larger business ‘the new rules merely formalize practices already in place’, for ‘smaller entities […] the measures that need to be taken are burdensome and expensive’.^[13] This is especially so in the post-Covid climate with many art market participants still reeling from losses of over 70% of their annual revenue.^[14] Admittedly, there are many companies^[15] offering to conduct due diligence on behalf of galleries. However, these services, while are relatively inexpensive, may be out of reach of some of the smallest entities.

It must be noted that in other sectors, AML due diligence processes are implemented following a risk assessment.^[16] There are typically four categories of increasing risk and participants apply differing levels of due diligence depending on which of these groups their operations fall into. Thus, arguably art market participants who deal with low-risk operations and thus presumably are smaller, will not have to implement an expensive and onerous process compared with others. However, this is an overgeneralization given that some small art market participants may engage exclusively with high risk transactions, thus requiring considerable due diligence.

Art AML fines have also attracted criticism. For instance, Rebecca Davison-Mora, Arcarta’s (an art market due diligence platform) community manager, told the Art Newspaper that while it is ‘early days’ to properly assess ‘the impact on businesses’, ‘these fines are part of a long line of challenges galleries have had to face over the past two years that may affect their ability to participate in key events – such as art fairs – and make a significant dent in their operating overheads’.^[17]

Furthermore, despite how potentially burdensome these requirements are, they may do little to limit money laundering in the art sector given that they do not apply to transactions involving NFTs. Yet, elsewhere, studies indicated that this is where money laundering is rife. For instance, a 2022 US Department of the Treasury report^[18] found that although there is some evidence of money laundering and the risk of terror financing through the sale of high value art, the digital art market has considerable potential for money laundering. We can also see this playing out in the Russia-Ukraine conflict. In March 2022, The Guardian reported that Russian oligarchs were able to evade sanctions through NFTs.^[19] Therefore, failure to include NFTs in the definition of ‘works of art’ limits the efficacy of the UK’s Art AML regulations in combatting money laundering.

Reforms

That in mind, this article proposes two reforms to UK’s Art AML regulations.

The first is that the compliance requirements for art market participants should differ depending on the size of the art market participant. This would require thresholds to determine the size of an art market participant: perhaps financial criteria, with less onerous and therefore cheaper requirements for smaller businesses.It could be argued that this opens up a route to exploitation: potential money launderers will seek these smaller businesses out to avoid regulations. To avoid this, the criteria should be designed such that the businesses with the least restrictive procedures still have to carry out due diligence and thus reveal the identity of these players. Alternatively, the government could subsidize the cost of using Art AML compliance services for smaller businesses. Thus, retaining the integrity of the regulations while making them accessible.

Secondly, digital art and collectibles should fall under the definition of ‘works of art’. This way a key emerging route to launder money can be stopped before it grows any larger. This may increase the burden further on art market participants. Nevertheless, providing this change is made in combination with the above, it will not have such an impact.

Conclusion

In sum, the UK’s art AML regulations are already in force and can be examined not as a theoretical but as a practical practice. It is (i) onerous for smaller and less profitable businesses, and (ii) fails to cover digital art despite the growth in money laundering in that sector, limiting the regulation’s efficacy. As such, reforms may be needed are needed to create a more effective and equitable system among a diversity of art market participants. 

Disclaimer: This article is intended for general information only and is not meant to provide legal advice. Readers should not construe or rely on any comment or statement in this article as legal advice. Opinions expressed are those of the author.

About the Author: Poppy Kemp (LLM 2022) is part of the international post-graduated team at the Center for Art Law. She is an incoming Research Assistant at the Law Commission of England and Wales and an aspiring land, art and cultural property barrister. Poppy is managing the Center’s “AML comparative study” due to be published in the Fall of 2022.

This article has been written under the review and guidance of Sophie Balaÿ, Attorney at Law and CFCS, VIDOCQ.

Source:

^[1] The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended) (Gr. Brit.).

^[2] See: HMRC, Businesses that have not complied with the regulations (2021 to 2022), Anti Money Laundering Supervision, 25^th July 2022, https://www.gov.uk/government/publications/businesses-not-complying-with-money-laundering-regulations-in-2018-to-2019/list-of-businesses-for-tax-year-2019-to-2020-that-have-not-complied-with-the-2017-money-laundering-regulations.

^[3]See: Anti-Money Laundering and Countering the Financing of Terrorism, 26^th July 2022, https://ec.europa.eu/info/business-economy-euro/banking-and-finance/financial-supervision-and-risk-management/anti-money-laundering-and-countering-financing-terrorism_en.

^[4] The Center for Art Law is completing a comparative study of the implementation of the Directive by jurisdiction.

^[5] British Art Market Federation, Guidance on Anti Money Laundering for UK Art Market Participants, 2022.

^[6] For instance, the UK extended its deadline to register under the AML rules. See: Naomi Rea, The UK has Extended the Deadline to Register Under its New Anti-Money Laundering Rules, Giving Art Dealers a Welcome 5 Months’ Reprieve, artnet news, 25^th July 2022, https://news.artnet.com/market/uk-delays-anti-money-laundering-rules-1903930.

^[7] Supra 1 at s.14(1)(d)

^[8] See Isabella Piasecka and Sophie Hollander, Artists Exempt from Anti-Money Laundering Regulations, Mishcon de Reya, 25^th July 2022, https://www.mishcon.com/news/artists-exempt-from-anti-money-laundering-regulations#:~:text=On%2026%20May%2C%20HMRC%20confirmed,the%20Anti%20Money%20Laundering%20Regulations.%22.

^[9] Value Added Tax (‘VAT’) Act 1994, s.26(6) – (6B) (Gr. Brit.).

^[10] Katie Fry-Paul, Cryptoassets and NFTs: UK regulatory update, 25^th July 2022, https://www.taylorwessing.com/en/interface/2022/nfts-and-cryptoassets/cryptoassets-and-nfts-uk-regulatory-update.

^[11] Marc Shoffman, HMRC Shows its Teeth with Bumper AML Fines for Agents, 17^th May 2022, https://www.estateagenttoday.co.uk/breaking-news/2022/5/hmrc-shows-its-teeth-with-bumper-aml-fines-for-agents.

^[12] Supra 2.

^[13] Robert Payne, Rebecca Welman, 5^th October 2020, Anti-Money Laundering Rules: Impact on the Art Market, https://www.forsters.co.uk/news/blog/anti-money-laundering-rules-impact-art-market.

^[14] See, for instance: Julia Michaelska and Anna Brady, Galleries Worldwide face 70% Income Crash due to Coronavirus, Our Survey Reveals, 20^th April 2022, https://www.theartnewspaper.com/2020/04/27/galleries-worldwide-face-70percent-income-crash-due-to-coronavirus-our-survey-reveals.

^[15] Such as www.ArtAML.com.

^[16] See, for instance, Solicitors: Risk Assessments: Anti-Money Laundering, The Law Society, 20^th January 2020, https://www.lawsociety.org.uk/en/topics/anti-money-laundering/anti-money-laundering-risk-assessments.

^[17] Riah Pryor, UK’s Revenue and Customs Agency Begins Handing out Fines to Art Market Players, The Art Newspaper, 20^th June 2022, https://www.theartnewspaper.com/2022/06/20/uks-revenue-and-customs-agency-begins-handing-out-fines-to-art-market-players.

^[18] US Department of the Treasury, Study of the Facilitation of Money Laundering and Terror Finance Through the Trade in Works of Art, February 2022.

^[19] Ben Quinn, Russia Oligarchs Still Able to Exploit UK Art Market Loopholes, Experts Say, The Guardian, 9^th March 2022, https://www.theguardian.com/uk-news/2022/mar/09/russia-oligarchs-uk-art-market-legal-loopholes.