Anti-money laundering laws in the UK are largely outlined in the Money Laundering Regulations 2017 (“Regulations 2017”)[1]. The Regulations 2017, which came into force on 26 June 2017, implemented the EU’s Fourth Anti-Money Laundering Directive (“4AMLD”). 4AMLD aligned EU money laundering laws with international standards, harmonised those laws across the EU and embraced a risk-based approach to respond to the threat of money laundering.
Barely a year following the UK’s implementation of 4AMLD, the European Parliament adopted a new directive amending 4AMLD. The Fifth Anti-Money Laundering Directive (“5AMLD”) was adopted by the European Parliament on 19 April 2018 and published in the Official Journal of the EU on 19 June 2018. 5AMLD came into force on 9 July 2018 and Member States are required to transpose 5AMLD into their national laws by January 2020. 5AMLD aims to expand the scope of the EU anti-money laundering framework by increasing transparency and creating a hostile environment for criminals and terrorists seeking shelter for their finances through non-transparent structures.
This blog seeks to provide an overview of the key changes introduced by the 5AMLD that will affect the art market.
Brexit Implications
The UK is expected to withdraw from the EU in March 2019, but its withdrawal is unlikely to have a bearing on its decision to adopt 5AMLD. Thus far, the withdrawal agreement between the UK and the EU includes a transitional or implementation period ending in 31 December 2020, during which the UK is required to implement EU directives such as 5AMLD. Additionally, to ensure that trade relations are not impaired, the UK will likely align its anti-money laundering laws with those of the EU. The UK art market should therefore prepare itself to comply with 5AMLD.
Key Changes Affecting the UK Art Market
Key amendments affecting the art market under 5AMLD include the: (i) broadening of the definition of “obliged entities”, which will likely capture UK art businesses, (ii) increased customer due diligence placed on such obliged entities, and (iii) identification of transactions relating to cultural property as “high-risk”, thereby requiring enhanced due diligence. To better understand these changes under 5AMLD, it is necessary to consider the relevant provisions under 4AMLD that have been amended by 5AMLD. We explore these below.
Art Businesses as “Obliged Entities”
4AMLD requires “obliged entities” to adopt a risk-based approach towards anti-money laundering and carry out the relevant due diligence before, for example, establishing a business relationship that has an element of duration or concluding certain types of transactions as set out under 4AMLD. In relevant parts, 4AMLD defines “obliged entities” as, among other things, persons trading in goods and making or receiving cash payments of €10,000 or more in a single operation or in several operations which appear to be linked. Thus, under 4AMLD, galleries or dealers who accept cash payments of €10,000 or more for a transaction or series of linked transactions in relation to an artwork are deemed “obliged entities” and are required to carry out the relevant due diligence when they (i) establish a business relationship or (ii) they conclude a one-off transaction or series of one-off transactions where payment is in cash and in the sum of €10,000 or more.
5AMLD broadens the definition of “obliged entities” by explicitly targeting the art sector. Under 5AMLD, the revised definition of “obliged entities” includes, among other things:
- 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 transaction 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 transaction or a series of linked transactions amounts to €10,000 or more.
Thus, while under 4AMLD any individual or business prepared to accept cash payments of €10,000 or more relating to goods (including artworks) is deemed as an “obliged entity”, under 5AMLD art businesses or individuals trading in works of art valued at €10,000 or more, irrespective of the payment method, are specifically identified as “obliged entities”. As such, under 5AMLD, these newly defined obliged entities will be required to conduct customer due diligence before they establish an ongoing business relationship with a client, or carry out an occasional high value transaction equal to €10,000 or more irrespective of the payment method.
Changes to Customer Due Diligence
4AMLD requires obliged entities to carry out customer due diligence including among other things, identifying all sellers and all buyers and verifying their identity; identifying all beneficial owners, where applicable, and taking reasonable measures to verify these beneficial owners’ identity to satisfy themselves that they know who they are transacting with; obtaining information on the purpose and intended nature of the business relationship; conducting ongoing monitoring of the business relationship to ensure transactions are consistent with what the business knows about the seller and buyer, and the risk profile; and retaining records of all such checks and update them whenever there were changes. These due diligence obligations will continue to apply once 5AMLD is implemented in the UK and, as explained above, most UK art businesses will, for the first time, need to introduce systems and processes in order to comply with the 4AMLD due diligence obligations.
While 5AMLD requires an increased level of customer due diligence, including a systematic, ongoing monitoring of beneficial owners of existing customers and the regular updating of the proof of registration of customers who are corporate or other legal entities (e.g., trusts).
Furthermore, under 5AMLD, obliged entities have a duty to discern, as far as reasonably possible, the background and purpose of all transactions that are particularly complex, unusually large, conducted in an unusual pattern, or lacking an apparent economic or lawful purpose. In such instances, obliged entities are required to increase the degree and nature of monitoring of the business relationship to determine whether those transactions or activities appear suspicious.
Specific enhanced due diligence measures are also to be applied by obliged entities where a transaction involves a high-risk third country (such as, e.g., Syria, Afghanistan, North Korea, Iraq, etc.). Here, enhanced due diligence measures include obtaining additional information on the customer and the beneficial owners as well as on their source of wealth and source of funds for the specific transaction; additional information on the intended nature of the business relationship and the reasons for the intended transaction; obtaining the approval of senior management for establishing or continuing the business relationship; and the conducting of enhanced monitoring of the business relationship on an ongoing basis.
Thus, for example, while under 4AMLD, obliged entities are required to identify beneficial owners when establishing the business relationship and/or carrying out a high value transaction, under 5AMLD, obliged entities are required to continually monitor and update their records on beneficial owners. Additionally, under 5AMLD, obliged entities are required to enquire about the source of the funds and source of wealth of their customers, if the customer originates from a high-risk third country, while there was no such obligation under 4AMLD.
Higher-Risk Art Transactions
4AMLD provides a non-exhaustive list of higher-risk situations where obliged entities are required to carry out enhanced due diligence. 5AMLD adds to the list of higher-risk situations “transactions related to . . . cultural artefacts and other items of archaeological, historical, cultural and religious importance, or of rare scientific value, as well as ivory and protected species.”
As a rule of thumb, it may be safe to assume that all artworks, antiques, and collectibles that require an UK export license fall within the above definition of a higher-risk transaction. Most dealers who are members of SLAD, LAPADA and BADA will typically handle such transactions, unless they deal solely in art created by living artists. Enhanced due diligence in such circumstances includes examining, as far as reasonably possible, the background and purpose of all such transactions. More particularly, art dealers will be required to increase the degree and nature of monitoring of the business relationship to determine whether those transactions or activities appear suspicious.
What Does This Mean for UK Art Businesses?
Art businesses should start taking practical steps to become compliant with 5AMLD by:
- establishing and maintaining anti-money laundering policies and procedures dealing, in particular, with customer due diligence, reporting, record-keeping, risk assessment and identifying ‘red flags’;
- appointing a ‘nominated officer’ and making sure that employees know to report any suspicious activity to that officer;
- providing on-going training of employees on their anti-money laundering responsibilities. Training should be tailored to the level of seniority and form part of the induction process for new employees. Existing employee should receive refresher training on an annual basis. Training should be compulsory and attendance should be documented and the evidence retained; and
- taking the risk of money laundering into account in the day-to-day running of transactions.
Penalties for Non-Compliance
4AMLD requires Member States to lay down rules on administrative sanctions and measures and ensure that their competent authorities impose such sanctions and measures with respect to breaches of the provisions of the Directive. As previously explained, in the UK, 4AMLD is implemented by Regulations 2017. Pursuant to Regulations 2017, if a person or business fails to comply with its provisions, they may face significant civil penalties or criminal prosecution. This could result in unlimited fines and/or a prison term of up to two years. A person will not be found guilty of an offence if they can show that they took all reasonable steps to avoid committing the offence.
While 5AMLD does not speak to penalties in relation to non-compliance, if the UK Government adopts the changes proposed by the Directive, it may decide to expand the existing penalties provided under Regulations 2017.
Once an art business qualifies as an obliged entity under anti-money laundering regulations, its directors and employees are exposed to greater risk of prosecution. Under Section 330 of the Proceeds of Crime Act 2002 (POCA), a person employed by an obliged entity, who knows or suspects, or who has reasonable grounds for knowing or suspecting, that another person is engaged in money laundering, must make disclosure of certain information to the National Crime Agency (irrespective of whether or not he or she has any involvement in the acts concerned or would otherwise be in danger of committing one of the ‘substantive offences’). Failure to do so is an offence which carries a maximum penalty of five years’ imprisonment or an unlimited fine. The “reasonable grounds for knowing or suspecting” standard (that is, in other words, a “should have known” or negligence test) is a higher standard of diligence. If the employee being prosecuted pleads that he/she had no idea that criminals were using the business to launder money because he/she is exceptionally trusting, that defence may well fail if the prosecution can show that a reasonable person would have suspected money laundering. For that reason, directors and employees of obliged entities face a greater risk of being found guilty of a money laundering offence.
Industry Voices
Industry voices are against increased due diligence requirements for art transactions and are concerned about the effects those requirements will have on the market. For example, the International Confederation of Art and Antique Dealer Associations (CINOA) has argued that 5AMLD imposes a burden on small businesses that will restrict their ability to transact and conduct business in a sustainable way. CINOA argues that the €10,000 threshold is too low, and that the application of strengthened due diligence for linked transactions would subject even low-value sales to heightened requirements, resulting in the loss of valuable time and clients. The British Art Market Federation has also expressed concerns about the onerous administrative burdens imposed by 5AMLD on small art businesses and is liaising with the UK government to minimise its effects.
US Legislation
Interestingly, like the EU, the US has proposed legislation to specifically regulate the art market. More specifically, the Illicit Art and Antiquities Trafficking Prevention Act (H.R. 5886), introduced on May 18, 2018 to the United States Congress, seeks to expand the application of the Bank Secrecy Act to include “dealers in art or antiquities”. If the proposed legislation passes, art businesses will be required to report suspicious transactions to the US Treasury Department, including those transactions involving cash payments of more than $10,000.
Given the recent trends, the art market will likely become more regulated. It is therefore important for individuals and businesses dealing in art, antiques and collectibles trade to familiarize themselves with the 5th AML Directive and begin taking steps towards shifting business practices to ensure their compliance with the more stringent legislative framework.
By Azmina Jasani and Philipp Nuernberger
[1] 4AMLD defines the following conduct, when committed intentionally, as money laundering:
- the conversion or transfer of property, knowing that such property is derived from criminal activity or from an act of participation in such activity, for the purpose of concealing or disguising the illicit origin of the property or of assisting any person who is involved in the commission of such an activity to evade the legal consequences of that person’s action;
- the concealment or disguise of the true nature, source, location, disposition, movement, rights with respect to, or ownership of, property, knowing that such property is derived from criminal activity or from an act of participation in such an activity;
- the acquisition, possession or use of property, knowing, at the time of receipt, that such property was derived from criminal activity or from an act of participation in such an activity;
- participation in, association to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the actions referred to in points (a), (b) and (c).