Since January 2020, the art market in the UK has enjoyed a honeymoon of sorts with Her Majesty’s Revenue & Customs (HMRC), the UK art market’s anti-money laundering (AML) supervisory authority. Since this regulator-regulatee relationship began, HMRC has been a patient and kind partner. However, as with most relationships, this one is evolving past the honeymoon phase.
During the first two years of the relationship, HMRC extended the registration deadline for art market participants (AMPs) from January 2021 to June 2021, hosted several free webinars explaining AMPs’ AML duties and obligations, and published specific updated art market guidance. The delayed deadline seemed to do the trick as since the June 2021 registration date, there has been a slow and steady increase of AMPs submitting registration applications.
Some AMPs who did not register have received letters from HMRC imposing sanctions for failure to register. The standard penalty is £5,000.00 per quarter, capped at £100,000 for 20 quarters. However, HMRC may elect to reduce the fine by as much as 50% if one falls on one’s sword and voluntarily declares that they were trading while unregistered, and by 25% if the fine is paid promptly (i.e. within 30 days). Voluntarily notifying HMRC of the mistake, with a plea for mercy given the triple whammy of being newly regulated, facing a global pandemic and dealing with Brexit, would seem a smart course of action.
HMRC is also paying attention to those AMPs who did successfully register. Some registered AMPs have also received letters from HMRC but these are giving notice of interventions, a polite word for government audits. These audits come in a variety of forms, and may be conducted in person or remotely, with or without notice. The purpose, in HMRC’s words, is to “test and challenge” whether the AMP understands the risks of their business as well as their AML compliance obligations. As part of the process, HMRC may ask to see copies of key documents including the original and updated risk assessment policy, controls and procedures, the content of training carried out, etc. as well as sample(s) of client files. They may also ask AMPs questions to find out if the AMP understands practices such as when and how to report suspicious transactions, how to apply customer due diligence, and how to identify beneficial owners.
The interventions are not an unexpected next step for HMRC, as they have exercised similar powers for the other AML-regulated sectors over which they have had supervisory authority for longer. Between 2019 and 2020, HMRC completed 2,000 interventions in their other regulated sectors. Their supervisory responsibilities extend to more than 30,000 businesses across several sectors in addition to the art market, such as money service businesses, high value dealers, estate agencies, trust and company service providers, and others.
However, HMRC’s enforcement powers are not limited to fines for failing to register and interventions. Their authority includes the ability to issue censures, suspend registrations and business operations, as well as in more extreme cases to refer matters for criminal investigation and prosecution. In the same 2019-2020 period, while exercising these powers over other, more mature regulated sectors, HMRC stopped 89 non-compliant businesses and individuals from trading and recovered more than £166 million from the proceeds of crime, of which in excess of £22 million was connected to money laundering offences. More recently, in 2021, HMRC fined a money services business a record £23.8m for disregarding money laundering regulations. The money services’ failures involved significant breaches of their risk assessments and record-keeping obligations, policies, controls and procedures, and basic customer due diligence. More recently, the Financial Conduct Authority, which has anti-money laundering supervisory authority over UK banks, succeeded in its first criminal prosecution of NatWest under the Money Laundering Regulations. The result: a fine of more than £250M.
Perhaps the financial sums at issue are greater with money service providers and banks than with most art market participants, but the financial industry also has greater resources available to devote to compliance with the Money Laundering Regulations. NatWest in particular had the processes, policies and the tech AML tools in place, but had numerous failures in the use of their tech AML tools and poorly developed human AML skills (see our previous blog on human and tech AML tools: No Silver Bullet to AML Compliance), which combined made them extremely vulnerable to criminal prosecution. If a bank the size of NatWest is facing criminal prosecution for the shortcomings of its compliance programme, it is easy to put into perspective how much more difficult it can be for AMPs to get it right given that their resources are comparatively much more limited than those of large corporate entities.
As if the threat of fines, penalties and criminal prosecution were not enough, HMRC has a duty to publish details of businesses that do not comply with the regulations. The most recent HMRC penalty list does not yet include AMPs but only those businesses that received a penalty notice between May and 31 July 2021. If and when AMPs appear on the list, details such as their name, registered address, the regulation breached and the amount of the penalty will be publicly available on HMRC’s website. HMRC also publishes names of businesses whose registrations are suspended and/or cancelled.
Clearly, the honeymoon is well and truly over. Those AMPs who were able to register and implement a programme, some as early as 2020, now need to update their risk assessments policies, controls and procedures to take into account the guidance issued since 2020. Those who have yet to register would be well advised to put AML compliance at the top of their agenda to avoid sanctions as well as the “name and shame” listing that can be expected on HMRC’s website. Experience tells us that the most difficult part of an AML programme is the initial stages of understanding a new language and system of risk identification and resolution. Once a robust and nimble programme is in place, the friction caused in administering it is less than one might expect.
 Press Release Jan 2021 HMRC: https://www.gov.uk/government/news/hmrc-issues-record-238m-fine-for-money-laundering-breaches
 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLRs) and the Money Laundering and
Terrorist Financing (Amendment) Regulations 2019
 See explanation of Human AML Skill and Tech AML Tools, No Silver Bullet to AML Compliance https://www.artatlaw.com/category/blog/