Introduction
The UK Money Laundering Regulations 2017 (“Regulations 2017”) which implement the EU’s Fourth Money Laundering Directive (“4MLD”) came into force on 26 June 2017, repealing the Money Laundering Regulations 2007 (“Regulations 2007”). The 4MLD seeks to give effect to the international standards for combating money laundering and terrorist financing developed by the Financial Action Task Force (“FATF”), an inter-governmental body founded on the initiative of G7. Please click here for more information.
The UK is traditionally ahead of the EU curve on anti-money laundering (“AML”) legislation and the UK government is likely to keep leading the way on AML following the country’s departure from the European Union. Since 2010, the UK government has:
- led the way on tackling tax evasion and tax avoidance, bringing in more than £2 billion from offshore tax evaders;
- been the first member of the G20 to establish a public central registry of company beneficial ownership information;
- introduced some of the world’s strictest legislation on bribery through the Bribery Act 2010, making it a criminal offence for a company to fail to prevent a bribe being paid.
The size of the UK’s financial and professional services sector makes the UK unusually exposed to international AML risks. In April 2016, the UK government published an Action Plan for anti-money laundering and counter-terrorist finance, which was described as representing “the most significant change to the anti-money laundering and terrorist finance regime in over a decade.” The combined impact of the Action Plan and Regulations 2017 are expected to be significant. The UK government is planning to launch a new AML supervisory body by the start of 2018, the Office for Professional Body Anti-Money Laundering Supervision, which will sit within the Financial Conduct Authority.
Main changes introduced by Regulations 2017
Regulated entities
Most art businesses remain unregulated under Regulations 2017 as was the case under Regulations 2007. There are a few exceptions such as High Value Dealers (“HVDs”) and companies offering credit against art or art-related investment products. Regulations 2017 widened the definition of HVDs by lowering the threshold for cash transactions subject to AML procedures from EUR 15,000 to EUR 10,000. Regulations 2017 define an HVD as “a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when the trader makes or receives, in respect of any transaction, a payment or payments in cash of at least 10,000 euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked.” Therefore, antique and fine art dealers, auctioneers and brokers, jewellers and car dealers qualify as HVDs if they accept cash payments over EUR 10,000.
If an art business falls within the AML regulated sector, it must comply with Regulations 2017. Outlined below are the key changes.
Simplified Due Diligence
Under Regulations 2007, regulated entities were entitled to automatically apply simplified customer due diligence (“CDD”) in certain circumstances (e.g. UK pension schemes and public authorities). These automatic exemptions no longer apply. While Regulations 2017 still allow simplified CDD, regulated firms are required to conduct a case-by-case risk assessment to determine whether simplified CDD is justified.
Politically Exposed Persons
The definition of a politically exposed person (“PEP”) has been expanded to include domestic PEPs, i.e., citizens holding prominent positions in their home country such as politicians, the judiciary and senior members of the armed forces. When doing business with a PEP, regulated entities must conduct enhanced customer due diligence. Under Regulation 35 of the Regulations 2017, a regulated person is required to apply enhanced due diligence measures to individuals for at least a year after they cease to be a PEP.
Record keeping requirements
Regulations 2007 required regulated entities to maintain their customer due diligence material for a period of five years from the date when the business relationship with the client comes to an end. Regulations 2017 impose a new obligation on regulated entities to delete personal data at the end of the five-year period.
Written risk assessments
Regulations 2017 contain detailed provisions about the risk assessment required of regulated entities. Under Regulation 18, a regulated person is required to take appropriate steps to identify and assess the risks of money laundering and terrorist financing, considering a number of factors such as: its customers; the countries or geographic areas in which it operates; its products or services; its transactions; and its delivery channels. Furthermore, a regulated person must keep an up-to-date written record of all steps it has taken to identify and assess the risks of money-laundering.
Register of Beneficial Owners for Trusts
Under Regulations 2017, the UK government is required to establish a central register of beneficial ownership information for trusts (“Trust Register”). The Trust Register will be operated by the HM Revenue & Customs (“HMRC”). HMRC is planning to launch the Trust Register this summer as an online service.
Trustees will be required to provide information on the identity of settlors; other trustees; beneficiaries; all other natural or legal persons exercising effective control over the trust; and all other persons identified in a document or instrument relating to the trust, including a letter or memorandum of wishes. This is a significant change in reporting requirements for trusts. The government has provided further guidance within HMRC Trust and Estates Newsletter April 2017.
The UK has already legislated to require transparency of the beneficial ownership of UK companies, Limited Liability Partnerships and Societates Europaeae. The obligation on these entities to maintain a register of people with significant control (“PSC register”) and provide this to the UK registrar of companies was put in place through the Small Business, Enterprise and Employment Act 2015, and a subsequent suite of regulations in March 2016.
Unlike the PSC register, the Trust Register will not be open to the public. It will only be available to law enforcement agencies and the UK Financial Intelligence Unit.
Proceeds of Crime Act
All art businesses, including those that do not fall within the scope of Regulations 2017, must comply with the Proceeds of Crime Act 2002 (“POCA”). POCA establishes a series of criminal offences in relation to money-laundering:
- Concealing, disguising, converting, transferring or removing criminal property from the UK;
- Entering into or becoming involved in an arrangement which facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person;
- The acquisition, use and/or possession of criminal property;
- The act of failing to report, or disclose knowledge or suspicion of money laundering to the relevant authorities;
- Tipping off any person in a way which is likely to prejudice a money laundering investigation.
If you commit a money laundering offence cited above, you risk a prison sentence of up to 14 years. A defence is available if you can show that you reported any knowledge or suspicion of money laundering to the National Crime Agency (“NCA”) and refrained from conducting the business transaction that you knew or suspected might constitute money laundering until the NCA had given you consent or deemed consent to proceed.
The UK Criminal Finances Act (“CFA”) which received Royal Assent on 27 April 2017, introduced important changes to POCA such as: (i) amendments to the suspicious activity reporting regime and (ii) new corporate offences of failure to prevent facilitation of UK and foreign tax evasion. The CFA is expected to come into force by September 2017.
Final remarks
Money-laundering creates serious criminal, reputational and financial risks for the art trade. Regulations 2017 increase the compliance burden for regulated businesses. If you are not in the regulated sector, there is no positive obligation on you to train your staff in identifying signs that criminals may engage in money laundering when doing business with you. However, we would argue that there is a moral obligation to train your staff in order to protect them from the risk of committing a money laundering offence, to protect the reputation of your business, and the British art trade as a whole.
Yulia Tosheva
Published 4 July 2017