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EU brings realism to art industry with nouveau AML regulations

The high end of the global art industry is an opaque world of often secret acquisitions, cautious collectors, subjective valuations, and high-value cross-border movement of artwork and funds. These inherent characteristics may protect the privacy and security of genuine buyers and their prized pieces, but they also make the art industry a magnet for criminals seeking to launder their ill-gotten gains.

Recent regulatory changes are starting to bring the art industry in line with regulated industries such as financial services. In the UK, changes have been made to money laundering regulations to reflect the requirements of the EU’s Fifth Anti Money Laundering Directive (5AMLD) that came into force on January 10, 2020.

These changes bring new obligations for art market participants (AMPs), who are defined as galleries, dealers, auction houses, and other intermediaries acting in the trade of artworks, including those engaged in the storage of art in free ports.

Specifically, AMPs engaging in transactions over €10,000 ($11,800) now need to ensure that they know three things:

The risk. AMPs need to understand all the different factors that increase the risk of money laundering for their particular business, considering their specific operations and processes. They also need to regularly update their risk assessment as criminals do not stand still, and the risks will likely evolve. There is no “one size fits all” approach.

Businesses will also need to establish appropriate AML policies and consider appointing a money laundering compliance officer, similar to a bank’s money laundering reporting officer. Risk assessments and accompanying controls will be fundamental in meeting regulators’ expectations of a robust risk-based approach.

The client. Adequate due diligence is essential. If the AMP’s client is an intermediary, e.g. an agent or art advisor, the onus is on the AMP to determine the end client’s identity. Where the principal is a corporate entity or a trust, the AMP needs to uncover the ultimate beneficial owner behind the veil of incorporation.

AMPs may also need to train staff to spot red flags when on-boarding clients, e.g. offshore jurisdictions associated with low AML standards, uncertain sources of wealth, and politically exposed persons. All of this information needs to be updated throughout the business relationship and in accordance with GDPR.

The transaction. The aim in every transaction is to identify the buyer, the seller, the role of every intermediary, and understand each party’s rationale. This is no small task when dealing with a complex cross border sale involving a gallery, agents, advisors, and counsel. AMPs need to be alert to red flags that may indicate that a given sale is not an arm’s length transaction. For example, consider filing a Suspicious Activity Report when:

  • The artwork’s value does not make economic sense
  • Counterparties are connected to each other
  • Funding sources change suddenly without rationale, and
  • Split payments are requested over multiple bank accounts.

Large auction houses and galleries with a global presence are already taking steps to mitigate money laundering risk. For many smaller operators, the challenge may be harder to address. The key is to embrace the change in the same way the financial services industry has.

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Anant Modi (pictured above right) is a Partner in FRA’s London office in the Forensic Accounting team. He has over 25 years’ experience of providing forensic and accounting services, in particular leading fraud and regulatory investigations, as well as working alongside lawyers to trace and recover misappropriated assets.

Shaf Sohail (above left) is a Manager in FRA’s forensic accounting team with over seven years of experience in forensic accounting, investigations, and disputes.

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