Europe's Fifth Money Laundering Directive: Where Does It Leave Art?
A market long known for the privacy of buyers - and sellers - faces a big challenge in adapting to European Union rules designed to squeeze dirty money from the system. How to balance legitimate privacy against the fight against money launderers?
For years a sector of the commercial world that wasn’t – so it appeared – much bothered by AML and KYC concerns was the art sales business. Art auctions have a certain mystery for the wider public, in that the identity of bidders in auctions are often kept private. How often has one read that an “unknown buyer” acquired a painting by a renowned painter such as Van Gogh, Monet or Picasso?
Inevitably, the pressure for tougher compliance with rules to stymie money launderers has reached the art world. An important industry that is also a barometer for health of the world’s wealth industry, art auctions provide a good test case for how debates on beneficial ownership disclosure should be addressed.
WilmerHale, an international law firm, comments on the state of play and what advisors to high net worth individuals need to understand. The editors of this news service are pleased to share these views and invite replies. The usual editorial disclosures apply. To comment, email firstname.lastname@example.org and email@example.com
The authors are David Rundle and Zach Goldman, counsel in WilmerHale’s global white collar defence and investigations practice.
The introduction of the Fifth Money Laundering Directive on 10 January 2020 brought the art market into the fold of regulated sectors for anti-money laundering purposes. The new law, which amends the existing regulations (The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017), requires “art market participants” to conduct due diligence on its customers, implement adequate systems and controls, assess its risk and report suspicious transactions.
How exactly will the regulations apply to the art market, an industry which is fundamentally different from the financial and professional services firms for which the regulations were designed for? More specifically, how will art buyers react to the requirement for greater transparency, given their present expectation for discretion and privacy?
Guidance published by the British Art Market Federation (BAMF) in January has, to some degree, clarified how the art market should apply the regulations. Ultimately, art market consumers - whether sellers or buyers - are likely to be subject to some level of due diligence. There is no legitimate scope to remain anonymous.
When do the regulations apply?
The regulations bring “art market participants” into the scope of the regulated sector, where they are acting in the course of business carried out in the United Kingdom. Art market participants are defined as firms or sole practitioners who, by way of their business, trade in, or act as an intermediary in the sale or purchase of “works of art” (1), where the transaction is €10,000 ($10,865) or more. The €10,000 value threshold is therefore baked into the definition of who is subject to the regulations. Even dealers from overseas, coming to the UK to sell works of art above that threshold, will be subject to the regulations. (2)
What does it mean for customers?
Where dealers are subject to the Regulations they will be obliged, as with other industries within the Regulated sector, to conduct customer due diligence. At its heart, this involves identifying the customer, verifying the identification and, where necessary, clarifying the source of the funds. Art market consumers may be surprised by who will consider them “customers”. This is not a simple issue to resolve, especially in a world where the use of intermediaries and agents is common.
An art market participant’s “customer”, for the purposes of the regulations, will depend on its business model, and the nature of the transaction itself. Take for example the scenario where a dealer sells a work of art (above the €10,000 threshold) on someone else’s behalf, to a person they know is acting as an agent. The guidance makes clear that the seller, the buyer and the agent will all be classified as the dealer’s customers for the purposes of the regulations, and hence will all need to be the subject of due diligence. Moreover, the dealer will need to verify that the agent is authorised to act on the buyer’s behalf.
Scope for privacy?
Customers should be aware that their identity will not be protected by using a corporate vehicle through which to buy, sell and own art works. As with financial institutions, art dealers are required to look behind the corporate structure and verify the identity of its beneficial owners. This may represent a brave new world for many dealers, particularly given the complexity of some structures which may be used for the purchase. Art market participants are also required to take reasonable measures to understand the ownership and control structure of the customer entity. (3) Given that art market customers may use complex offshore structures to purchase works, for tax or confidentiality reasons, dealers will inevitably be required to ask questions. Customers should be aware that the opacity of the structure, and the jurisdiction in which it sits, may crystallise a need to conduct an enhanced level of due diligence. Dealers will need to become comfortable with asking probing questions and ensure that they receive a satisfactory response.