Financial Crime Spotlight: Money Laundering Controls in the Art Market

Key Risks

A February 2023 Financial Action Task Force (FATF) report highlights some the unique risk factors that impact the global art market, including the emphasis on privacy and discretion, subjectivity in value of artworks with purchases driven by personal taste, use of third party intermediaries, lack of expertise in this area and the size of the global art market, as well as the relative ease with which small objects of high value can be transported across borders. While there are legitimate reasons for these characteristics, this makes the art market a target for criminals for money laundering and terrorism financing².

In terms of transaction risk in this sector, money laundering could occur where a buyer facilitates the purchase of an artwork with funds that originated from criminal activities such as tax evasion, fraud, forgery, bribery/corruption, illegal trade in stolen goods, insider trading, market abuse or drug trafficking. There is also the risk that sellers handle or facilitate a sale of artwork which is stolen, looted or purchased with the proceeds of crime.

Key requirements in the UK

The UK takes a more prescriptive approach in its application of the regulation of anti-money laundering (AML) and counter terrorism financing (CTF) to the art market and its participants compared to many other jurisdictions. Art market participants (AMPs), like many others, have been subject to extensive AML rules introduced in the Proceeds of Crime Act 2002 (POCA), namely offences in relation to money laundering – the process by which criminal property is disguised or ‘cleaned’ so as to appear legitimate.

AML/CTF obligations for AMPs were expanded in 2020 with the introduction of the Money Laundering Regulations 2017 (MLRs)³. Their inclusion in this legislation is designed to further minimise the risks of criminals exploiting the prevalence of confidentiality in the art market and bring more AMPs within scope.

The definition of AMPs in the MLRs today covers individuals or firms working directly within the art market, such as high value dealers and auction houses, as well as other parties such as agents, intermediaries and some artists. In addition to POCA obligations, AMPs who trade in or act as intermediaries in the sale or purchase of art worth EUR 10,000 or more are required to take additional steps to prevent money laundering. This includes identifying the physical person or corporation who AMPs are dealing with in any transaction – known as Customer Due Diligence (CDD) – as well as assessing the purpose and intended nature of each transaction.

These requirements cover a wide range of business activities taking place in the art world, capturing smaller firms, art advisors and financers, and storage facilities alike, with the intention of making AMPs more vigilant of AML risks on a day-to-day basis. Therefore, it is important the AMPs take their obligations seriously and if they fall within scope ensure that they:

1. Register with HMRC.
2. Conduct regular risk assessments.
3.  Implement and perform regular customer due diligence systems and checks.
4. Implement policies, procedures and controls for AML/CTF.
5. Appoint an internal Nominated Officer and provide appropriate training to employees.
6. Report suspicious transactions to the National Crime Agency (NCA).
7. Understand the consequences of non-compliance, both criminal and civil.

Guidance

Additionally, in January 2024, the NCA issued an alert warning of potential criminal exploitation of the sector by individuals subject to sanctions imposed on Russia⁴. It further highlights the need for the sector to conduct regular CDD in order to understand any change in a client’s circumstances or those of elites they may represent. Criminals will test organisations’ due diligence processes by conducting legitimate business activity and then request sudden changes, in that way concealing and moving assets that may be the proceeds of crime or subject to sanctions.

The British Art Market Federation published guidance in this respect and suggested some key risks that should be reviewed regularly by AMPs including⁵:

• Changes in client circumstances – checking international sanction listings and other due diligence systems against client details on a regular basis.

• Transfers of ownership of art between connected parties such as family members, business associates or intermediaries.
• Entities making payments to the service provider on behalf of clients.
• Transactions involving the sale of art in a short time period.
• Transactions involving shell companies or complex corporate/trust structures where the identity of the Ultimate Beneficial Owner is unclear.
• Art that is stolen or subject to restrictions (e.g. cultural objects or blood antiquities).
• Transactions involving intermediaries to acquire, sell or transport art.

It is important to understand that in the context of the art world that some of these indicators can often be entirely legitimate, so they should not be considered in isolation but rather holistically to avoid turning away valuable business from genuine sources.

While there are specific difficulties investigating AML/CTF issues in the art market, namely law enforcement’s relative lack of specialist knowledge on the art market and international cooperation, UK regulators are working collaboratively with AMPs in relation to AML/CTF requirements, so that AMPs can feel confident in their ability to recognise and understand potential issues.

Practical considerations

The art market will always be vulnerable to criminals who wish to exploit its characteristics and practices. It is important that AMPs recognise their legal obligations in order to improve their efforts to prevent and combat abuse of the art trade for criminal purposes.

Key AML/CFT compliance takeaways that AMPs should apply in their operations in the UK art market include:

1. Understand and implement robust CDD measures and record keeping procedures to check customer identification.
2. Implement thorough transaction monitoring systems, risk-based policies and processes for reporting suspicious activity.
3. Develop training programs and guidance for employees in respect of AML/CTF compliance to ensure best practice internally and externally.

We have recent experience of advising clients in relation to the art market sector, both in the UK and globally. If you have any questions in relation to the AML/CTF risks impacting the sector, including implementing policies and procedures to assist legal and regulatory compliance requirements, please contact the authors.

With thanks to Sophie Babu for her work on this briefing.