Out-Law News | 28 Jul 2021 | 10:33 am | 2 min. read
New guidance issued by HM Revenue & Customs (HMRC) emphasises the increased focus of law enforcement agencies to disrupt the use of the art market as a vehicle for money laundering, an expert in white collar crime and investigations has said.
Natalie Sherborn of Pinsent Masons, the law firm behind Out-Law, was commenting after the HMRC published guidance on understanding money laundering risks and taking action for art market participants.
The global art market is valued at more than £50 billion, with an estimated £2.3 billion of this per year linked to financial crime. To address this risk, EU law makers introduced the fifth anti-money laundering directive, which came into force last year. That directive, finalised prior to Brexit, was implemented in the UK through the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (the MLR 2019), which extended the scope of the obligations under the Money Laundering Regulations 2017 and brought “art market participants” (AMP) within the regulated sector for the purposes of anti-money laundering (AML) where the value of the works of art exceed €10,000. As a result, since 10 January 2020, all those involvement in the sale process or operating a freeport have been required to conduct due diligence, risk assessments and enhanced record-keeping, with an obligation to report suspicious transactions to law enforcement.
The extended deadline for registering as an AMP with HMRC expired on 10 June 2021. Continuing to trade after this date without registration could result in civil fines or a criminal prosecution. HMRC recently published guidance on the regulations identified the core areas of risk that AMPs should consider in the course of business activities.
Sherborn said that HMRC’s guidance provides its own AML risk assessment for the art market. She said that assessment should be read alongside guidance produced last year by the British Art Market Federation and endorsed by HMRC. Other relevant documents, such as the National Risk Assessment 2020 and guidance produced by the Financial Action Task Force (FATF), divides identified risks into those applicable to all AMPs and those relating to AML regulations.
“The increased move to online sales, precipitated in part by the restrictions imposed in response to the pandemic, for example, is identified as a particular risk,” Sherborn said. “Transactions made online, over the phone or via an intermediary reduce exposure to the customer, decrease effective identification, and can increase vulnerability to money laundering and other financial crime.”
“HMRC’s assessment highlights the risk of criminals seeking to take advantage of legitimate business and recommends that the reason for a transaction be discussed, to satisfy its efficacy,” Sherborn said. “Particular care should also be taken where the transaction involves unusual or inexplicable sales/purchases of art; unusual delivery requests; payment in cash or from ‘high risk’ countries; anonymity and a lack of trading history or trading references.”
HMRC confirmed in its guidance that AMPs can rely on customer due diligence (CDD) carried out by another “appropriately supervised entity”, but it said the strict conditions attached to this can be easily misunderstood.
“For example, the entity on whose CDD they are relying must be carrying on business in the UK and subject to the requirements of the money laundering regulations; or carrying on business overseas and subject to equivalent legislation in another country,” Fiona Cameron of Pinsent Masons said. “Additionally, the AMP needs to know the identity of the customer or beneficial owner, what level of CDD was conducted, and have an agreement in place with the third party that all CDD documents will be provided immediately on request.”
Sherborn said: “Whilst HMRC’s guidance does not change the legal requirements or the approach to be taken to AML risk assessments, its publication underlines the efforts being made by law enforcement, not just in the UK but across the globe, to restrict the available routes for those intent on laundering the proceeds of crime. The guidance emphasises the importance that AMPs carefully assess and document the specific risks faced and establish and maintain effective policies, controls and procedures to address these. HMRC is likely to take a dim view of those who fail to do so.”