Guidance

Understanding money laundering risks and taking action for art market participants

Published 28 June 2021

About

This money laundering risk assessment identifies the key areas that art market participants (AMPs) should consider as they carry out supervised business activities.

You must read this alongside the AMP guidance and other relevant documents, such as the National Risk Assessment 2020 and guidance produced by the Financial Action Task Force (FATF).

Risk characteristics

An AMP means anyone who as part of their business:

• trades in or acts as an intermediary in the sale or purchase of works of art and the value of the transaction, or series of linked transactions, is of at least 10,000 euros
• operates as the operator of a freeport or any other business by way of business stores works of art in the freeport and the value of the art is 10,000 euros or more.

A work of art is defined in the Value Added Tax Act 1994 section 21(6) to (6B) for the purpose of section 21(5)(a) of that Act. This is summarised as:

• a painting, drawing, collage, decorative plaque or similar picture
• an original engraving, lithograph or other print
• an original sculpture or statuary
• a sculpture cast
• a tapestry or other hanging
• a ceramic
• an enamel on copper
• a photograph

but not:

• a technical drawing, map or plan
• any picture comprised in a manufactured article that has been hand-decorated
• scenery (including backcloths)

The UK National Risk Assessment (NRA) 2020 covered AMPs for the first time. Art businesses were only previously captured by the Money Laundering Regulations (MLRs) if they were in scope as a High Value Dealer (HVD). The 2020 NRA assessed AMPs separately to HVDs as their risk profile and their definition differs.

AMPs are currently assessed as high risk for money laundering and low risk for terrorist financing.

The UK NRA reports the art market to be attractive for money laundering because of the ability to conceal the art’s beneficial owners, the final destination of art, the wide-ranging values involved, and the size and international nature of the market. It adds that it is too early to fully assess the effectiveness of new mitigations in place by AMPs under the Money Laundering Regulations.

The use of illicit funds to buy, then sell high value goods is one of the oldest, and most common elements in money laundering and terrorist financing methodologies.

Art shares some commonalities with other high value goods, in that they are highly versatile for criminals. Art can be high in value, retain its value, can be purchased using legal tender and can be readily transferred from person to person. Even if art work loses some of its value, it could be sold at a loss for ‘clean money’, making the product more attractive for re-sale in the open market.

Art is also assessed to be attractive for money launderers due to the ease with which items can be transported within the UK and across borders.

This provides a convenient way to launder high volumes of funds across borders, through relatively small items. With the banking and border cash systems being progressively tightened around the world, small, transportable high-value commodities, such as art, are commonly transported across borders and traded or sold.

Art is likely to be less suspicious to law enforcement, when compared with the likes of gold or cash. Art can be seen as a status symbol in the criminal world, thus making purchasing of art more attractive to criminals.

Risk indicators

It is vital that AMPs understand and meet their obligations under the MLRs to protect themselves, their families and their communities from the dangers of infiltration by criminals.

Any weakness in the controls the business uses may be exploited by criminals who will seek to use, coerce or control the AMP to move more of their illicit money. Such money is often earned from activities that cause significant harm to society, such as drug dealing, people smuggling or modern slavery.

It is important that a business carefully assesses and documents the specific risks that business faces and establishes and keeps up-to-date policies, controls and procedures to address these. These must be effective to help prevent money laundering or terrorist financing through the business.

Risks common to all AMPs

The key cross-sector risks for all AMPs include:

• unusual sales or purchase activity
• anonymity
• face-to face sales compared to other sales
• high-risk jurisdictions
• off-record sales

Key risk indicator	Notes
A potential sale or purchase of art does not appear to be normal business practice, have a valid commercial reason or makes no economic sense.	This could be the art, the delivery method or payment arrangements that are not consistent with the normal practice for the type of business concerned.
Anonymity with the buying and selling of artwork	The art market has traditionally operated in a way that provides anonymity with the buying and selling of artwork often conducted in private or through third parties in order to remain anonymous and conceal the beneficial owner. Whilst there are legitimate reasons for operating in such a way, this trading environment is advantageous to those seeking to launder money and criminals abusing such legitimate mechanisms for anonymity in order to shield their involvement and their source of funds during art transactions. This could be to purchase art with illicit funds, purchase art by someone sought by law enforcement, to hide beneficial ownership to evade tax or use art as a stored value which is easy to transport and trade, when moving currency through the banking system would raise suspicion.
Payment from high-risk jurisdictions.	High-risk jurisdictions (See GOV.UK for information about high-risk jurisdictions) are more likely to be linked to money laundering and terrorist financing. You should carefully consider the purpose and nature of any transaction with a business from a high-risk jurisdiction. For more, see the ‘further comment’ at the end of this table.
Remote sales compared with other sales	Face-to-face contact with a customer offers some form of tangible relationship and an opportunity to interact with the customer. Transactions made online, over the phone or via an intermediary reduce this exposure to the customer, decrease effective identification, and increase vulnerability to money laundering and terrorist financing. High-end, luxury-focused AMPs are in an excellent position to carry out effective customer due diligence (CDD) where their business model includes cultivating and building relationships with their customer.
Criminals take advantage of unwitting legitimate businesses.	Talking to your customers about the reason for the purchase or sale of the art should help to determine whether there is a legitimate reason for the sale and whether anything appears unusual.
The customer asks for the art to be delivered in an unusual manner or to an address that is not their own.	There may be a genuine reason for this, but it is important to ask questions to decide if the transaction should go ahead and/or a Suspicious Activity Report (SAR) filed.
A business wants to conduct a sale or purchase of art in cash for an ‘off the record sale’.	The sale is not likely to have been recorded in that business’ records and have a proper audit trail. If offering payment this way, the business is also likely to be using cash for other purposes, such as paying workers cash in hand and thus avoid paying tax and National Insurance on the wages.
A new customer with little or no trading history and no trade references.	Is this a genuine customer or a front for a business that is possibly laundering money?

Risks relating to the Money Laundering Regulations

The below highlights risk indicators relating to elements of the Money Laundering Regulations including:

• reliance
• linked transactions
• data protection
• online verification
• un-registered AMPs
• online sales
• rental of art and interior designers

Key risk indicator	Notes
Customer due diligence (CDD) and reliance	As part of your CDD measures you can rely on CDD carried out by an appropriately supervised entity in certain circumstances. We have noted some misinterpretation of the use of reliance in the art industry. Reliance is covered under Regulation 39 of the MLRs. There are set criteria that must be adhered to: the business on whose CDD you are relying must be carrying on business in the UK and is subject to the requirements of the MLRs; or carrying on business overseas and subject to equivalent legislation in another country; you must immediately obtain from the third party being relied on all the information needed to satisfy the requirements of the regulations around CDD in relation to the customer or the beneficial owner or anyone acting on behalf of the customer. You will need 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. On request from you, the third party must immediately supply copies of any identification and verification checks done and any other relevant documentation on the identity of the customer or beneficial owner or anyone acting on behalf of the customer.
Art and linked transactions	For AMPs, a linked transaction can occur when; a transaction over €10,000 appears to be have been deliberately broken down into several smaller payments so there are multiple payments against a single invoice (this does not include payments made via a finance or credit arrangement); several works of art each valued below €10,000 are sold at the same time together and thus the total sale price is over the AMP threshold. For example, an art gallery is selling paintings from one artist at £6,000 per painting. The same customer buys 3 paintings costing £18,000 at the same time. The sale is therefore above the threshold and subject to MLR requirements. It would not be appropriate to issue separate invoices for each piece of art work and claim they were separate sales.
Data protection	Under Regulation 41 personal data obtained by you for the purpose of the Regulations, e.g. for CDD purposes, may only be processed for the prevention of money laundering and terrorist financing unless use of the data is allowed by other legislation.
Dealing with an unregistered AMP	As part of your CDD measures, if you are dealing with another AMP you should check on GOV.UK whether the business is registered with HMRC for AML supervision. If not, you should not continue dealing with that AMP. You should consider reporting this activity to the National Crime Agency (NCA) via a SAR. Reporting should also be made to HMRC on GOV.UK. Please note that AMPs have until 10 June 2021 to register with HMRC (and it can take a few weeks to process those applications), so some AMPs may not show as registered before then.
Online sales verification	The art industry has changed in 2020 and into 2021 due to the impacts of COVID. More sales are being conducted online and remotely. Verifying identity for online sales is different compared with face-to-face transactions as you do not have that interaction with the customer. For online and remote sales after receiving the identity documents you need to verify them. It is recommended that you conduct a video call to ensure the person you are dealing with is genuine and is the person in the identity documents.
Renting of art	If you are renting art you could still fall within the scope of an AMP. If you are renting art with no obligation to buy then you are not an AMP. It will depend on the contract that is in place and might depend on whether there is an obligation to buy the painting at the end of the rental period. If the rental amount is inflated to reduce the final sale amount, this could be seen by HMRC as a way to avoid the requirements under the MLRs.
Interior designers	An interior designer could be an AMP, as they could be acting as an intermediary. This would depend on what the interior designer’s working agreement is with their customer. If the interior designer is buying the art on behalf of their customer, they will have to declare who their customer is to the selling AMP, so they conduct the correct CDD.

Further comment on payment from high-risk jurisdictions

There are risks for AMPs in relation to the country that their customers are operating in. Some jurisdictions are deemed higher risk than others and/or have poor or insufficient money laundering and terrorist financing measures.

Other risks include levels of bribery and corruption, tax evasion, capital flight, conflict zones, and organised crime activity in a jurisdiction. It is not only the country that the customer is based in that may be the risk, it could also be neighbouring countries as money laundering or terrorist financing often involves the movement of funds across borders.

Information about high-risk jurisdictions is widely available, which is detailed from several open source documents and media. All AMPs will need to decide their own level of comfort when assessing jurisdictional risk. The business will be expected to develop and maintain awareness around this topic and incorporate it into their written policies and procedures and risk assessment.