5AMLD-and-the-art-market = A-new-landscape
- Just as the 4th EU Anti-Money Laundering Directive added to the regulatory burden on the real estate industry, the 5th EU Anti-Money Laundering Directive (‘5AMLD’) has expressly included the art industry (together with certain crypto businesses).
- 5AMLD has just been implemented in the UK through the Money Laundering and Terrorist Financing (Amendment) Regulations 2019 (‘MLR 2019’), which expressly bring ‘art market participants’ within the regulated sector. The MLR 2019 came into force on 10 January 2020.
- 5AMLD brings ‘art market participants’ within the regulated sector, requiring them to comply with UK anti-money laundering regulations, whether or not they deal in cash.
- The definition of a ‘work of art’ is derived from tax law and is particularly technical; those within the art industry who think they may fall outside the scope of the new regulations should seek legal advice to confirm their position.
- Those who are caught by the new provisions need to take immediate action to avoid the risk of criminal liability and regulatory sanction.
The numbers $/£ - Art is a lucrative market.
- At its most extreme, a single transaction can be worth millions: in May 2019, ‘Rabbit’, a sculpture by Jeff Koons, was sold to an anonymous purchaser for $91.1 million, setting a record for the most expensive work sold by a living artist.
- In 2018 the UK was the second-largest market in the world, falling below the United States, and above China.
- By its very nature, art is also an attractive tool for money laundering – it can be transported easily across jurisdictions, valuations are subjective and therefore easy to manipulate, catalogue listings often provide scant information about the seller, and transactions are frequently private.
- According to the United Nations Office on Drugs and Crime, the underground art market may bring in as much as $6 billion annually, of which financial crime accounts for around $3 billion.
Who is caught?
Art market participants — the definition of an ‘art market participant’ is wide.
- HMRC guidance, issued on 10 January 2020, takes a broad brush approach, explaining that “those in the art market who deal in sales, purchases, and storage of works of art with a value of 10,000 euros or more, whether this is for a single transaction or series of linked transactions, regardless of payment method used” are now within the scope of the UK anti-money laundering regime.
- Unlike ‘high value dealers’ (who were already within the regulated sector), art market participants are now caught regardless of whether they deal in cash.
- An ‘art market participant’ is more technically defined in the MLR 2019 as any firm or sole practitioner who trades by way of business in (or acts as an intermediary in) the sale or purchase or ‘works of art’, as well as the operators of freeports who by way of business store such ‘works of art’ (subject always to the 10,000 euro de minimis for the relevant transaction or series of transactions).
- Importantly, the term ‘intermediary’ is not defined, and so it is not clear whether those who help advise on sales, including valuers, but who do not ultimately play a part in the transaction itself, fall within scope. It is hoped that further guidance (promised by HMRC) will provide some clarity.
Works of art
The definition of a ‘work of art’ itself is extremely precise. It is drawn from tax legislation, an area of law notorious for its complexity. As it stands, the definition includes certain:
- Paintings, drawings, collages, decorative plaques or similar picture executed by hand
- Original engravings, lithographs or other prints
- Sculptures, Statues
- Sculpture casts
- Tapestries or other hangings
- Enamels on copper
- Even then, those items which fall within those categories are carefully defined by reference to further conditions. For example, a ceramic must be signed in order to qualify for VAT purposes.
The exemptions are equally precise:
- technical drawings,
- maps, plans,
- pictures comprised in a manufactured article that has been hand-decorated, and
- anything in the nature of scenery (including a ‘back-cloth’) are all excluded.
It is understood that certain antiques
- items over 100 years old which would not otherwise be defined as works of art,
- as well as certain collectors’ items, also fall outside the scope, as they are dealt with separately under the tax legislation.
Although the treatment of video installations is particularly fraught, there has otherwise been surprisingly little case law on the meaning of a ‘work of art’, something which may change post the MLR 2019.
However, the courts have traditionally taken an objective approach to determining whether an item is a ‘work of art’ (looking at the item itself as presented).
Given the complexity of the definition, and its source in the tax legislature, those in the art industry who consider that they may be outside the scope of the rules, would be well advised to seek legal guidance before proceeding on that basis.
What are the requirements?
Art market participants are required to comply with the UK anti-money laundering requirements from 10 January this year (2020) and to register with HMRC by 10 January next year (2021). HMRC has noted that it will “take into account the short lead-in time” in assessing the response to non-compliance and will assess each case “on its own merits”, but art market participants should get to work immediately.
First, the MLR 2019 require art market participants to comply with the anti-money laundering procedure rules set out in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017. Broadly, this includes:
- Having money laundering procedures in place and training staff;
- Undertaking a risk assessment of both the business and individual transactions;
- Conducting customer due diligence (which in high risk transactions will need to be ‘enhanced’); and
- Conduct ongoing monitoring of transactions and business relationships.
Secondly, participants will also fall within the scope of section 330 of the Proceeds of Crime Act 2002. This means that they must make a Suspicious Activity Report to the National Crime Agency if they know or suspect, or even if they have ‘reasonable grounds for knowing or suspecting’ (the objective test), that another person is engaged in money laundering, and the information upon which that suspicion is based came to them through their business in the regulated sector.
Crucially, such obligations cannot be delegated, and failure to comply with the anti-money laundering regime can result in serious criminal penalties – in 2019 HMRC fined a money transmitter £7.8 million for failures under the 2017 regulations, even though no money was actually laundered.
These new and burdensome requirements are likely to have a significant impact on the way art deals are conducted, and it remains to be seen whether they will lead to increased transparency in the industry. They are unlikely to drive the art market abroad, given other European jurisdictions are similarly obliged to implement 5AMLD that and the United States is also considering a clamp down.
One question remains – which market will money launderers target next? With real estate, art and the crypto world now heavily regulated, the playground for money launderers is shrinking fast.
 HMRC Guidance, 10 January 2020
 Regulation 4 MLR 2019
 Section 21(6) Value Added Tax Act 1994
 Section 21(6)(f) Value Added Tax Act 1994
 Section 21(6A) Value Added Tax Act 1994
 See the decision in Haunch of Venison Partners Limited v Revenue and Customs Commissioners (2008) Decision C00266, followed by Commission Regulation (EU) No 731/2010.
 See again Haunch of Venison Partners Limited v Revenue and Customs Commissioners (2008) Decision C00266 it was held that a work of art does not cease to be so, simply because it is “dismantled for transportation”.
 HMRC Guidance, 10 January 2020