A New Year’s Eve: Art Market Participants Become Regulated

From tomorrow, 10 January 2020, “art market participants” will become part of the regulated sector, requiring them to carry out the same customer due diligence checks as, for example, bankers and lawyers.  The law will apply to any individual or business which is engaged in a transaction over €10,000 and includes dealers, auction houses, galleries and museums.  It will even include artists who sell to clients directly.

The new law applies to all “participants” who do business in the UK, even if the client is overseas. Similar laws are being enacted across the EU. Failure to comply is a criminal offence and may result in a significant fine or imprisonment.

The definition of ‘art’ for these purposes has been confirmed as:

• Paintings, drawings, collages, decorative plaques or similar pictures executed by hand
• Original engravings, lithographs or prints produced from plates made entirely by hand and in a limited edition (maps and plans excluded)
• Original sculpture or statuary
• Sculpture casts produced under supervision of the artist in a limited edition that does not exceed eight
• Tapestries made from an original design in a limited edition not exceeding eight
• Ceramics executed by an individual and signed by them (excludes manufactured items or manufactured items that are hand decorated)
• Hand executed enamels on copper, signed by the artist or the studio, and only as part of a numbered limited edition not exceeding eight (excludes jewellery and gold- or silversmiths’ products)
• Signed photographs printed by or under the supervision of the photographer and only as part of a numbered limited edition not exceeding 30.

The Government had been consulting on 5AMLD during 2019 inviting views from across the UK art sector to ease the implementation of the regulations.  However no guidance has been published in time for tomorrow’s hard deadline and so the art market has had to quickly mobilise. 

The key requirements to note are:

• Businesses need to appoint an ‘MLRO’ (money laundering reporting officer) promptly.
• Participants must register with HMRC by 10 January 2021.
• Participants must conduct ‘client due diligence’ when engaged in transactions of over €10,000.
• If acting for an individual, checks will need to be run against the following documents: ID (e.g. passport or driving licence) and proof of address (e.g. utility bill).
• If acting for a company, trust or partnership, Participants must identify the individual behind the entity who is the ‘ultimate beneficial owner’ (UBO) – i.e. the individual who benefits from the transaction. If the UBO is another entity, reasonable efforts must be made to establish the ownership structure of that entity. Checks must then be run against that individual/entity and the purpose for the transaction and source of funds should be established.
• If a customer is acting as an agent or intermediary on behalf of another individual or entity the Participant must establish that the agent has authority to act.
• The name of individual clients and UBOs must be checked against lists of those subject to sanctions and those who are ‘politically exposed persons’ (i.e. those in a position which entails a greater risk of exposure to corruption and bribery).
• If the due diligence process raises any red flags, Participants must undertake ‘enhanced’ due diligence searches.
• If there are suspicions the MLRO must make a report to the National Crime Agency before the transaction proceeds, and must not inform the client.

Our advice

Given our top tier international art law expertise we understand the difficulties the art market will face in implementing these regulations in a way that is practical but which does not entirely disrupt their current business practices.  It is expected most clients will not be difficult in providing this information but training staff when to ask and how to ask may be crucial in ensuring a smooth transition. Please get in touch if you have any questions.  We would be happy to:

• Provide individuals and businesses, including sales staff and senior management, with appropriate training;
• Amend current terms of business to ensure compliance with 5AMLD and other relevant laws, including data protection;
• Draft anti-money laundering policies and standard forms for business use; and
• Guide businesses through the process of registration with HMRC.

A number of art market participants feel unhappy that the definition of ‘art’ does not include classic cars, musical instruments, jewellery etc.  However we would advise those involved in those fields not to rest on their laurels and consider undertaking similar checks as the trajectory for this legislation will likely one day swallow them too.