How New Anti–Money Laundering Laws Will Affect Art Collectors

Julian Stallabrass, an academic at the Courtauld Institute of Art, wrote in the London Review of Books in 2013 that “the more art is useful for investment, tax scams, money-laundering, and entry to the elite,” the more it “parades its principled uselessness” at art fairs. Stallabrass’s polemic stance toward the art market reflects real instances of wrongdoing and the attitudes of some who view art as a movable commodity with subjective value.

“Connoisseurs and collectors may not view rare artwork as commodities,” a 2018 Deloitte report stated. “But frequently, that’s how cultural objects are perceived in the marketplace [and] illegitimate investors and businesses see additional value in these objects: the means to mask, move, and leverage ill-gotten proceeds.”

A number of high-profile cases have involved both the vendors and buyers of art reportedly using the art market to sidestep sanctions, obscure the origins of dirty money, and avoid provenance checks.

For instance, in July 2020, the United States Permanent Subcommittee on Investigations published a report arguing that the art market’s lack of transparency allowed Russian oligarchs linked to President Vladimir Putin to purchase $18 million of art through a shell company, avoiding U.S. sanctions on financially corrupt elements in Russia.

In September 2020, the global financial community was rocked by the FinCEN files leak, which detailed more than 2,500 documents sent to FinCEN (Financial Crimes Enforcement Network) reporting about $2 trillion worth of suspicious transactions moving through major global banks. These leaks later connected buyers of antiques at major auction houses with Pantheon Worldwide Limited, a shell company registered in Hong Kong and London that had unclear dealings with alleged antiques and art traffickers. Due to the globalized nature of the financial system, Pantheon’s operations in America involved European and British actors like Standard Chartered, a bank that ultimately issued a suspicious activity report to FinCEN.

Partly in reaction to these revelations, governments in the U.S. and the European Union have been reporting on, consulting about, and legislating new anti–money laundering legislation (AML) to reflect the complexity of a modern, globalized financial system that is increasingly intertwined with technology.

On January 1, 2021, the U.S. House and Senate voted through a bill to extend the rules of the 1970 Bank Secrecy Act to cover the art market, specifically antiques and art dealers. The bill aims to improve anti–money laundering efforts by making it harder for purchasers to obscure their identity through offshore entities and shell companies by requiring collectors to identify an “ultimate beneficial owner.”

The U.S. government’s bill comes hot on the heels of a large slate of EU legislation drafted in 2018 and implemented across 2020. European AML efforts go back before the creation of the union under the Maastricht Treaty (1992) to 1991, when AMLD1 (Anti-Money Laundering Directive 1) introduced preventive actions like customer due diligence, user identification, and transaction reporting.

The latest EU directives, which affect collectors residing in or buying from EU and U.K. jurisdictions, are AMLD5 and AMLD6, published in May and October 2018, respectively. These two documents are being implemented across the EU, but national governments will set the timeline for when the laws come into effect. “The EU directive is generic enough to leave room for local interpretation and the provision of more concrete guidance by national regulators,” said Astrid Brandy and Maxime Heckel from Deloitte Luxembourg.

Despite nations’ ability to interpret the law, both AMLD5 and AMLD6 will set out clear areas of new regulation. For instance, AMLD5 addresses virtual currencies, high-risk third-party countries, identification of beneficial ownership, and the harmonization of national ownership registers across borders.

AMLD6 adds to the work of AMLD5 by widening the scope of criminal intentionality, potentially making art buyers liable for money laundering charges. The directive states that “the acquisition, possession, or use of property, knowing at the time of receipt, that such property was derived from criminal activity” will be punishable as a criminal offense.

Because a Brexit withdrawal agreement was reached in January 2020, AMLD5 was transposed into U.K. law and became effective that month. Art market participants in the U.K. are now working toward registering their AML compliance with Her Majesty’s Revenue and Customs (HMRC) before a June 10, 2021, deadline. This will help the U.K. build on its previous Proceeds of Crime Act (2002), which initially set out measures for recovering proceeds from illegal activity.

Many experts think that a post-Brexit U.K. will continue to collaborate with the EU on AML. “Given that both the EU and the U.K. have a vested interest in curtailing, or [being] seen to be curtailing, money laundering and terrorist financing, cooperation between the U.K. and the EU in relation to the enforcement of anti–money laundering regulations will likely continue,” said Azmina Jasani, a partner at Constantine Cannon’s Art and Cultural Property Law Group.

Jerry Waters, the managing director at FCS Compliance, added this caveat: “The U.K. has some of the most stringent AML legislation in the world, but is still known as ‘the money laundering capital of the world’ [because] the legislation is not being enforced stringently enough.”

Consequently, any art collectors wanting to buy, trade, and operate in the U.K. and EU—a combined market worth upwards of $18 trillion in GDP—will need to understand how to comply with the new regime and what galleries, auction houses, and other vendors will expect of them. Importantly, dealers and collectors in the Americas, Asia, and other regions will also need to comply with the new regime when working with clients in the U.K. and EU.

There is now a larger expectation that collectors will make sure they are legally and ethically acquiring art. Most collectors are either individual customers or qualify as “art market participants” (AMPs), legally defined as a dealer who is buying on behalf of their business or a client, and has handled one or multiple linked transactions worth upwards of €10,000 (about $11,900).

Consequently, if a collector intends to sell artwork from their collection at a value of €10,000 or more, they will come under substantial new regulations. Those who stay on the buyer side of art market transactions will still need to take extra steps, but will not legally need to undertake due diligence. There have also been reports of loopholes available to dealers who don’t want to comply with AML, but using them comes with significant risks.

“While it is good practice for buyers to conduct due diligence on the artwork and its seller before buying, in their capacity as customers, buyers are not required to carry out anti–money laundering checks on their sellers,” Jasani said. “Where an AMP buyer buys to resell, the buyer must conduct anti–money laundering checks on the end buyer.” So if a Paris-based dealer is buying a €50,000 painting at auction on behalf of an Italian collector, she will need to do an AML due diligence check on the collector before finalizing the sale.

The extra steps required of the non-AMP collector include providing personal identification documents and proof of address, and identifying beneficial owners of companies, trusts, special purpose vehicles, and organizations to the AMP if they are buying through such a structure. While complying, collectors should as ever be mindful of not transferring such information electronically without encryption—compliance needn’t become an exposure to fraud or identity theft. Additionally, the EU’s 2018 General Data Protection Regulation (GDPR) ensures a minimum level of privacy protection for AMPs involved in Europe and the U.K.

Alongside this, the AMP is required to do a minimum level of due diligence research on collectors buying from them to make sure they do not generate any red flags. Consequently, collectors should expect to be asked more questions by their dealers, advisors, and auction house contacts.

According to Tamara Bell, a specialist in art law and luxury assets at Charles Russell Speechlys, red flags include: “hot jurisdictions being involved in the transaction (e.g., funds coming from Syria or Zimbabwe); the buyer being a ‘politically exposed person’ (e.g., a politician or board member on a state-owned oil company), and therefore more likely to be involved in corruption; or the buyer (or seller) having previously been involved in AML investigations.”

Susan J Mumford, the founder of ArtAML, an art market compliance platform, said collectors should embrace the new legal regime and its benefits. “The reality is that the AML regime is not going to go away, and from what I hear, the U.K. is likely to stay in harmony with the EU as the scope changes in time,” she said. “My recommendation to individuals and institutions is to take a leaf out of my book: Accept that AML is increasingly a reality of participating in the modern art market.” She added: “This mindset will position you ahead of the game.”