by Shane Lewis 16 August '19
New Anti-Money Laundering Obligations to be Imposed on EU Art Businesses
(“5th AMLD”) The EU’s 5th Anti-Money Laundering Directive came into force on July 9, 2018, and the Member States are expected to implement it by January 10, 2020.
(“5th AMLD”) The EU’s 5th Anti-Money Laundering Directive came into force on July 9, 2018, and the Member States are expected to implement it by January 10, 2020. Among other amendments, the 5th AMLD expands the scope of the anti-money laundering framework to impose obligations on art businesses explicitly. Undoubtedly, the 4th EU AML Directive did affect art businesses, albeit indirectly, omitting to name the sector explicitly. Key amendments introduced by 5th AMLD will be felt (possibly for the first time) by art businesses throughout the EU.
Art Businesses are Now Targeted
For the first time, obliged entities under the 5th AMLD include “persons trading or acting as intermediaries in the trade of works of art, including when this is carried out by art galleries and auction houses, where the value of the transaction or a series of linked transactions amounts to EUR 10,000 or more” and “persons storing, trading or acting as intermediaries in the trade of works of art when this is carried out by free ports, where the value of the transaction or a series of linked transactions amounts to EUR 10,000 or more.” Notably, the previous Directive’s definition of obliged entities as “person trading in goods to the extent that payments are made or received in cash of EUR 10,000 or more... ” (emphasis mine) is now expanded to explicitly include the trade in works of art employing all payment methods.
What this presumes in practice is that any individual or company involved in the sale of works of art valued at or above EUR 10,000 (whether trading directly or acting as intermediary) will need to conduct customer due diligence when establishing a business relationship or carrying out an occasional transaction that amounts to or above EUR 10,000, whether in cash or any other means.
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Due Diligence (“DD”) Obligations Newly targeted art businesses will now have customer DD obligations and consequently be required to identify the customer and customer’s identity, identify the beneficial owner, assess the intended nature and purpose of the business relationship and conduct ongoing monitoring of that relationship. Further, art businesses will be obliged to perform enhanced DD in the following instances:
(a) Where the background and purpose of the transaction are either particularly complex, unusually large, conducted strangely or seemed to lack economic or lawful purpose. If one of these facts is present, the business will need to increase the level and level of monitoring of the business relationship to determine whether the transaction appears suspicious.
(b) Where the transaction involves a high-risk third country like Iraq, Syria or Afghanistan. In such a case, the art business will be required to perform enhanced DD measures aiming to address the risk posed by deficiencies in those countries’ AML protections. Specifically, they will need, among other things, to obtain information on customers and the ultimate beneficial owner (UBO) – including the reasons for the proposed transaction and details on the source of UBO funding and wealth; report transaction details to senior management and obtain approval for establishing or continuing the business relationship; increase controls on business relationships, and select transactions which may need further scrutiny.
(c) Where the deal relates to cultural artefacts and other items of archaeological, by Phoebe Kouvelas, LL.M. historical, cultural and religious importance. For the first time, cultural artefacts are included in the Directive’s list of higher-risk factors. This category does not cover contemporary artworks, and thus art businesses trading in the primary art market will not be affected (unless, of course, they sell works of art valued at or above EUR 10,000, in which case they will have the obligations discussed above). However, it may be safe to state that those dealing in items which fall under any country’s protective cultural patrimony laws will fall under the Directive’s enhanced DD obligations. In these cases, the obliged entity will need to discern the background and purpose of such transaction by increasing the monitoring of the business relationship to be able to establish whether such an operation is suspicious or not.
Crucially, where the transaction – whether concluded or attempted - appears suspicious, the obliged entity must report it to the competent authorities, regardless of the amount involved and must promptly respond to requests by the competent authorities for additional information.
By appointment only
Next Steps for Art Businesses
Starting from January 2020, art businesses will need to comply with the AML obligations discussed above. In practice, they will need to be able to conduct customer due diligence, maintain records, identify suspicious situations, conduct risk-assessment and report suspicious transactions. To do so, they will need to put in place and adhere to specially-designed AML policies and procedures.
Further, art businesses will be required to appoint an officer with sufficient knowledge of the businesses’ money laundering and terrorist financing risk exposure to whom all employees will report any suspicious activity. Art businesses will also be required to provide special ongoing training to employees to help them identify and recognize operations which may be related to money laundering and instruct them as to how to proceed in such cases.
These new legal obligations for art businesses do place a considerable burden – both administrative and financial - on their operations. More importantly, however, they put the directors and employees of art businesses at risk of committing a money laundering offence if they fail to meet those obligations. It is thus imperative that art businesses proactively act and take all the necessary steps to implement the requirements imposed under 5th AMLD to be able to demonstrate compliance and minimize the risk of being found guilty of a criminal offence.