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Article:

HMRC and BAMF publish updated AML guidance for the art sector

29 July 2022

 

The 5th EU Anti-Money Laundering Directive (“5AMLD”) extended the European Anti-Money Laundering (“AML”) regulatory remit to art market participants (“AMPs”). This was implemented in the UK through amendments to the 2017 Money Laundering Regulations (“MLRs”) which came into force on 10 January 2020. As of this date, AMPs became supervised by Her Majesty’s Revenue and Customs (“HMRC”) which, in conjunction with the British Art Market Foundation (“BAMF”) published AMP sectoral guidance for money laundering supervision in February 2020. This guidance was subject to minor tweaks in February and April 2020.

The following year, in June 2021, following the UK’s departure from the EU, our national AML framework was updated, and HM Treasury confirmed that artists themselves (defined as “persons who create original art”) are not scope for the Regulations. HMRC published supplementary guidance to clarify scope and provide the sector with support in understanding risk indicators which their business might encounter. Importantly, while the definition of AMP became narrower, it still leaves many firms who are involved in sales, purchases and/or storage of works of art which are obliged under the UK MLRs. The AMPs which fall in scope of the regulations are diverse and varied, from internationally renowned auction houses to local high street art shops. 

Finally, fast forward to summer 2022 and, following responses to the UK Government’s MLRs consultation, it was decided that the definition of AMPs was to be further refined to exclude artists who sell their own works of art for a price over EUR 10,000. This was swiftly followed by the publication of updated HMRC and BAMF AML guidance for UK AMPs.

What are the key changes?

Multiple paragraphs of the guidance have been subject to updates, and BDO therefore encourage all AMPs to carefully digest the new guidance, understand the implications to their business and cross-reference to their AML control environments.

In BDO’s view, the four most pertinent updates are as follows:

  1. The guidance highlights the MLR requirement for AMPs to maintain a written AML Risk Assessment and to support this with written policies and procedures. Pro-forma, copied or generic risk assessments are not considered to be best practice and all risk assessments should be tailored to the unique circumstances of the business concerned.
     
  2. With respect to CDD, the guidance encourages all AMPs to be treated equally. Six increasingly complex deal chain scenario have been set out to assist AMPs in determining who their “customer” is for CDD purposes and how CDD should be applied to those individuals or entities (see table 1). The updated guidance further includes: direction on obtaining source of funds / source of wealth where appropriate; identifying ultimate beneficial owners; steps to be taken to understand the composition of complex legal structures (such as trusts) within ownership and control structures; and approach towards verifying the authority of individuals purporting to act on behalf of others.
     
  3. Clarifications have been made with respect to specific art market terminology and process. For example, the definitions of both intermediaries and introducers with respect to art market deal chains has been clarified, as well as the provisions with respect to art rental agreements. In addition, “conceptual works of art” have been removed from the definition of “Work of Art”. Also, as above, artists selling their own work are now considered to be out of scope of the MLRs. This extends to artists, and/or their employees, who sell their own work through their own business (i.e. selling their own work exclusively) as well as sales from an artist’s estate.
     
  4. Expectations with respect to the use of electronic verification by AMPs has been more clearly defined within the guidance, including:
  • The requirement for AMPs to understand the evidence/documents/information used by external service providers to verify the client’s identity;
  • The expectation to challenge verification information received from an outsourcing provider where it initially seems concerning to demonstrate ownership of risk; and
  • Guidance on how to use PRADO (Public Register of Authentic identity and Travel Documents Online) to identify non-UK customers.

 

Table 1 - CDD Guidance for Art Market Participants as included in updated HMRC and BAMF guidance

# Situation CDD Requirements Notes
1 An AMP is selling
art to their customer, a buyer.
The AMP needs to
conduct CDD on the
buyer.
The buyer is the AMP’s customer, when the buyer is paying the AMP to buy the art or paying for the AMP’s services.
2 An AMP is facilitating the sale of art between its customers: a seller and a buyer. The AMP needs to conduct CDD on both the seller and the buyer. The seller and the buyer are the AMP’s customers, when the seller is paying the AMP to sell the art or for the AMP’s services and when the buyer is paying the AMP for the art or for the AMP’s services.
3 An AMP is facilitating the sale of art between its customers: a seller and a buyer. The customers are beneficially owned by another person. The AMP needs to conduct CDD on both the seller and the buyer. The AMP needs to identify and verify the beneficial owners. The seller and the buyer are the AMP’s customers, when the seller is paying the AMP to sell the art or for the AMP’s services and when the buyer is paying the AMP for the art or for the AMP’s services. Requirements for beneficial owners are at Reg 28 (4).
4 An AMP is facilitating the sale of art between its customers: a seller and a buyer.

The seller is using the services of an agent or advisor to provide advice on where best to sell the art.

The agent or advisor is not involved with the actual sale.

The buyer is also using the services of an agent or advisor to provide advice on the maximum amount to pay for the art.
 
The agent or advisor is not involved with the actual purchase.
The AMP needs to conduct CDD on both the seller and the buyer. The seller and the buyer are the AMP’s customers, when the seller is paying the AMP to sell the art or for the AMP’s services and when the buyer is paying the AMP for the art or for the AMP’s services.

The agents or advisors are not sufficiently involved in the purchase or sale to be facilitating the sale or purchase.
5 An AMP is facilitating the sale of art between its customers: a seller and a buyer.

The seller or buyer is using a person (‘A’) to act on their behalf.

A is actively involved with the sale or purchase of the art.
The AMP needs to conduct CDD on both the seller and the buyer. The AMP needs to verify that A is authorised to act on behalf of the seller or buyer and to identify and verify A. The seller and the buyer are the AMP’s customers, when the seller is paying the AMP to sell the art or for the AMP’s services and when the buyer is paying the AMP for the art or for the AMP’s services.

The AMP must also identify and verify the person purporting to act on behalf of the seller or buyer, in line with Reg 28 (10).
6 Three AMPs are facilitating the sale of art in a transaction between a seller and a buyer.

They are paid for the art or services by their customers in the chain.

AMP 1 is paid for their services by the seller, and for the art by AMP 2.

AMP 2 then sells the art to AMP 3, on behalf of AMP 1.

AMP 2 is paid for their services by AMP 1 and AMP 3.

AMP 3 is paid for the art and their services by the buyer.
AMP 1 needs to conduct CDD on the seller and AMP 2.

AMP 2 needs to conduct CDD on AMP 1 and AMP 3.

AMP 3 needs to conduct CDD on the buyer.
Each AMP must conduct CDD on their customers.

Their customers are whoever is paying the AMP for the art or services in respect of the transaction.

In this example:

AMP 1’s customer is the seller and AMP 2.

AMP 2’s customers are AMP 1 and AMP 3.

AMP 3’s customer is the  buyer.

 

How could this affect my AMP business?

  1. AMPs are encouraged to undertake a gap analysis of the updated guidance against their existing policies, procedures and controls to understand where enhancement opportunities are present. This should be used to develop a structured action plan to remediate any gaps identified.
     
  2. AMPs must ensure that both their AML Risk Assessment and policies and procedures are documented and readily available to HMRC should they be requested. The AML Risk Assessment is the key to successful AML compliance, and if it is inaccurate or incomplete, any mitigating systems and controls are also at risk of being insufficient, exposing an AMP to additional and potentially unknown/unquantified money laundering risk. The AML Risk Assessment methodology/approach should be commensurate to the size and nature of the AMP in question and, crucially, tailored to the unique business model of said AMP.
     
  3. AMPs should consider the 6 new CDD scenarios set out within the guidance and expand on these to build practical, scenario-based instructions into procedures. This may also require enhancements to be made to training arrangements to embed the understanding of who is considered to be the “customer” in different deal chains.
     
  4. AMPs should revisit the definitions and terminology set out within their policies and procedures, as well as training, to ensure that these align with those included in the updated guidance
     
  5. AMPs should implement robust and detailed outsourcing procedures. While HMRC acknowledge that identity verification using external providers is commonplace within the art sector, it reminds firms that it is only possible to outsource the process but not the risk.

How can we help?

Our Economic Crime Advisory team work closely with AML-regulated firms across a wide range of sectors including financial services; gambling and gaming; legal and professional services; and cryptoassets as well as the art market. We have a deep understanding of their businesses and the specific environments in which they operate, enabling us to act as a strategic partner, providing clear advice which is both balanced and constructive.

We have experience in reviewing and helping firms across the end-to-end deal chain to enhance their economic crime frameworks, including undertaking gap analyses of regulations and guidance to internal policies and procedures; developing or appraising AML Risk Assessment methodologies; advising on due diligence measures and translating these into actionable procedures and manuals; and developing and delivering targeted training to support the embedding of uplifted AML controls.

Therefore, please do not hesitate to contact a member of our Economic Crime Advisory team if you have any questions regarding how your AML framework can be optimised to align with HMRC’s regulatory requirements and expectations.