Phoebe Kouvelas, LL.M., is founder of ArtSecure, a boutique law firm offering specialized advice on Art, Intellectual Property & Cultural Property matters. She regularly litigates and advises on a wide range of commercial and regulatory issues.
January 10, 2020 is a crucial date for the art world. And here’s why: it marks the deadline of national implementation of the EU’s fifth Anti-Money Laundering Directive (“5th AMLD”), which is fast approaching.
Briefly, the fifth AMLD is the first AMLD that expressly targets the art sector by imposing due diligence obligations on those who store, trade or act as intermediaries in the sale of fine art valued €10,000 or more. Under these obligations, art businesses will now have customer due diligence obligations and will consequently be required to identify the customer, the customer’s identity and identify the beneficial owner. Further, the trader must assess the purpose and intended nature of the business relationship and conduct ongoing monitoring of that relationship.
Additionally, there are three instances in which the trader will be required to conduct enhanced due diligence and collect even more in-depth information:
(a) Where the transaction is particularly complex, unusually large, conducted in an unusual manner or seems to lack economic or lawful purpose.
(b) The transaction relates to a cultural artefact.
(c) Where a high-risk third country is involved.
Crucially, the Directive imposes reporting obligations on traders; specifically, where the trader knows or suspects that the funds are the proceeds of criminal activity, they will have to file a report to the Financial Intelligence Unit (FIU) concerned.
Art Businesses in 2020: Necessary preparations
In practice, starting from January 2020, art businesses will need to have in place an efficient AML framework. The following actions will be necessary:
Adopt a risk-based approach
The first step will be to adopt a risk-based approach so as to determine and assess (on a regular basis) which risk factors apply to the business. This risk assessment will then be used as a reference against which each business relationship will be rated. In assessing the risk factors, the type of customer (e.g. individual, company or trust), the distribution channels (e.g. entirely online or face-to-face) and the countries involved (high-risk country or an EU member state) are all relevant, yet non-exhaustive.
Know-your-customer and ongoing monitoring
Further, art businesses will need to be satisfied that they know the identity of the customer and the beneficial owner by carrying out “Know-Your-Customer” due diligence checks, as soon as the business relationship commences. Having done that, art professionals will then need to monitor the business relationship and identify any changes in the customer’s circumstances which may affect their risk profile. For example, professionals will need to be able to demonstrate that they use systems for the immediate identification of politically exposed persons (PEPs) or criminal sanctions imposed on a customer.
Appoint an officer and train the staff
To be able to implement the above actions, art businesses will have to appoint a compliance officer at management level with sufficient knowledge of the business’s exposure to money laundering and terrorist financing risks. All employees will report any suspicious activity to that officer. Additionally, businesses will also be required to provide special ongoing training to employees, to help them recognize operations which may be related to money laundering and to instruct them as to how to proceed in such cases.
Report to and cooperate with the authorities
Where a transaction – whether concluded or attempted – appears suspicious, art professionals must report it to the competent authorities, regardless of their involvement and must promptly respond to requests by the competent authorities for additional information.
The beginning of the new year and the new decade will no doubt bring important changes in the way the art world conducts business. It is, then, thus important that art businesses act proactively and take all the necessary steps to implement the obligations imposed by the fifth AMLD as soon as possible in order to be able to demonstrate compliance and minimize the risk of being found guilty of a criminal offence.