The EU’s 5th Anti-Money Laundering Directive (“5th AMLD”) came into force on July 9th 2018 and Member States are expected to implement it in their national laws by January 10th 2020. Among other amendments, the 5th AMLD expands the scope of the anti-money laundering framework to explicitly impose obligations on art businesses. Surely, the 4th EU AML Directive did affect art businesses, albeit indirectly, omitting to specifically name the sector. Yet, 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 “persons trading in goods to the extent that payments are made or received in cash in an amount of EUR 10,000 or more .. ” (emphasis mine) is now expanded to explicitly include the trade in works of art by means of all payment methods.
What this means 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 when carrying out an occasional transaction that amounts to or above EUR 10,000, whether in cash or any other means.
Due Diligence (“DD”) Obligations
Newly targeted art businesses will now have customer DD obligations and will consequently be required to identify the customer and the customer’s identity, identify the beneficial owner, assess the purpose and intended nature of the business relationship and conduct ongoing monitoring of that relationship. Further, art businesses will be obliged to conduct enhanced DD in the following instances:
(a) where the background and purpose of the transaction is either particularly complex, unusually large, conducted in an unusual manner or seems to lack economic or lawful purpose. If one of these conditions is present, the business will need to increase the level and nature of monitoring of the business relationship in order to determine whether the transaction appears suspicious.
(b) where the transaction involves a high-risk third country like Iraq , Syria or Afghanistan. In such case, the art business will be required to perform enhanced due diligence 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 transaction relates to cultural artefacts and other items of archaeological, historical, cultural and religious importance. For the first time, cultural artefacts are included in the Directive’s list of higher-risk factors where enhanced DD is required. Clearly, this category does not include 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 say 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 in order to be able to establish whether such transaction is suspicious or not.
Crucially, where enhanced DD is conducted and 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.
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 to ensure that the measures they take are proportionate to their risks, nature and size and report suspicious transactions. In order 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, as that suspicious activity is identified from the proper implementation of the required AML policies and procedures. Art 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.
Clearly, these new legal obligations for art businesses as newly defined obliged entities do place a considerable burden – both administrative and financial - on the operations of small businesses. More importantly, however, they place 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 important that art businesses act proactively and take all the necessary steps to implement the obligations imposed by the 5th 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.