Art Market Mobilizes To Meet AML Risks

Jackie Bennion Deputy Editor March 15, 2021

Art Market Mobilizes To Meet AML Risks

A new program endorsed by multiple stakeholders will offer free training for galleries and artists about to meet tougher EU anti-money laundering obligations. It comes as the global art market has been stunned by a record-breaking crypto sale.

(An article that appeared on WealthBriefing, sister news service to this one, examined how anti-money laundering laws in Europe affect the fine arts and wider auctions market. In a cross-border world, rules in one jurisdiction can affect others'. So art gallery owners and auctioneers in New York, LA or other North American cities need to sit up and take note. And what's law in one place can often spread as people examine best-practice ideas. The editors are keen to hear views from FWR readers who operate in this space.) 

The last 12 months have been difficult and transformational for the art world; it was arguably capped last week when a digital collage sold for $69 million. The work by US artist Beeple was made possible by a growing market fixture known as non-fungible tokens (NFTs). These non-replicable tokens are published on the blockchain and give works of art that all-important digital ownership or provenance stamp.

The sale was the first by Christie’s to accept payment in a digital currency. The reported buyer was a Singapore-based financier behind a crypto-based fund called Metapurse. Known only as Metakovan, he has already puchased a number of works by Beeple for around $2.2 million. After “fractionalizing” them to open up crypto ownership, the works now have a market value of around $230 million, according to Coinmarketcap, which tracks digital assets.

All this suggests that the art market is opening up in directions that may worry traditionalists, but it shows the potential for expanding the asset class and drawing in young artists and collectors comfortable with the medium and its rising digital talent.

A more immediate concern for the industry, however, is meeting tough new anti-money laundering disclosures. Although the 5th Anti-Money Laundering Directive (AMLD5) came into law over a year ago, COVID disruptions have set a new deadline of June 10 for registering with HMRC as an art market participant and grappling with all the risks associated with buying and selling high-value art under the new regime. The new compliance demands much stronger monitoring and transparent record-keeping for any artwork sold for €10,000 ($11,928) or more.

A consortium of UK arts organizations has launched a free nationwide training program to help galleries and artists comply with the new rules.Those behind it say that breaching them will bring heavy financial penalties.

“The arts will be under greater scrutiny as a sector after the June deadline and HMRC will be looking to make examples of those not following the new rules," Nicola Finnerty, partner at Kingsley Napley said.

It is also likely to hit those who can least afford it.

“The vast majority of those affected are sole traders or micro-enterprises that simply do not have the resources or staff to invest in meeting these regulatory requirements,” Creative United chief executive Mary-Alice Stack, said, another of the program's backers.

Until now, the art market has been largely unregulated, built on high levels of trust and client confidentiality. But AML5 has put galleries, auction houses, dealers and individual artists on notice to look carefully at whether money laundering or terrorist financing could arise from their business practices.

Hetty Gleave, who advises on disputes over art attribution, provenance and titles at Fladgate LLP, said lots more documentation to cut down on the potential for money laundering is anything but straightforward.

“In essence what the regulation has done is brought the world of the art market into the same sphere as solicitors, estate agents and everyone else who handles money," which means producing ownership details and proof of identification for those selling works.

"The difficulty for the art world is that unlike selling a house, where only the seller can sell the property, art is often sold by a concealed agent. You think you are buying from this seller but you are not, you are buying from a third-party agent," she said.

"Often the person selling doesn’t know who it belongs to and that is the big problem" in a sector that has worked for years on confidentiality and trust, she said.

Chris Bentley, who works on the insurance side of the market as regional UK lead for fine art at Axa XL, agrees that the new regime has changed the way sales are conducted.

“Yes, there are some people who choose to operate with a degree of secrecy when they purchase their artworks, mainly because they don’t want their families or their premises to be targeted for their wealth, whether through theft or associated crimes.”

“However, in my experience the vast majority of the art market is transparent about what they do. And the introduction of this regulation is a positive step, because it mandates processes and record-keeping that will unequivocally demonstrate that.”

Around $1.7 trillion of art sits in private hands, with a fair proportion never coming out of secret storage locations. Owning and managing it is a complex business often relying on a host of experts that may have their individual agendas. Due to a lack of regulation, the market is also highly manipulated. It is estimated that around 40 per cent of art in circulation is forged or misattributed, and this is a conservative estimate.

Whether the additional rules will have the desired effect, Gleave from Fladgate is less certain. "People who want to launder money, launder money. I don’t mean that in a flippant way. People who buy and sell art do need to be more vigilant,” and "due diligence is critical, always has been" she said. But some of the new requirements could be a step too far.

"For smaller galleries that may have dealt with the same clients for years, suddenly asking them for their bank statements and where they got the money to buy the art, you can see relationships faltering," Gleave said. "Then again, if there is supply and demand, people are going to have to get over it,” she said.

Her previous firm Hunters Law set up a mediation committee to resolve disputes because "the last thing collectors want is litigation," Gleave said. (She spoke to this service before she left to join Fladgate earlier this year.) “As soon as you litigate over a piece of art, it is burnt,” and that is bad for everyone, she said.

Some in the sector believe that the extra layers of compliance and transparency provided by the new AML measures will help modernize the market and make it more attractive as an asset class to institutional investors. The use of blockchain, as the Christie's sale demonstrated, is no longer on the margins of reforming practices.

“Prior to the start of the pandemic, very little of the art market was conducted online or centralized," Axa XL's Bentley said.

“Whereas people had tended to rely only on email, today they increasingly have online sales portals. Yet when you buy an artwork, you’re still buying a physical item that tends to be shipped to you, along with the supporting information for provenance and valuation, which more often than not are physical documents or scans of those documents,” coming from different sources, he said.

“Given how the pandemic has accelerated the modernization of the art market, we’re seeing increasing numbers of businesses starting up ancillary to the art market, which can help businesses fulfil their obligations under this new legislation."

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