Over recent years, the art market has drawn increasing interest from organised crime and terrorist groups seeking to identify ways to launder the proceeds of crime and fund their illicit activities.
It has been an attractive proposition given the portability of art and risks of dissipation; prevalence of informal records and handshake transactions; subjectivity in appraisal values; and privacy afforded by complicated ownership structures and increasing number of freeports.
The UK’s Approach
In efforts to mitigate these risks, the UK has seen greater regulation of the art market with the Money Laundering, Terrorist Financing (Amendment) Regulations 2019 which came into force in January 2020. The effect was that the EU’s Fifth Money Laundering Directive was implemented in English law to make art market participants (‘AMPs‘) regulated for anti-money laundering purposes.
Following on the heels of this legislation, the National Crime Agency (NCA) has issued an amber alert, to ‘highlight the sanctions evasion and money laundering risks presented to UK industries linked to the art storage sector, and to serve as a reminder on due diligence checks and reporting obligations.’
Alongside criminal offences related to sanctions and money laundering, the alert also highlights cultural property trafficking against a backdrop of reportedly tens of thousands of artefacts having been looted from Ukraine since its invasion in 2022.[1]
Who needs to be aware?
The alert highlights the wide range of stakeholders affected, being ‘UK artwork storage facilities, the UK specialist service providers that are linked to the art storage sector and the clients that utilise these art storage facilities’.
This encompasses:
- galleries, museums, warehouses, auction houses, art dealerships, and freeports;
- shipping and transport companies, insurance companies and agents, brokers, lawyers, accountants and banking providers; and
- their clients and individuals as collectors, buyers and sellers of artworks.
NCA guidance and its potential impact on art sales and litigation
The NCA states that certain elements of due diligence should be undertaken each day. Storage facilities should be checking international sanctions lists daily against clients and their assets and lost and stolen art registers and other due diligence systems for works under their control. Facilities such as warehouses and smaller galleries will need to consider resourcing and training on these matters, while art databases need to be prepared for returning searches for a greater volume of enquiries.
Storage facilities are to give transactions greater scrutiny. Consideration is to be given whether the buyer is a close contact of the seller; attempts to sell quickly or cross-jurisdictional deals; whether artwork provenance has been verified by a trusted source; and any attempts to sell at artificially low or inflated prices.
The time needed for these checks should be factored into timelines of sales, considering resourcing of those third parties. Delays may be expected for investors looking to sell depreciating artworks quickly and consideration on timing should also be given as to the sophistication of third parties such as shipping organisations potentially less able to opine on artwork pricing or provenance.
Storage facilities are to be examining any regular payments from unclear sources, or if their clients’ businesses have unusual financial activity. Clients should be prepared for transparency as to the identity of selling and buying parties, and lawyers may need to consider producing externally-facing due diligence to third parties.
High net worth individuals used to working with offshore accounts will need to be prepared to answer questions as to the ultimate beneficial owners and, if a business structure is complex, be able to provide clear commercial reasons for that. Clients will also need to ensure their company’s website looks professional and up to date to avoid unnecessary holdups.
While delays may be inevitable, greater due diligence and transparency will assist in certainty for buyers. Court proceedings would also benefit; clearer internal records of storage facilities would aid provenance in the event of third-party disclosure orders, and careful records of artworks held may also be beneficial to storage facilities in any dispute over loss or damage under bailment.
What should clients expect?
High net worth individuals buying and selling art should be prepared for thorough due diligence at regular intervals, which is being checked for changes in their circumstances at various stages. This may lead to an increase in fees, causing investments in art to become more expensive and time consuming.
Storage facilities must be alert and up to date with their protocols. The NCA notes that failure to undertake regular and appropriate due diligence is considered to be a red flag for complicity and may indicate an attempt to circumvent regulations. The responsibility is on the organisation and/or individual to ensure that they have put in place sufficient measures so that they do not breach financial sanctions.
Ultimately the alert highlights a variety of stakeholders in the industry, and the onus is on those institutions to be prepared. If you would like help in navigating these regulatory frameworks, please get in touch.
For further information, please contact:
Natalie Sherborn, Partner, Withersworldwide
natalie.sherborn@withersworldwide.com
References
[1]https://www.nytimes.com/2023/01/14/world/asia/ukraine-art-russia-steal.html
