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The Artful Dodger

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Oliver Twist: And you Dodger, you're my friend

The Artful Dodger: Huh! A friend's just an enemy in disguise. You can't trust nobody. 

According to the National Crime Agency (“NCA”), money laundering costs the UK more than £100 billion a year. https://nationalcrimeagency.gov.uk/news/national-economic-crime-centre-leads-push-to-identify-money-laundering-activity

It is reported that if market experts are correct in estimating that 6 percent of assets held in global wealth portfolios are allocated to “luxury investments”[1], this is estimated to be a total of US$1.74 trillion in art and collectable wealth held by ultra high net worth individuals in 2018.

High value goods act as both stores of wealth for corrupt individuals and luxury purchases to enjoy. Transparency International UK “At Your Service”[2] published a case study into “Suspicious Laundromat payments to high value dealers” revealing in its analysis that a total of 31 transactions in relation to art, auctions and antiques were involved in a money laundering case. Another case study involved the Malaysian state sovereign wealth fund 1MDB whereby the US Department of Justice alleged that the businessman, Jho Low used stolen funds to purchase art work from well known auction houses.

As such, it is no surprise that the Fifth Money Laundering Directive (“5MLD”) which came into effect on 10 January 2020, includes the art world.

The 5MLD expands the scope of obliged entities beyond the high value dealer category to include art market participants for a transaction (or series of linked transactions) exceeding EUR 10,000 including art galleries, auction houses and free ports. As a result, dealers and intermediaries will need to establish the identity of their client (including beneficial ownership if the client is a company); obtain documentation to support identification; assess the potential risk of money laundering through conducting a risk assessment; and establish appropriate policies, controls and procedures. The scope also extends the way a payment is made. All transactions exceeding EUR 10,000 are now covered regardless of whether they involve cash, bank transfer, cheque or other payment method.

As new entrants to the Anti-Money Laundering (“AML”) and compliance world, the art market participants can learn a lot from other industries and sectors that have been subjected to regulations over the years. With the benefit of hindsight, the art industry can theoretically implement measures and conduct the necessary checks with a lot less guesswork than their predecessors. Having the right foundation for processes and procedures to be implemented early on can prevent the last minute scramble, firefighting and crisis moments when the HMRC (the supervisor for AML purposes) makes a visit or undertakes a review. For example, the real estate sector was brought into scope but many businesses delayed compliance or those that attempted to comply did not do so to the level that the regulators were happy with. Last year, the HMRC targeted estate agents with unannounced inspections as part of their crack down on money laundering.

The Criminal Finances Act (“Act”) which came into effect in April 2017, introduced new measures to tackle asset recovery and money laundering in the UK. A key element of the Act is Unexplained Wealth Orders ("UWOs") – an investigative tool to help law enforcement act on corrupt assets.

Mrs Zamira Hajiyeva was the subject of the UK’s first UWO in February 2018. Mrs Hajiyeva, is the wife of Jahangir Hajiyev, the former chairman of the International Bank of Azerbaijan who was jailed for embezzlement and fraud.

The NCA sought the UWOs against Mrs Hajiyeva relating to properties worth £22 million. During her appeals case, the NCA presented evidence of the couple’s lavish lifestyle including spending £16 million at Harrods over a period of 10 years; and having bought a $42 million Gulfstream jet.

The UK Court of Appeals heard that the London property was probably brought through a British Virgin Islands company “to keep the identity and provenance of the monies hidden” and in a manner that had the “hallmarks of money laundering”.

In another case, Vlad Luca Filat, the son of the former prime minister of Moldova, was ordered to hand over almost £500,000 following a corruption investigation by the NCA.

An NCA investigation found that Mr Filat’s extravagant London lifestyle, which included a £1,000-per-day Chelsea penthouse and a £200,000 Bentley Bentayga, was funded by large deposits from overseas companies, including in the Cayman Islands and Turkey. Large cash sums were paid into three HSBC bank accounts, including £98,000 in one three-day period.

The 22-year-old business student at City University was seen in Facebook posts partying in St Tropez, sipping Dom Pérignon through a straw.

The cost of compliance is high. The cost of non-compliance is higher.  As criminal activity continues to threaten the financial landscape and regulatory changes from 2018 (and previous years) begin to take effect, research note that from 1 January to 31 August 2019, a total of US$8.07 billion of AML fines were imposed globally.

Regardless of how much time and money financial institutions already have spent on AML/KYC tools and processes, we believe firms must continue to invest in newer technologies and processes.  What we aim to do is use RegTech available out there combined with our legal knowledge of AML, to provide a service that is not only compliant but also, aimed to cut down the costs of AML compliance.

[1] Deloitte Art & Finance Report 2019

[2] (October 2019)

Annette Fong

Annette Fong Head of Compliance Solutions

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