Annette Fong Head of Compliance Solutions
Beneficial owners where art thou?
“Romeo, Romeo, wherefore art thou Romeo?" As uttered by Juliet on her balcony looking out to the garden, and Romeo waits in the shadows.
Hiding in the shadows and anonymity is a money launderer’s best friend. The potential role of the art market in money laundering has attracted increasing attention over recent years. Therefore, it is important to understand beneficial owners as the lack of beneficial ownership information feeds anonymity.
The art market is often described as the last unregulated market and in 2018, the global art market was valued at $67.4 billion. As such, there is no surprise that art market participants are captured by the Fifth Money Laundering Directive (“5MLD”). With such change in the air, art market participants now need to ask “Beneficial owners, where art thou?”
Definition of a beneficial owner
A beneficial owner is the natural person who ultimately controls or owns the customer and/or the natural person on whose behalf the transaction is being conducted. Ownership is defined as 25% or more of a company’s shares or voting rights or who otherwise exercises control over the company or its management. Beneficial ownership identification and verification are critical requirements for combating everything from financial crime, tax evasion and corruption, fraud and money laundering, to trafficking and terrorist funding.
Importance of identification
With countries worldwide trying to combat money laundering and terrorist financing for years, who are these persons? The secretive nature of art ownership makes the identification of beneficial owners especially challenging. As the regulations catch up with the many ways criminals will try to launder their money, more sectors are brought under scope whereby art market participants now need to identify and verify beneficial ownership.
The Panama Papers exposed how collectors and companies have been secretly selling and acquiring famous pieces from artists such as Picasso and Amedeo Modigliani. One of the most high profile crackdowns involved the founder and former president of Banco Santos. He was convicted of money laundering and other offences. He used his proceeds of crime to fund artworks such as Jean-Michel Basquiat, Francis Picabia and other. He managed to illegally smuggle these out of Brazil by shipping them to destinations all over the world under false documentation, undervalued declarations and titles. Once these pieces made it to destinations like London and was then sold on to collectors unwittingly. This is what happened to Roy Lichtenstein’s “Modern Painting with Yellow Interweave”. Once this painting resurfaced at the auction house in 2008, it was seized by the American authorities and returned it to the Brazilian government. This illustrates the importance of conducting due diligence on not only on the art work itself, but also the party who is selling it. As reported, sometimes the provenance of the funds can be more critical than the provenance of the art.
An article published in the Globe and Mail “The link between art and money laundering” reported that:
“Once purchased, the art can disappear from view for years, even decades. A lot of the art bought at auctions goes to freeports – ultra-secure warehouses for the collections of millionaires and billionaires, ranging from Picassos and gold to vintage Ferraris and fine wine. The freeports, which exist in Switzerland, Luxembourg and Singapore, offer a variety of tax advantages because the goods stored in them are technically in transit. The Economist magazine reported that the freeport near the Geneva airport alone is thought to hold $100 billion (U.S.) of art.
Once inside the freeport, the art can be sold privately and anonymously to other buyers. The art need never leave the warehouse after the private sale is completed.”
Secrecy and anonymity in art has been long been used to limit legal exposure and avoid publicity. The new legal requirements will mean art market participants will now have to find out who the beneficial owner is and have this evidenced in their records before they are able to complete a transaction. This is one of the many challenging things the new sector will suddenly find themselves having to comply with regulations.
Who the Regulation impacts
The Money Laundering and Terrorist Financing (Amendment) Regulations 2019 considers those who fall within scope to include firms and sole practitioners:
- Who trades in or acts as intermediary in the sale or purchases of art work;
- Operates where the value of the transactions amounts to €10,000 or more;
- Operates where the value of a series of linked transactions amount to €10,000 or more; or
- Operates a free port (secure storage facilities where valuable commodities can be kept)
Compliance with money laundering regulations will include:
- Implementing policies and procedures;
- Conducting a business risk assessment of the money laundering risks faced by the business;
- Conducting appropriate due diligence on your client which may include more onerous searches than simply obtaining their identification documents;
- Conducting a risk assessment on the individual client to determine how much customer due diligence is required;
- Training your business; and
- Where necessary, forgoing a transaction because the regulations would not allow you to proceed.
Specifically in relation to beneficial ownership, an art dealer’s risk assessment should consider:
- Countries where sales are conducted;
- Jurisdictions where the art dealer obtains its inventory;
- Delivery channels;
- Services offered to clients;
- Types of transactions;
- Client profiles;
- The location of contracting parties;
- The source of funds;
- The source of wealth;
- Financing methods; and
- The value of the art objects.
Although it can be a sensitive subject for art dealers suddenly having to ask those they have had long business relationships questions like their source of wealth, it is there duty now to know who is waiting in the shadows.
We offer an end to end service to help businesses with AML compliance from HMRC registration to policy drafting, procedure implementation, and business risk assessments. In conjunction with our services, we also offer technology solution to assist with process efficiency and cost effectiveness. Please contact Annette Fong or Julie Dao for more information.