The art market into the fold of regulated sectors for anti-money laundering purposes due to the introduction of the Fifth Money Laundering Directive on the 10th of January 2020. As well as the inevitable impact on the art market, financial institutions will need to react to this change in the way that it views the risk posed by the sector when monitoring related customers and transactions. Art market participants are brought into the scope of the regulated sector where they are acting in the course of a business carried out in the United Kingdom, by the regulations. Art market participants will need to conduct customer due diligence like other industries within the regulated sector by identifying the customer and, where necessary, the source of the funds. The Guidance makes clear that the seller, the buyer and the agent will all be classified as the dealer’s customers for the Regulations, and hence will all need to be the subject of due diligence. Moreover, the dealer will need to verify that the agent is authorized to act on the buyer’s behalf.
Other practices of art market consumers may be significantly impacted by the Regulations’ due diligence requirements as the recent legislation also made substantive changes to the requirements under the Regulations. One such change obliges all regulated entities, including financial institutions, to take reasonable measures to understand the ownership and control structure of the customer entity. The Regulations allow for regulated persons to effectively outsource the due diligence obligations to an agent or service provider. This may allow the dealer to distance themselves from the process, but it does not avoid it. Ultimately, as the provisions stipulate, the dealer is still liable for any failure to apply the due diligence measures
For financial services firms, the introduction of the art market into the regulated sector, rightly or wrongly, sends a clear message as to how they should view the money laundering risk posed by the industry. That cannot be ignored. Time will tell how the art market reacts to being regulated from an AML perspective, and whether the potential erosion of confidentiality impacts the health of the sector. Statistics regarding the London art market over the next few years will be a rough, but helpful, metric to assess the impact of these changes.