Forthcoming anti-money laundering regulations are set to regulate one of the few remaining unregulated markets: the Art World. Where some see transparency, others see an intrusion as such regulations are perceived as bringing friction to an otherwise personal and delicate sales process traditionally built on personal relationships, discretion and trust.
In this article, we’re going to give you the essential information, while also exploring what these regulations mean for your business as well identifying what you can do to jump over these hurdles.
You may use the links below to jump to the various areas of the article:
i. What the 5th Anti-Money Laundering Directive (5AMLD) aims to address.
ii. What the 5th Anti-Money Laundering Directive means to your business.
iii. Understanding due diligence and how to identify known, new and unknown clients.
Summary
1. New European Regulation will require all Art Galleries and Dealers to identify clients and conduct due diligence on all transactions over £8,000.
2. The 5th Anti-Money Laundering Directive will extend to card, bank transfers and Virtual Currencies e.g. BitCoin not just cash.
3. The 5th Anti-Money Laundering Directive will be adopted by all countries in Europe regardless of the outcome of Brexit and is expected to come into effect in the UK in early to mid 2019.
4. The new regulations present an interesting challenge in that any records you store relating to your transactions to confirm Due Diligence undertaken will need to be encrypted in order to be compliant with GDPR.
What the 5th Anti-Money Laundering Directive (5AMLD) aims to address
• The primary focus of the 5th Anti-Money Laundering Directive centres around heightened levels of transparency.
• It aims to achieve this primarily through a public register of companies while exposing the names and details of the owners of these companies.
• This information will be centralised, maintained and made accessible to European Union member states and will be referred to as the Beneficial Ownership Register.
• The register is anticipated to reduce the use of shell companies being registered in tax havens and thus their use as a means to launder money.
• While thresholds for identifying clients using pre-paid cards or virtual currencies have been lowered, businesses will be required to consult the Beneficial Ownership Register as part of their Know Your Customer (KYC) process when transacting with a new client.
• 5AMLD will also require enhanced due diligence on all transactions as well as verification of client information by reliable and independent means. Current revisions of the forthcoming legislation suggest this will have to be captured electronically.
What the 5th Anti-Money Laundering Directive means to your business
In order to comply with the 5th Anti-money Laundering Directive, Galleries and Dealers will be required to identify clients and exercise due diligence on transactions with these clients. You will be required to:
1. Submit reports relating to transactions deemed to be suspicious to a suitable Financial Intelligence Unit (FIU)
2. Have in place effective mechanisms to capture and subsequently disseminate transaction reports.
3. Consult the Beneficial Ownership Register as part of your revised Know Your Customer (KYC) processes.
4. Identify clients paying by credit card, bank transfer, virtual currency or cash for amounts equal to or exceeding £8,000 as well as those using prepaid cards for any transaction exceeding €150
5. Identify clients and conduct due diligence on all transactions, for existing, new and unknown clients.
6. Maintain an electronic record of steps and measures taken to identify and demonstrate due diligence undertaken. Ensure that any data you store is encrypted and is in compliance with the General Data Protection Regulation (GDPR)
Understanding due diligence and how to identify new and unknown clients: Identifying known, new and unknown clients
1. Identification is a crucial and all important step as it removes anonymity and assigns a known, identified party to a transaction.
2. When obtaining identification, you may wish to obtain proof of ID such as a valid passport or EU Identity Card.
3. If you are conducting a transaction where your client is unknown and not present, you are unable to ascertain that the ID supplied to you matches the individual supplying it. Hence, you may wish to compare the details supplied with the ID against known available watchlists available online as part of your due diligence process.
4. The 5th Anti-Money Laundering Directive proposes that the verification of client identity be captured electronically. In doing so, in accordance with the General Data Protection Regulation, you will need to ensure that the report and or evidence you record be encrypted so you are in compliance with EU law and GDPR.
Understanding due diligence and how to identify new and unknown clients: Performing and conducting Due Diligence
1. When exercising due diligence, Galleries and Dealers may be required to show they have exercised both caution and consideration before completing a transaction with a client.
2. Conducting due diligence with your new or unknown buyer is part and parcel of your Know Your Customer (KYC) process designed to protect you.
3. Done correctly, due diligence actually helps you mitigate risk by requiring you perform a series of predefined processes and associated measures, tools or services to bring transparency and place you in control.
4. Due diligence exists to ensure everything you believe to be true about your client is shown to be the case, both from the information they supply and the profile or picture you build within the report generated by the transaction you complete together.