Tobias Bumm/ July 26, 2020/ Uncategorized

High purchase prices are normal in the art trade. At auctions, prices sometimes reach breathtaking heights. However, cash payments are quite common, and the identity of buyers and sellers is kept confidential. Therefore, the art market is considered extremely attractive for money laundering. Accordingly, this attracts the attention of the legislature. The implementation of the 5th EU Money Laundering Directive is meant to counteract money laundering and has been in force since July 2018. But was recently converted into national law on January 10 of this year. Now, not only cash transactions over 10,000 euros are affected, but all transactions where this value is reached or exceeded. Regardless of whether payment is made by bank transfer, direct debit, or credit card.

Who is affected and what classifies an art object?

Everyone, who trades with art or acts as intermediaries is obliged to the new Money Laundering Directive. An intermediary or art broker is anyone who mediates the conclusion of sales contracts for art objects commercially. Accordingly, galleries and auction houses are among those affected, but also operators of art warehouses in free trade zones.

What is classified as an object of art is also precisely defined by law and includes paintings, drawings, original engravings, and original sculptural products. Whereas antiques are not included unless they are also art.

Risk management, due diligence, and reporting obligations

Big changes are waiting for the art market – not only organizational, but also financial. It is a matter of perfect risk management, in which internal security measures must first be established within the company. This includes procedural instructions, internal guidelines to prevent money laundering, as well as regular training and reliability checks of employees. Eventually, a special money laundering appointee must be established, if required by the responsible supervisory authority. In a second step, the customer, product, and transaction risk are assessed. However, this analysis must be regularly reviewed and updated; suspicious cases must be reported. Furthermore, it is no longer sufficient evidence, if a party has already been identified in previous transactions, . Moreover, it is now necessary to check and update all information previously obtained.

Checklist for customer identification: From now on, art dealers are obliged to identify customers and carry out risk assessments.

Those who know with whom they do business have already fulfilled much of their due diligence. Know-your-customer Compliance must be comprehensibly documented. Specifically, this means copies of buyers’ ID cards or relevant data must be recorded and documented for five years. For sales to companies, the beneficial owner must be determined via the commercial or transparency register. Additionally, the procedure for auctions is affected by the new regulation. From now on, it is necessary to register participants at the beginning, since it is not possible to predict who might later auction an object worth 10,000 euros or more. Moreover, if there is a suspicion during a transaction that the partner may not have acted in compliance with the Money Laundering Directive, the Financial Intelligence Unit (FIU) must be informed.

And if not……?

Anyone who does not adequately meet their due diligence requirements, i.e. who has not verifiably documented the identity of the buyer or sufficiently investigated the business relations for money laundering, must expect fines of up to EUR 100,000. In fact, repeated infringements can be subject to penalties of up to EUR 1 million or twice the economic advantage. From now on, the legislator will be even tougher if it can be proven that art dealers knew or suspected illegal means in their dealings. This is considered to be intentional aiding and abetting money laundering and is punishable by three to five months imprisonment, or up to two years for reckless aiding and abetting.

The concern that the industry will incur considerable additional effort due to customer identification and risk analysis is certainly justified. It remains to be seen what the regulation exactly means for the art market and whether it will have a lasting impact on the existing structure. In any case, more transparency, especially when dealing with high values, is desirable.

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