It is well documented that the international art market is used for nefarious as well as legitimate purposes.
The privacy and opaqueness surrounding the way the market operates, albeit often for legitimate reasons, can present opportunities for art lovers of a less desirable kind to circumvent know-your-customer checks, sanctions and anti-money laundering regulations and undertake other illegal activities.
In January, the UK National Crime Agency issued an amber alert entitled Financial Sanctions Evasion, Money Laundering & Cultural Property Trafficking Through the Art Storage Sector.
While the alert focuses on sanctions evasion and money laundering risks applicable to UK art storage facilities and related UK specialist service providers (“art market professionals”), it is also highly relevant to private collectors.
Those directly facilitating the art market have obligations to undertake extensive due diligence on their clients.
The alert serves as a reminder to art market professionals on their due diligence and anti-money laundering obligations and provides a list of key indicators that art market professionals should keep in mind as part of their due diligence on clients:
- Changes in client circumstances – checking international sanctions listings and other due diligence systems against client details on a daily basis.
- Transfers of ownership of art between connected parties such as family members, business associates or intermediaries.
- Transactions involving the sale of art in a relatively short period of time.
- Entities making payments to the service provider on behalf of clients.
- Transactions involving shell companies or complex corporate or trust structures wherein the identity of the ultimate beneficial owner is unclear.
- Art that is stolen or subject to restrictions.
- Transactions involving intermediaries to acquire, sell or transport art.
The motivation behind the key indicators is right and proper, but what the NCA has failed to acknowledge is that some of these key indicators are more often than not entirely legitimate.
Art market professionals will understandably be hot on their due diligence – and rightly so, but they need to consider circumstances holistically and not simply through the key indicator looking glass.
The presence of one or two indicators should not be considered conclusive evidence that a private collector is seeking to or has undertaken illegal activities. For example:
- A private collector may wish to sell an artwork (or fractional share thereof) to a connected person because the transaction can be executed quickly in order to free up liquidity for an immediate short-term need such as a margin call or to refinance an expensive bridging loan that the lender will not extend.
- A private collector may wish to utilise the relative anonymity afforded by shell companies or complex corporate or trust structures for security reasons and/or to preserve the value of their art collection. The desire for privacy does not mean a desire to be secretive or evasive – privacy is not a dirty word.
- A private collector may not be an art professional, but rather may rely on the advice of art advisers that operate within the market. Sellers often instruct art advisers to assist with sales to ensure their art is sold in the correct season and at the correct venue. Sellers also frequently engage art brokers/intermediaries on sales to maintain privacy until a suitable buyer has been found.
These scenarios are entirely usual in the world of wealthy individuals and are completely legal. So while helpful, the key indicators should not be considered in isolation – not least because doing so would result in art market professionals turning away valuable business from legitimate sources.
Nevertheless, the inconvenient upshot of the alert is that private collectors will, inevitably, be subject to more administrative barriers when dealing with their collections from a wider range of art sector service providers such as shipping/transport companies, insurance providers, agents, brokers, lawyers, accountants and finance providers. Private collectors need to be prepared.
The key points private art collectors should consider:
- Keep a complete know-your-customer pack readily available. Lawyers engaged by private collectors are a useful tool to hold and circulate such information so it can be provided to art market professionals promptly.
- Use the same art market professionals. This should limit the time required for them to onboard a new private collector as a client by reducing the time spent answering background questions as part of their due diligence process. While familiarity will not be an alternative to due diligence, it will help.
- Build flexibility into the timeframe to complete a sale, as more art market professionals involved in the transaction may be required to conduct due diligence. Private collectors may also wish to consider alternatives to a sale, such as art finance, which, depending on the provenance and location of the artwork in question, can be advanced fairly quickly, usually at a loan-to-value ratio of 50 per cent.
- While the transaction may only involve the transportation or insurance of art, rather than a sale, ensure the provenance for the relevant piece is as comprehensive as possible. This not only maintains the value of the piece for a future sale, but also allows the private collector to demonstrate how and when the artwork came into the private collector’s possession.
Private collectors can use these regulations and due diligence processes to their advantage, to select which art market professionals to work with and to mitigate the risk of a collection being subject to investigation and, possibly, freezing orders because of a collection’s link to a disreputable art adviser.
Where an art market professional does not appear concerned with such requirements, this should be taken as a warning sign that they may not be as professional as they seem.
While the alert does not introduce any new legal or regulatory requirements, it does make clear that those directly facilitating the art market, particularly storage and sales, do have obligations to undertake extensive due diligence on their clients.
Tristan Dollie is a partner in Brown Rudnick’s special situations’ credit and trading group
