Much publicity has been given to the new burdens imposed on ‘Art Market Participants’ (‘AMPs’) by the Fifth Money Laundering Directive requiring those involved in the art world to register and adhere to its provisions.
Although this specific requirement for registration and due process is new, dealers, and others in business generally, were already subject to the criminal law and other provisions seeking to prevent money laundering.
Anyone, be they collector, one-off buyer, or the man in the street could already be prosecuted under the Proceeds of Crime Act 2002 for money laundering if the unfortunate facts fit.
Section 328 of the 2002 Act states:
“A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects [my italics] facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.”
Criminal property includes laundered money.
The exact meaning of ‘suspicion’ has been discussed at some length in a number of reported cases. There was a particularly fascinating case in 2006 where a Crown Court Judge decided to speculate with his own definition, further to which, when the case went to appeal, the Court of Appeal Judges thought it sensible to make clear the proper meaning of “suspicion”:
“It seems to us that the essential element in the word ‘suspect’ and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice…”
A central requirement in the due diligence process that dealers will now have to undertake is ascertaining the ‘source of funds’ of their own purchasing clients.
Below is a rather unusual set of circumstances in which a client of mine became involved.
An American client was buying some significant pictures from an auction house. The ultimate intention was to sell on the majority of these paintings to a customer of his based in Hong Kong.
There was a long negotiation by the client with the auction house for the purchase of the paintings under a private treaty arrangement. The client was well known to the auction house, having had many dealings over the years with them. So customer due diligence by the auction house was not necessary this time given that they were all well acquainted.
As the deal finally closed, the client experienced severe cash flow problems, due to delayed payment from one of his own clients on an entirely separate deal relating to Chinese ceramics. So, payment on his own deal to the auction house became delayed.
Eventually his negotiations for payment with the auction house became fraught.
In an attempt simply to buy time, he stated – incorrectly – that the finance for the transaction was coming from his client who, he advised, was in turn in some difficulties paying at present, due to export restrictions imposed on him by the authorities in Hong Kong.
All this was, in fact, an off-the-cuff story created simply to gain time with the auction house.
The repercussions were unexpected. The auction house did not like what they heard about the ultimate Hong Kong client and referred the matter to their lawyers. The point was that the ultimate source of funds for the purchase was (apparently) going to be the Hong Kong dealer, and the lawyers took the view that this ultimate source of funds had to be investigated – why was he subject to Hong Kong export restrictions?
There were very extended conference calls with the American client, the auction house, and myself, in order to explain the position fully.
The result was that on being satisfied that the Hong Kong client (together with my own client) was bona fide and a legitimate source of funds, the deal eventually went through and the auction house was happy to receive the purchase monies.
A rather odd story but an example of what can happen when the source of funds becomes questionable.
A more recent example was reported in the legal press in September. A large firm of solicitors has just been fined over £19,000 for failing to carry out proper due diligence checks on funds received from abroad.
Reminder: it was announced in August that the registration period for the new 5th Directive as it applies to the art market has been extended to June 10 2021.
Milton Silverman is senior commercial dispute resolution partner at Streathers Solicitors LLP, London.