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.
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:
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:
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:
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