Readup.ink | Britain’s art-loving elite fumes at money laundering crackdown

“It puts off rich people buying art in London because it’s a pain in the backside,” the gallery employee, granted anonymity like others in this article to speak freely about a sensitive topic, said.

London’s art market is the third largest in the world, accounting for 17 percent of global sales in 2023, and just behind China, which mostly relies on Hong Kong.

But experts fear Britain's fresh anti-money laundering (AML) clampdown will send the city tumbling down the list. Although they were introduced a few years ago, it's only in the past year that the British government has started to clamp down aggressively, according to industry experts.

The United Kingdom taxman now requires art market participants to register with them for money laundering purposes and follow strict new rules if they sell works worth more than €10,000 — or if they operate a customs warehouse storing works of art above that value.

At the heart of the financial crime rules, inherited from the European Union after Brexit in 2020 but adapted to fit the U.K. art market in 2021, is an obligation for sellers to know who their buyers are, requiring proof and verification of identity.

“Commercial and personal confidentiality are an important feature of the art market, and for good and valid reasons. However, these new rules are designed to limit the risk of confidentiality being abused in order to hide illicit activity,” say the 2023 guidelines provided by the British Art Market Federation and approved by the U.K.’s Treasury.

Industry players, however, say this ruins not only the romance of art sales — but makes them a little awkward too.

Frieze, held in London’s Regent’s Park, showcases some of the world’s most expensive art, and has guests willing to meet those price tags.

The guest list boasts some of the world’s top A-list celebrities. Spotted on the day POLITICO attended in early October was former Prime Minister Rishi Sunak, alongside hordes of glamorous art world insiders.

One gallerist at Frieze pointed out the particularly personal nature of the art world.

“We have to ask the mates of our boss for their source of funds, ID, proof of address. It makes that personal connection completely different. It’s embarrassing — you don’t want to ask your friends for that.”

Meanwhile, the United States has no art market money laundering regulations, despite New York coming out on top in the global art market rankings. China and Hong Kong don’t include art in their own AML rules, according to an anti-money laundering expert.

“Doing business in the U.K. is seen as quite complicated these days. And perception is really important in a global market, where there are alternatives that people can go to,” said Martin Wilson, chief general counsel at Phillips auction house and chairman of the British Art Market Federation.

“The London art market is entrepreneurial, which basically means artwork comes in, gets sold here, and then often leaves the country. For that to happen, you need a really smooth process. You need it to be as smooth as your competitors,” he said.

Traveling art

But purchasing art and taking it out of the U.K. now involves a lot more red tape.

At another stall at Frieze, a large canvas depicts a fluorescent meadow of flowers, just out of reach, hidden behind a wire fence. The painting, a guide tells a crowd of eager onlookers, is supposed to represent the American dream. The freedom and opportunity of that ethos is something one cannot put a price on.

The painting is on sale for £85,000.

Someone wanting to purchase that piece of art would now be asked where their money came from. In 2020, the Treasury’s national risk assessment for money laundering and terrorist finance determined the art market to be a “high risk” for money laundering. It joins cash, property and other financial services industries in the high-risk bracket.

“The size of the sector, combined with a previous lack of consistent regulation, means the global art market has been an attractive option for criminals to launder money,” the Treasury’s risk assessment said.

As a high-risk threat, sellers must follow new rules including registering with tax authority HM Revenue & Customs (HMRC), writing a risk assessment to state how exposed they are to money laundering and carrying out customer due diligence before a transaction is concluded.

“Art is moved easily across borders. That's the big advantage of art: A house in central London is a good investment, but you can’t take it with you,” explains Angelika Hellwegger, legal director at law firm Rahman Ravelli.

And although the rules began a few years ago, it’s this year that HMRC has picked up the pace on compliance. “As a company, we have had about three times as many clients receiving interventions from HMRC so far in 2024,” said the expert who works in art and anti-money laundering.

“It feels like the honeymoon period is over. The pace has been definitely accelerating, both in the number of galleries investigated and the strictness of implementation. Previously, they would ask: ‘Are you registered and were you doing the basics?’ And now their questions are much more aggressive and assertive.”

Financial penalties have already been dished out. Under the new regulations, between 2021 and spring 2023, 31 art market participants were fined for failing to register with HMRC. Between spring and fall 2023, 32 fines were issued. Figures for 2024 have not been released but art market participants speak of an even greater intensity.

Penalties have been up to £13,000 so far and limited to registration failings. But all art anti-money laundering experts POLITICO spoke to expect that HMRC would begin fining galleries for money laundering faults imminently — a more serious charge.

Even though some clients may have nothing to hide, the threat of increased oversight — which could result in a fine or an investigation — puts some off.

“The money laundering regulations are the bane of my life. People who want to buy art want it instantly, they don’t want to wait 22 days to have all their details checked out,” said another gallery employee at Frieze.

Maria O’Sullivan, a lawyer who specializes in compliance in the art industry, described the particularities of the art market which make regulation difficult: “The art world is based on relationships, more than any other business that’s got anti-money laundering regulation,” she said.

“The source of wealth is easier to establish than the source of funds. The source of wealth you can nearly always find online, for example, if your client is a major shareholder in a company. Asking about the source of funds is more personal. Galleries don’t want to ask for that information.”

The rules, which were brought in under the former Conservative government, threaten to further injure an already wounded art sector, which suffered increased taxes and red tape in the wake of Britain’s departure from the EU.

“Between Brexit and these new money laundering regulations, the London market's been hit pretty hard,” said the art AML expert.

And as new Labour Chancellor Rachel Reeves prepares her first budget, which is set to increase taxes on the wealthy’s assets, art lovers fear it could be another nail in the coffin for London as a top destination for high-end art.

The real owner

Across the Atlantic, the U.S. lacks regulation, despite art being well documented as a vehicle for money laundering.

“The art industry currently operates under a veil of secrecy allowing art advisers to represent both sellers and buyers masking the identities of both parties, and as we found, the source of the funds. This creates an environment ripe for laundering money and evading sanctions,” said Tom Caper, a U.S. senator from Delaware, speaking in 2020 upon the release of a report, which found that the art market was “the largest legal, unregulated market in the United States.”

It's exactly that veil of secrecy that the U.K.’s rules seek to prevent. Beneficial ownership rules, which concern who will ultimately own a piece of art, include any companies or trusts that may be used to purchase it. It's a key tenet of the U.K.’s anti-money laundering plan.

For the U.K.’s Treasury, this isn’t a simple glance at an ID card. Conducting customer due diligence means “exhausting all possible means to verify the identity of the customer, or the ultimate beneficial owner,” it said in its risk assessment.

“Criminals can conceal the ultimate beneficial owner of art, as well as the source of funds used to purchase art. This can be achieved by using complex layers of U.K. and offshore companies and trusts, agents or intermediaries, with agents and intermediaries commonly used in the market,” the department adds.

While experts argue that the use of offshore trusts to purchase art is a thing of the past, that doesn’t mean gallery employees are willing to find out.

“We’re not supposed to be detectives," the first employee quoted above said. "We take the information from the individual at face value. We wouldn’t go to the authorities of a jurisdiction to check who the beneficial owner of a trust is, for example."

Another argued it is “misguided” to require small businesses to perform due diligence that the financial services industry should do. “The regulations put the onus on the galleries to jump through certain hoops. I think it’s like using a sledgehammer to crack a nut. Banks are subject to money laundering checks, so due diligence is already performed,” they said.

Wilson, meanwhile, defended the purpose of the regulations in trying to target dodgy dealings. But the British Art Market Federation chairman also questioned what he sees as a failure to distinguish between low- and high-risk transactions. He pointed out, for example, that a painting sold by a seaside gallery for £11,000 is viewed in the same way as a multimillion-dollar transaction in an auction.

As a result, gallerists approach the rules with a “tick box” mentality, he warned. “What’s dangerous is that everyone who ticks those boxes believes they’ve eliminated the money laundering risk.”