Are You Caught In The Wider Net Of The New Money Laundering Regs?

As a late Christmas present, the UK government issued the long-awaited amendments to the money laundering regulations ("MLRs") that must take effect by 10 January 2020. The changes impose customer due diligence and transaction monitoring obligations on letting agents, art market participants; cryptoasset (e.g. virtual currency) exchange providers and custodian wallet providers. The definition of tax adviser is also extended to those who provide material aid or assistance on tax; and certain limits are lowered for e-money transactions and new restrictions are imposed on acquiring anonymous prepaid card transactions. I've summarised some of the key aspects below, but there is no substitute for getting advice on your specific circumstances. Let me know if you need assistance.

Whether your activities fit the various definitions may not be easy to decipher. Crypto-currency exchange and wallet providers have been in discussion with the authorities for many years, and the impact there is reasonably clear. The definition of "letting agent" and the impact on the property market, however, deserves a blog of its own.  The impact on the art market is also difficult to address...

Art Market Participants

Recent allegations reveal that a complex web of people and international locations are often involved in art fraud. Not only does this type of fraud itself produce dirty money, but high prices, inconsistent record-keeping, subjective valuations, questionable authenticity and anonymity also create a fertile environment for laundering cash generated by other crimes. Digital technology and encrypted communications have made it increasingly hard to detect and prove fraud and money laundering after the fact. Prosecution of art fraud across national borders has been difficult.

Prior to MLD5, "high value dealers" fell within the scope of the AML regime, and these were defined as:

"a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods), when the trader makes or receives, in respect of any transaction, a payment or payments in cash of at least 10,000 euros in total, whether the transaction is executed in a single operation or in several operations which appear to be linked."

The MLRs have now been amended to also apply to an “art market participant”, meaning a firm or sole practitioner who either: 

(i) by way of business trades in, or acts as an intermediary in the sale or purchase of, works of art and the value of the transaction, or a series of linked transactions, amounts to 10,000 euros or more; or 

(ii) is the operator of a freeport when it, or any other firm or sole practitioner, by way of business stores works of art in the freeport and the value of the works of art so stored for a person, or a series of linked persons, amounts to 10,000 euros or more;

A “work of art” means anything which in a long list in section 21 of the Value Added Tax Act 1994.

A “freeport” means a warehouse or storage facility within an area designated by theTreasury as a special area for customs purposes pursuant to section 100A(1) of the Customs and Excise Management Act 1979 (designation of free zones).

What Does Compliance Involve?

Those caught by the MLRs must at least apply certain "customer due diligence measures", including verifying the identity of the customer (subject to certain thresholds or triggers) and the ultimate beneficial owners of the money and assets involved:

• before establishing a business relationship; 
• if they suspect money laundering or terrorist financing; 
• if they carry out a funds transfer of more than a 1,000 euros; or
• if they doubt the veracity or adequacy of documents or information previously obtained for the purposes of identification or verification. 

Additional requirements apply in some cases. For instance, art market participants must also apply customer due diligence measures consistent with how that role is defined:

• in relation to any trade in a work of art when the firm or sole practitioner carries out, or acts in respect of, any such transaction, or series of linked transactions, whose value amounts to 10,000 euros or more; 
• in relation to the storage of a work of art when it is the operator of a freeport and the value of the works of art so stored for a person, or series of linked persons, amounts to 10,000 euros or more.

You must also understand the nature of your customer’s business and its ownership and control structure. If you can’t complete that due diligence, or enhanced due diligence where it is appropriate to make further checks, then you must cease dealing with the customer and file a suspicious activity report (SAR) with the National Crime Agency (NCA).

You will also need to monitor transactions with your customers for suspicious activity, which must also be reported to the NCA.

The Proceeds of Crime Act makes all forms of money laundering a criminal offence, and creates other offences such as failing to report a suspicion of money laundering and “tipping off” a suspected money launderer, which applies to staff and your nominated money laundering reporting officer (MLRO).

The Fraud Act 2006 also sets out offences committed by false representation, failing to disclose information and abuse of position.

The Data Protection Act 2018 and the EU General Data Protection Regulation require you to take appropriate security measures against the loss, destruction or damage of personal data. You also remain responsible when you pass data to a third-party for processing or to countries that do not have adequate data protection regimes.

The MLRs require a risk-based approach to compliance. It’s not enough that you comply, because you must be able to demonstrate that you comply, if challenged. That means written policies and procedures; good records of obligations performed, training, compliance monitoring; and taking steps to remedy gaps or failings identified. Your written AML policy should show that you and your staff are aware of the requirements and how you go about meeting them. You should also have a set of detailed, written AML procedures that show exactly how you and your staff will satisfy the commitments in your AML policy.

Again, while I've summarised some of the key aspects of AML compliance here, there is no substitute for getting advice on your specific circumstances. Let me know if you need assistance.