Fraud has always been a concern of the art world; from forgeries through to money laundering. 20|30 Group's Louisa Bartoszek discusses changes to money laundering regulation in the United Kingdom, which came in from January 10, 2020. She explores how new technology known as Self-Sovereign Identity could reduce costs of compliance to the art world and protect identities in a compliant way.
Fraud has always been a concern of the art world; from forgeries through to money laundering. Mainly due to the anonymous and opaque nature of the industry. Transactions are often private. Prices can be subjective and extremely high.
I was therefore intrigued to learn over the weekend that from January 10, 2020, art and auction houses have received regulatory backing to combat money laundering and terrorism financing in the United Kingdom.
The new rules appear to have quietly slipped through Parliament before Christmas in The Money Laundering and Terrorist Financing (Amendment) Regulation 2019. Better known by its EU shorthand of '5MLD'.
Under the new rules, dealers and auctioneers must conduct stricter due diligence and clearly establish the identity of “the beneficial owner”. In layman’s terms, this means both the buyer and the seller, before entering into a transaction. This applies to transactions worth more than 10,000 euros (£8,500).
As part of 5MLD, art market firms will also need to register with HMRC, risk assess their business and put AML policies and procedures in place. Failure to complete registration during the year 2020, will mean a business cannot trade in works of art above the threshold after January 1, 2021 (until it registers).
This is a subject I’m very familiar with having spent over a decade working at a global bank and endured rigorous and mandatory Know Your Customer (KYC) and Anti Money Laundering (AML) training on an annual basis.
Looking into the new rules for the art world, they are very similar to banking with an emphasis on clear and enforced AML policies, employee training, appointing an AMLR Officer and a robust record-keeping system.
My understanding is that as a minimum, legally certified photographic ID with a date of birth, as well as a recent proof of address will be required, and the name checked against relevant watch or sanctions lists.
With the global art market turning over an estimated $67.4 billion in sales in 2018, according to Art Basel and UBS’ 2019 global report, it seems logical and sensible to bring AML/KYC regulations in line with the stringency of banking.
Particularly if the rumours are true about the alleged scale of money laundering which takes place in London in markets such as art. The UK, predominantly London, accounts for 21% of global sales, second to the United States which dominates with 44% market share that year.
According to the United Nations Office on Drugs and Crime, the underground art market may bring in as much as $6 billion annually. The portion attributed to money laundering and other financial crimes being in the $3 billion range.
To me, art world participants face a dilemma. But one which has a solution.
As already highlighted, the art world is traditionally cloaked in secrecy. But not due to questionable financial dealings. It’s more a matter of privacy. The purchaser or seller may wish to remain anonymous for innocent personal reasons.
Personal security being one reason. Whether that be security related to future risk of theft, or perhaps other sensitivities which require privacy, such as divorce, debt or death.
Dealers have another reason in that they may not wish to reveal the identity of their client to a specialist who could compete for their business. The art world generally being exclusive, high-net-worth and relationship-based.
Some galleries have indicated a nervousness to ask such personal questions in case the purchaser views it as an invasion of privacy. That they could ‘lose a client’.
Then there is the financial impact. Both the cost of compliance and the cost of failing to do so.
KYC/AML compliance costs can be breathtakingly high. Some studies indicate major financial institutions reportedly spend up to $500 million each year on KYC due diligence.
The potential surge in business costs, at first glance, is daunting but it doesn’t have to be this expensive.
The art world has an advantage over banks in that they have the opportunity to minimise costs by investing in newly emergent blockchain identity technology known as Self-Sovereign Identity (SSI) from the outset.
SSI could help make art transactions simpler whilst tackling the needs of identity transparency (a verified customer profile) versus identity privacy (with the customer having direct control and ownership of their data). It would allow any art market participant involved in the transaction to issue verified credentials to all users or user to self-attest identity credentials of both the purchaser and the seller.
It could also be adapted to facilitate an efficient and easy record-keeping system, in accordance with global privacy rules (such as GDPR in the EU).
Verified credentials would give additional benefits such as increased security and confidence, taking the pressure off individual front line gallery or auction house employees who could place their trust in verified SSI credentials which would be extremely hard to fake.
Regulations such as 5MLD are here to help to protect our society from bad actors. But it does not have to be painful and expensive.
Here at 20|30 Group, we are building identity, security and privacy solutions using blockchain and distributed ledger technology to help businesses do the right thing, in a fast, safe and cost-effective way.
To learn more about SSI visit IDWorks, a 20|30 Group company.