Tales are filtering through showing that some of the initial concerns about the application of the Fifth Anti Money Laundering Directive to those in the art trade are, to a certain extent, justified. Here are a couple of examples that I have come across.
A client was buying an expensive painting from an art fund. This fund wanted to use its solicitors to do its ‘KYC’ (Know-Your-Customer) due diligence on the potential buyer.
My client, a well-known art dealer of many years standing, was buying the picture in his company name.
The sellers together with their solicitors took the view, ultimately correctly, that my client’s company was selling onto his own customer, and that therefore the funds were coming from my dealer client’s customer.
Mindful of wanting to know the ‘ultimate beneficial owner’, and ‘source of funds’ – as is required under the directive’s due diligence process – the fund and its solicitors wished to know the name of the ultimate buyer.
My dealer client had a considerable quandary: the fund was a very substantial source of paintings of considerable interest to my client and his own customers. He did not want to put the fund’s nose out of joint.
Equally, however, my client’s customer was a very important customer indeed and there was a considerable risk that disclosing the customer name to the fund could, once and for all, cut my client out of future deals and, conceivably, even this one.
Ultimately, my client took the view that standing in the way and being obstructive would also not help his cause and he duly disclosed the identity sought by the fund (with the permission of his customer, of course). So far, happily, there have been no adverse consequences but one can understand the dealer’s concerns here.
Rising star
Another scenario reported to me was as follows:
A buyer in the US was part of an eminent family with a generations-old collection. He wished to buy a picture by a rising-star artist which, according to my dealer client who was handling the purchase for him, could be bought on the primary market for approximately £100,000 whereas equivalent works at auction sell for £2m to £3m.
The particular picture concerned was one of very few available and was being sold by a top-end gallery.
That gallery would sell such a picture only into a very trusted collection from where it would not be re-sold in the foreseeable future but would be retained in that collection for a long time.
The gallery had carried out its KYC due diligence on the purchaser but he then sent the purchase monies in a company name, which did contain the same surname as his own. The gallery then, very properly, wished to carry out its KYC due diligence on the company name.
As a result so much time and correspondence ensued that there was a danger of the deal falling through. My dealer client, again, made a judgment call and put the two parties directly in touch in order for the deal to be progressed rapidly.
Once again, there was a theoretical risk that the dealer client would be cut out from important opportunities available both from the major US collection and from the gallery selling the picture but this was a risk he decided to take under the circumstances.
Business protection
Could dealers take any steps to protect their business and client list?
In theory at least, it would be possible to draft a contract prohibiting the party conducting the KYC due diligence from future direct dealings with the previously confidential, but now disclosed, party.
The problem, of course, is how willing the intended signatory – the subject of the intended prohibition– would be to signing up to such an arrangement in what is, after all, an open market.
It may be worth a try. Dealers would first have to weigh up the comfort they might get from such paperwork versus both the enforceability of it and the extent to which even proposing it might sour relations.
Milton Silverman is senior commercial dispute resolution partner at Streathers Solicitors LLP, London.
