While large swathes of the market raced to register ahead of the June 2021 deadline – a matter well covered in ATG – a worrying number of smaller or independent dealers have not.
“Yes, it has a £15,000 price tag, but probably won’t sell anything close to that”, said an independent dealer we surveyed at a recent national art fair. The Victorian Impressionist picture referred to went on to sell for £11,500 after some negotiation, at which point I asked the dealer whether he had registered for HMRC’s money laundering for art market participants.
His response was: “I rarely sell anything for more than £8600 (or €10,000 – the regulated amount requiring full anti money laundering paper trail), so that doesn’t really affect me.”
This thought process is all too common among independent dealers who deem HMRC’s regulation as a matter only for the major auction houses.
Resource and process
The mounting issue, which will probably soon involve penalties levied against some of those that may be under investigation, will hurt smaller, independent art dealers as the largest firms already have in place robust resources and processes to negate any anti-money laundering (AML) activities.
Even before the fifth directive came into force, these bigger firms would have employed background checks and had automated processes to flag up any worrying signs. Independents simply do not have these resources or tools in place.
We all know the art market can be more discreet than others, driven largely by either the required discretion of their clients or their desire to carefully protect their customer bases.
Our research among smaller independent dealers uncovered that they struggle on the area of client confidentiality.
It’s a fine balancing act to keep a prospective buyer interested, engaged and even charmed, without over-stepping the mark of prying into their lives. No one wants to miss a rare sales opportunity.
The reality is that small independent dealers have to establish the same level of KYC (Know Your Customer) information as the largest firms.
Position it as professionalism
What may come across as prying eyes or intrusive behaviour needs to be positioned simply as professionalism.
This is essentially a marketing job between dealers, their suppliers, and their clientele to be seen to be operating at the highest levels at every juncture.
Customers are getting used to disclosing their details in all elements of life, not least because of scrutiny which didn’t exist previously.
For example, when drawing large sums of cash out of the bank or when paying the same in, you’re now required to say what it’s for. It’s the continuing challenge of dealing with the emergence and growth of potential routes for financial crime and the necessary ways to reduce that.
The general law-abiding public have nothing to fear from this increased scrutiny; in fact quite the opposite – their transaction and data are no doubt kept confidential.
How it works
Lessons from financial services give us a perfect example of what is going to happen to the art market.
When regulation hit the sector (banks and insurers, primarily) in the early 1990s, the regulator started off by pursuing the larger firms operating in the industry, sanctioned the biggest fines and caused the largest commotion.
A number of independent financial advisers took the view they were less vulnerable and less susceptible to investigation. It was a combination of misunderstanding of rules and naivety. It took the regulator a few years, but once the larger companies had faced their sanctions, it then went after independent advisers.
Many small independent operators lost their licences and faced insurmountable penalties – many disappeared from the industry as a result.
The same process will affect the art market in due course. The largest firms will be hit first, then it will be the turn of the independent dealers.
Dealers that have a plan in place will successfully maintain compliance by making the requisite KYC and AML checks part of their customer journey. A concise explanation of the requirements should not come as a surprise to the vast majority of clients and a simple, quick point of sale process that meets those requirements will not disrupt the sales process.
We know HMRC will soon be looking to penalise the arts and antiquity market as they review the impact of the 2020 legislation.
Let the myriad of important, vibrant, talented and passionate dealers not get caught out by what should be seen as ‘being professional’.
Founder of Momenta Group