HMRC is carrying out its Anti Money Laundering compliance audits in the UK art world, sending in teams to check whether art market participants of all sizes are complying with their anti money laundering obligations under the new regulatory framework. Contrary to what might have been expected by some, these audits are not light touch. They are detailed, time consuming and demanding - even for the best prepared. For the unprepared they are a very tough - and sometimes alarming - experience.
Having experienced an auction house HMRC AML audit recently I thought it would be helpful to set out for Art Market Participants (AMPs) and their advisors how our compliance team approached it and what we learned from the experience. Our experience was very positive but only because we were fully prepared. If you are an AMP who has not yet been audited or if you are advising a yet to be audited AMP I would recommend that you read this article carefully as it may save a lot of work and stress. I am sure that this is not a complete guide, but following these steps will help to be better prepared.
Review your client KYC for completeness well in advance of being contacted by HMRC
Long before being contacted by HMRC you should do your own look-back audit of your transactions over the past year - a pre-audit audit. Do you have KYC for all your clients? Have they all been screened? To be clear if you are complying with your obligations you are required to have that information in place already. But if there are gaps you need to chase them up now. Better late than never. This is a laborious task and you won’t have time to do it once HMRC tell you that you are about to be audited. So do it now.
Make sure you have the basic documents in place
The key focus and starting point of any HMRC audit is on your Risk Review and the AML Policy and procedure. It is crucial that these documents are fit for purpose and up to date. The risk review must be a genuine and considered analysis of where the major AML risks lie in your business. The AML Policy and Procedure document should be tailored to your business and be detailed and practical.
Check your AML Training is up to date and that you have records of training
HMRC will expect you to have trained staff on a regular basis to ensure that they are all up to speed. They will also expect you to have records of training. Who was trained and when?
Know your basics
Familiarise yourself with the BAMF anti-money laundering guidelines. (Available on the BAMF website). Know which countries are deemed to be risky (See the European Union and FATF list of High Risk jurisdictions).
Consider which transactions are likely to be of most interest to HMRC
When doing your pre-audit audit focus on transactions likely to be of interest to HMRC - high value transactions, transactions involving offshore companies, transactions involving trusts, transactions where the parties are in high risk or non-traditional art market countries. Make sure you have the key information to hand on these transactions.
Prepare an audit-ready folder of key documents
Have a paper file with the following documents:
AML and KYC Policy and Procedure
AML and KYC Staff Training records
ID and Proof of Address of Directors and key officers of your company
Most recent accounts filed
Basic transactional data (no. of transactions, average value, geographical client split)
Basic Details of all Suspicious Activity Reports (SARs) filed to date
Know what questions you are going to be asked and have the answers ready.
HMRC have a standard list of up to 100 questions which they ask. You will be better prepared and it will save a huge amount of time if you know the questions in advance and have the answers ready and to hand. An AML compliance professional will be able to give you guidance on the current standard list of questions.
Set aside plenty of time
When you are contacted by HMRC and told you are about to be audited you may be told or expect that it will take a few hours. It doesn’t. Clear your day and allow for the possibility of the audit running into the following day. It is a long and laborious process.
Get professional assistance
As an AMP, your first call, if you are told you are about to be audited, should be to an AML compliance professional or lawyer . They will save you a world of pain by giving you detailed guidance on how to prepare for the audit and will be happy to sit in on the audit to provide practical and moral support. When selecting an AML compliance professional or lawyer ask them about their experience, both of working in the art market and of HMRC audits. Not all professionals are equally experienced.
Discuss the dataset
Before the audit you will be asked by HMRC to supply lists of clients and/or transactions. You will then be asked at the audit to show the KYC and transactional paper trail for transactions selected - randomly or not so randomly - by HMRC. Sometimes the requests for lists of transactions or clients are very broad or historical. If you think this is the case don’t be afraid to suggest to HMRC narrowing the dataset by date or by value so that it is less onerous and more relevant.
Be ready to describe the typical transaction journey from beginning to end
Map out the typical client journey from marketing to delivery, describing in detail each step.
Know which transactional documents you are going to need to provide
For each transaction you will likely need to show:
An image and description (including dimensions) of the artwork
Photo ID and proof of address of individual clients
Appropriate KYC for corporate entities, trusts and other more complex structures
Ultimate Beneficial Owner information where applicable
Evidence of any due diligence carried out e.g. sanctions/PEP screening or enhanced due diligence
Shipping or collection documents
Evidence of payment