Due diligence

In the art market, due diligence means two different things. The first is a legal duty the dealer owes the state, and it concerns the customer. The second is the buyer’s question: is the work what it is said to be? The money laundering rules impose the first.

Published by ArtisDomus, written by Polina Surina.

The difference matters when you ask. A dealer who says due diligence is done may mean the money laundering file. That can be exactly true and still tell you nothing about the object.

The UK’s Money Laundering Regulations 2017 define an art market participant (reg. 14). It is a firm or sole practitioner who, as a business, trades in works of art or acts as an intermediary in buying or selling them. The rule applies where one transaction, or a series of linked transactions, is worth £10,000 or more. The same regulation covers the operator of a freeport where works of art of that value are stored for a person or a series of linked persons.

An art market participant must carry out customer due diligence on any trade in a work of art of that value. The same applies to storing works of art of that value (reg. 27(7C)).

The checks are set out in reg. 28. The art market participant must identify the customer and verify who they are. If someone else ultimately owns the customer (the beneficial owner), it must identify that person too. It must take reasonable steps to verify the beneficial owner’s identity, so that it is satisfied it knows who the beneficial owner is. It must also assess the purpose and intended nature of the business relationship or one-off transaction, and get information on it where appropriate.

Regulation (EU) 2024/1624 replaces the EU money laundering directives. It covers anyone who trades in cultural goods or acts as an intermediary in that trade, including art galleries and auction houses (art. 3(3)(i)). This applies where one transaction, or linked transactions, is worth at least EUR 10 000 or the equivalent in national currency. It also covers anyone storing, trading or acting as an intermediary in cultural goods and high value goods in free zones and customs warehouses, at the same figure (art. 3(3)(j)).

Cultural goods are the goods listed in Annex I to Council Regulation (EC) No 116/2009, the EU export licence list (art. 2, point (56)). So customs categories decide what the duty covers, whatever the trade calls art.

The checks apply to a one-off transaction of at least EUR 10 000, in a single operation or through linked transactions (art. 19(1)(b)). They also apply whenever there is a suspicion, whatever the amount (art. 19(1)(d)). They start with identifying the customer and the beneficial owner (art. 20(1)). The Regulation applies from 10 July 2027 (art. 90).

It is a crime to deal dishonestly in a tainted cultural object, knowing or believing that it is tainted (s. 1, Dealing in Cultural Objects (Offences) Act 2003). It does not matter whether the person knows or believes that it is a cultural object. The maximum penalty on indictment is seven years in prison, a fine, or both.

A cultural object is an object of historical, architectural or archaeological interest (s. 2). It is tainted if someone removed it from a building, structure or monument of such interest that it was part of, or excavated it. The removal or excavation must have been an offence, and must have happened after the Act came into force. It does not matter whether this happened in the United Kingdom or elsewhere, or under which country’s law the offence was committed.

Dealing means acquiring, disposing of, importing or exporting (s. 3). Acquiring means buying, hiring, borrowing or accepting. Disposing of means selling, letting on hire, lending or giving.

No published standard tells a private buyer how far back to trace, which archives to search or what a clean result looks like.

For what a private buyer can ask for, see provenance, certificate of authenticity, checking a contemporary work is authentic and what to check before you pay.