AML participants have changed, what can we learn from them?
It is no secret that AML regulation has evolved significantly in recent years. The EU’s 5th Anti Money Laundering Directive (5AMLD) has forced estate agents, accountants and all actors operating in the art market, to implement AML processes, leaving administrative cracks and exposing vulnerabilities.
Meanwhile the surge of e-commerce has made it easier for global consumers to spend their money. The compound annual growth rate for 2020-2024 is predicted to be 8.1%, and while beneficial, this growth also creates more opportunities for corrupt funds and money launderers to take advantage of newly regulated industries.
Therefore, unique from banks and investment funds, these participants can offer insight and reveal trends in AML processes, given that they are closer to the end consumer than most, and are rapidly adapting to their legal requirements.
It is for this reason that Arcarta has developed the Art Regulation Report. Our experience as an AML provider for Art Market Participants has allowed us to understand the implementation of regulation from a unique standpoint. Working with over three hundred Art Market Participants, we have gained insights from regulation in its infancy, and developed methodology to assess AML processes at a grassroots level.
Due to be released later this Summer, the findings from the report are relevant to more than just the Art Market, and can challenge other sectors to think creatively about their own AML processes and experience design.
In anticipation of the report’s launch here are the five AML trends we uncovered that you need to know moving forward into 2022/23.
1. Increased Information Sharing & Global Due Diligence
In light of current Russian Sanctions, the US regulatory body FinCEN (Financial Crimes Enforcement Network) has “strongly encouraged” financial institutions to share information with one another regarding individuals, entities, organizations, and countries suspected of possible terrorist financing or money laundering.
This concept of information sharing has also filtered down into more intimate markets where the sharing of information is driven by both client experience and risk. From our surveyed participants we found that the buyer’s due diligence experience across international markets is key, as currently their experience is incongruent depending on geographic location and laden with personal administration.
If international systems of information sharing develop, due diligence could be performed for an individual or entity periodically within a sector and then shared across any regulated business. We therefore predict that this conversation will develop in the coming years as the need for information sharing grows at both the governmental and business level.
2. Harmonization of International Regulations
In July 2021, The European Commission presented a package of legislative proposals to strengthen the EU’s anti-money laundering and countering the financing of terrorism (AML/CFT) rules. The package attempts to harmonize AML/CFT rules across the EU. It also proposes the creation of a new EU authority to fight money laundering across regulated nations. However, as of date fourteen EU member states have yet to respond to the 5th directive, indicating that it will be challenging to regulate with an overarching task force when each nation state is at different stages of the regulatory process.
In addition, from our own research we have found that harmonization is also key for a fair international marketplace. While the UK has transposed 5AMLD into law for art market participants, the United States have yet to regulate their art market. This has caused inequality within the two geographical regions who, with an increasing share of the online marketplace, have a significant overlap of buyers – putting UK businesses at a disadvantage. In order to remedy this, regulation must find common ground past the boundaries of the EU.
3. Increased Transparency
We have encountered that there is a lack of transparency around how due diligence is performed in our sector. It is also clear through our research that confidentiality is still being prioritized and that there is confusion resulting from different regulations for different geographic markets.
We predict that conversations regarding transparency between clients and businesses will become more prominent; especially as more effective and robust beneficial ownership reporting requirements are being called for by regulatory authorities.
4. Further Incorporation of AML Technologies in Daily Processes
In 2021 the Financial Action Task Force (FATF) put together a paper on the opportunities and challenges that new technologies are bringing to Anti-Money Laundering (AML) and counter-terrorist financing (CTF) processes. They found that in the private sector, new technology such as AI, and its affiliates of machine learning and natural language processing can improve risk assessments, onboarding practices, accountability and overall good governance, all while saving costs.
While all these benefits seem to point to effective implementation, lack of education and cost has meant that technology is not being utilized to its full potential.
In our study we found that when technology is available and understood by a regulated business they will lean into it, using it as a tool to assert trust and reliability. We therefore predict that the use of technology will become more ingrained in daily AML processes and that education will be key in effective and widespread use.
5. Increased Regulation for Cryptocurrencies
While currently crypto-currency and NFTs often slip through regulation, movements will be made to regulate them more thoroughly. This is inevitable as cryptocurrency companies make the transition from disruptive to established participants in the financial system.
In 2021, it was reported that a “significantly high” number of cryptocurrency firms are failing to meet U.K. money laundering rules. In the United States there has been renewed vigor as President Biden signed an executive order regarding the responsible development of digital assets. As the art market continues to delve deeper into the dealing of NFT’s we believe this conversation will continue across multiple markets – and we will be watching closely!