On November 14, 2024, the UK government laid a new piece of legislation before parliament, the Sanctions (EU Exit) (Miscellaneous Amendments) (No.2) Regulations 2024 (the "Regulations"). The Regulations introduce a number of changes to the UK's various sanctions regimes and are intended in significant part to improve the implementation and enforcement of UK financial sanctions, including by strengthening the intelligence-gathering capabilities of HM Treasury's Office of Financial Sanctions implementation ("OFSI"), the agency responsible for the implementation and civil enforcement of UK financial sanctions. Among the package of amendments contained in the Regulations is the imposition of a new mandatory reporting obligation on art market participants ("AMPs") and high value dealers ("HVDs") that will come into effect on May 14, 2025. Affected businesses should prepare now to ensure compliance with the new obligations and likely increased scrutiny from OFSI by reviewing their sanctions risk assessments and compliance controls to identify areas that may require strengthening. Any necessary enhancements to sanctions policies, procedures, and other controls should also be implemented ahead of the new reporting obligations taking effect.
New Mandatory Reporting Requirement for AMPs and HVDs
The Regulations will introduce new mandatory financial sanctions reporting obligations on AMPs and HVDs from May 14, 2025. Pursuant to this requirement, AMPs and HVDs will have to inform OFSI "as soon as practicable" using OFSI's Compliance Reporting Form if they know or have reasonable cause to suspect based on information coming to them in the course of carrying on their business that:
- a person is a UK designated person ("UK DP"), as well as providing any information by which the UK DP can be identified and the information on which the knowledge or suspicion is based. If the person is a customer of the AMP or HVD, the nature and amount or quantity of any funds or economic resources held by the AMP/HVD for the customer at the time when it first knew or suspected that the customer was a UK DP must also be reported to OFSI and, thereafter, compliance with OFSI's annual frozen asset reporting process will be required; and
- a person has breached a prohibition or failed to comply with an obligation under UK financial sanctions (including financial sanctions licensing).
OFSI has clarified that "information or another matter" that comes to an AMP "in the course of carrying on its business," thereby triggering a mandatory financial sanctions reporting obligations, will apply when an AMP:
- trades in, or acts as an intermediary in, the buying or selling of works of art, where the transaction value (or the value of a series of linked transactions) is €10,000 or more; or
- stores works of art where the value of the works of art so stored for a person, amount to €10,000 or more, which could include offering discrete storage services before or after a sale, or transferring items on a customer's behalf to third party storage facilities.
With respect specifically to the UK's Russia sanctions, AMPs and HVDs also will have to inform OFSI as soon as practicable if they know or have reasonable cause to suspect based on information coming to them in the course of carrying on their business that they hold funds (i.e., financial assets and benefits of every kind) or economic resources (i.e., other assets of every kind that can be used to obtain funds, goods or services) for a "prohibited person," which is defined to include the Russian Central Bank, National Wealth Fund, Ministry of Finance, as well as any person owned, controlled, or acting on behalf or at the direction of one of these persons. Additionally, when the AMP or HVD continues to hold those funds or economic resources, it must provide a report to OFSI each year by November 30 as to the nature and amount or quantity of the funds or economic resources it holds as of September 30 in the relevant calendar year.
For the purpose of this obligation, the following definitions of AMPs and HVDs will be used:
- AMP means a firm or sole practitioner that is registered or required to register as an AMP under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 ("MLR"), except in relation to the sale or storage of a work of art under Section 21(5)(a) of the Value Added Tax Act 1994 that is created by, or attributable to, a member of the firm or the sole practitioner; and
- HVD means a firm or sole trader that trades in goods (including an auctioneer dealing in goods) by way of business, when the firm or sole trader makes or receives a payment or payments in cash of at least €10,000 in total in respect of any transaction, whether the transaction is executed in a single operation or in several apparently linked operations.
OFSI Guidance for AMPs and HVDs
In coordination with the announcement of its intention to impose mandatory sanctions reporting obligations on AMPs and HVDs, OFSI published new Financial Sanctions Guidance for HVDs and AMPs ("OFSI Guidance"). The OFSI Guidance states that mandatory financial sanctions reporting obligations are being extended to these sectors to encourage better sanctions compliance and improve OFSI's understanding of how financial sanctions are being implemented by AMPs and HVDs, with the aim of raising awareness among AMPs and HVDs of their sanctions obligations, as well as assisting OFSI to identify potential sanctions circumvention loopholes and financial sanctions breaches.
High value and luxury goods, including works of art, are susceptible to being used to evade UK financial sanctions and the OFSI Guidance makes clear that the "onus is on" AMPs and HVDs to "ensure that [they] have put in place sufficient measures to ensure [they] do not breach financial sanctions."
While OFSI does not mandate specific compliance measures that it expects businesses to implement, the OFSI Guidance recommends that AMPs and HVDs develop and implement strong sanctions compliance programs that are calibrated to be risk-based and appropriate to the sanctions risks individual AMP or HVD businesses have assessed that they face. OFSI suggests that AMPs and HVDs should consider incorporating the following elements in to their sanctions compliance programs:
- developing, implementing, and adhering to written, standardized operational compliance policies, procedures, standards of conduct, and safeguards;
- specifying in sanctions compliance program materials that participation in conduct in breach of sanctions may result in disciplinary action up to and including termination of employment or business relationship;
- making appropriate sanctions compliance resources available to personnel responsible for ensuring the AMP's or HVD's compliance with sanctions laws and regulations;
- providing proportionate sanctions training to personnel;
- communication of sanctions compliance expectations to counterparties, partners, subsidiaries, and affiliates in line with local laws and regulations;
- articulating a commitment to protecting personnel who raise concerns about conduct breaching sanctions in good faith from retaliation and establishing speak up / whistleblower mechanisms to facilitate reporting of suspected or actual sanctions breaches (or breaches of a business's sanctions policy); and
- regularly using third parties with sanctions compliance expertise to audit the sanctions compliance program to ensure its effectiveness and to provide feedback that enables continuous improvements to be made to the program over time.
One cornerstone aspect of a robust compliance programme that OFSI does expect AMPs and HVDs to develop and implement is a risk-based and proportionate due diligence process. In particular, the OFSI Guidance encourages AMPs and HVDs to screen customers and other business partners against the UK Sanctions List and the OFSI Consolidated List at the start of a new business relationship. When dealing with an entity, screening also should be performed to establish who directly or indirectly owns or controls the entity to confirm that the entity would not be considered subject to UK sanctions by virtue of being owned or controlled by a sanctions target. These checks should be repeated regularly throughout the business relationship (e.g., prior to engaging in transactions with the person) because the sanctions list can, and does, change frequently and the sanctions status of a party can change during the course of a single transaction.
OFSI also expects AMPs and HVDs to assess all aspects of, and parties to, proposed business activity to identify any business partners, contractors, financial institutions, or other third parties that are UK DPs or entities owned or controlled by a UK DP. When conducting sanctions screening and due diligence checks on customers and payment chains, AMPs and HVDs may wish to use subscription-based resources to perform initial checks on corporate ownership structures.
Additionally, when an AMP or HVD is conducting activity in, or around, high-sanctions risk countries or territories, OFSI expects the AMP or HVD to have a strong understanding of its obligations under the UK sanctions regulations in place that impact that country or territory. When necessary, OFSI encourages businesses to seek independent legal advice to understand their obligations and the steps that can be taken to comply with them.
Common Sanctions Evasion Practices
The OFSI Guidance identifies a number of techniques used to circumvent and evade UK financial sanctions that AMPs and HVDs should be aware of when designing and implementing their sanctions compliance controls, as follows:
- UK DPs can seek to take advantage of the relatively unregulated nature of the international markets for some high value goods;
- UK DPs may seek to take advantage of the relative ease with which goods in the art and high value goods markets often can be moved, transported, and concealed;
- UK DPs can seek to capitalize on the regularity with which high value goods and works of art move between jurisdictions to conceal that the true purpose of a move is sanctions evasion – this can be a particular concern in relation to precious metals and stones, which are very durable and often effectively untraceable;
- UK DPs may use the ability of individuals and entities to conduct business discreetly in the art and high value goods sectors to increase their options in seeking to negate or minimize the effects of UK financial sanctions;
- movement of assets that were previously associated with a UK DP, by that person's family members (or otherwise on their behalf) where the funds realized are then disbursed offshore through secrecy jurisdictions;
- obscuring or concealing the involvement of a UK DP in a transaction through the use of intermediaries and shell companies to source, buy, or sell art or high value goods;
- lack of clarity as to the source of a payment or funds, including concealment of the ultimate beneficial owner of the goods, the use of offshore accounts to make transactions, or a change in payment arrangements;
- wines and spirits from specific geographic regions or vintages, and associated distilleries, wineries, and vineyards often are attractive investment options for those subject to UK financial sanctions;
- cryptocurrencies and non-fungible tokens ("NFTs"), including digital artworks, may be used by UK DPs in an effort to circumvent restrictions imposed by financial sanctions, particularly because digital assets can be exchanged or traded for traditional fiat currency;
- the subjective value of many types of luxury goods offers UK DPs and their enablers an opportunity to easily manipulate price to conceal the true value of an item; and
- cultural objects, or "cultural property" from areas where terrorist groups are active can be used to finance their operations in breach of financial sanctions.
The OFSI Guidance makes clear that OFSI expects AMPs and HVDs to design and implement proportionate, risk-based due diligence procedures to identify and mitigate the risk these strategies pose to AMP and HVD business practices.
Compliance and Penalties
Failure to comply with mandatory financial sanctions reporting obligations is an offence, that can result in imprisonment and/or fines for individuals, and fines for companies.
OFSI is also responsible for monitoring compliance with UK financial sanctions and for the civil enforcement of UK financial sanctions. When OFSI identifies breaches of these sanctions it has powers under the Policing and Crime Act 2017 to impose civil monetary penalties of up to the greater of £1,000,000 or 50% of the total value of each breach on a strict liability basis (i.e., OFSI does not have to prove that an AMP or HVD knew or had a reasonable cause to suspect that it was engaged in a sanctions breach). Where a course of conduct involves multiple sanctions breaches, these powers can result in quite significant penalties.
In serious cases, particularly those involving sanctions circumvention or evasion, OFSI may also elect to refer cases to law enforcement agencies for investigation and potential criminal prosecution. Breaches of financial sanctions are serious criminal offences and are punishable by a maximum of up to seven years' imprisonment for individuals and unlimited fines for companies.
Conclusion
While OFSI has announced in a blog post that it intends to complete further industry engagement prior to these measures taking effect in May 2025, affected AMP and HVD businesses should take steps now to conduct (or refresh) their sanctions risk assessments and ensure they understand the nature of their obligations under applicable UK sanctions regimes. Given the time involved in designing and implementing effective compliance controls, early consideration also should be given to designing or making any needed enhancements to compliance controls in anticipation of the new mandatory reporting obligations coming into effect. These efforts can then by supplemented as and when OFSI issues additional guidance for industry ahead of the new reporting obligations going live.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
