Money laundering directive poses dealer dilemma

Client confidentiality can become a problem under provisions against money laundering rules. Two case studies reveal the kinds of challenge the art trade has to face


  • Milton Silverman

17 April 2023

Close-up of abstract oil painting

Anecdotal evidence is beginning to show that initial concerns about the application of the EU's fifth directive against money laundering to the art trade are, to a certain extent, justified.

One such story is about a client of mine, who was buying an expensive painting from an art fund. This fund wanted to use its solicitors to do its know-your-customer due diligence on the potential purchaser.

My client, a well-known art dealer of many years standing, was buying the picture in his company's name. The sellers and their solicitors took the – ultimately correct – view that my client's company was selling on to his own customer, and that therefore the funds were coming from that customer.

The directive's due diligence process requires the ultimate beneficial owner and source of funds to be identified. The fund and its solicitors therefore wished to know the name of the ultimate buyer in this case.

My dealer client thus faced a considerable quandary: the fund was a substantial source of paintings of considerable interest to him and his customers, and he did not want to put its nose out of joint. On the other hand, his customer was an important one, and there was a considerable risk that disclosing their name to the fund could cut my client out of future deals – and conceivably even this one.

Ultimately, my client was of the view that being obstructive would not help his cause, and he duly disclosed the name sought by the fund, albeit with the customer's permission. So far, there have been no adverse consequences: but one can nevertheless understand the dealer's concerns in this case.

Repeat due diligence causes problems

Another scenario reported to me was as follows.

A buyer in the US was part of an eminent family with a generations-old collection. He wished to buy a picture by an artist who was a rising star. According to my dealer client, who was handling the purchase for him, this work could be bought on the primary market for around £100,000, whereas equivalent works sell at auction for £2m–£3m.

The particular picture was one of very few available, and was being sold by a top-end gallery. It would only consider selling such a picture into a trusted collection, which would not resell it in the foreseeable future but retain it for a Iong time.

The gallery had carried out its know-your-customer due diligence on the purchaser. However, he then sent the purchase monies in a company name that did contain his surname. However, the gallery then, very properly, wished to carry out the same due diligence process on the company name.

This entailed so much time and correspondence that there was a danger of the deal falling through. As with the other case, my dealer client made a judgement call and put the two parties directly in touch so the deal could proceed more rapidly.

Once again, there was a theoretical risk that my client would be cut out from important future opportunities with the collection and the gallery; but this was a risk he decided to take under the circumstances.

Related article

Money laundering in the art market

Read more

Protecting business requires careful approach

Could dealers in similar circumstances take any measures to protect their business and client list?

In theory at least, it would be possible to draft a contract prohibiting the party conducting due diligence from directly dealing with the previously confidential, but now disclosed, party. The problem, of course, is how willing the proposed signatory – the subject of the intended prohibition – would be to agree to such an arrangement in what is, after all, an open market.

It may be worth a try. Dealers would first have to weigh up the comfort they might get from such paperwork against its enforceability – and even the extent to which just proposing it might sour relations.

A version of this article was previously published in Antiques Trade Gazette in July 2022

Milton Silverman is senior dispute resolution partner at Streathers Solicitors LLP

Contact Milton: Email

Related competencies include: Ethics, Rules of Conduct and professionalism, Legal/regulatory compliance, Purchase and sale

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