Following the conviction of Cheshire-based businessman John Hornby this month, for attempting to ship artworks to Russia- the UK's first conviction for breaching sanctions relating to luxury goods, resulting in a £28,000 fine - it has never felt clearer that due diligence in the market is no longer optional.

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Knowing when the right time is to conduct such checks is arguably less clearcut. Dealers and galleries have long expressed concern that asking for passports and invoices too early in a burgeoning customer relationship could unsettle a transaction, in a sector which has long relied on opacity and personal relationships. However there are risks to leaving these conversations till the last possible moment.

The most obvious risk is delaying the consignment of a work due to delays in receiving essential information. When travelling to fairs and selling overseas these delays can cause significant additional cost in shipping and handling. Raising the requirements earlier also ensures a smoother transaction if additional information is required (for example if a buyer is buying through an entity).

While concerns about protecting the relationship are valid, more regular collectors are increasingly familiar with the requirements. For buyers that are more resistant to the process, being direct and clear about what you need can give buyers confidence that they are dealing with a credible, professional business, and that the work they are acquiring has been handled with the same care. Approached this way, due diligence stops being a hurdle to the sale and becomes part of the assurance a serious buyer is looking for.

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So, when is the right time to conduct due diligence?

The answer, in part, depends on the nature of checks required. Under the Anti-Money Laundering regime, customer checks kick in as a legal requirement when transactions, or a series of linked transactions, reach or exceed a value of £10,000 (recently changed from its former 10,000 euros threshold). At this stage, verifying the identity of clients, establishing beneficial ownership where appropriate and assessing the level of risk presented by the proposed transaction is obligatory.

A significant shift has also moved due diligence away from being a one-off, or a single ‘point-in-time’ event. That is, where expectations may have once been that a customer identified and then able to continue transactions without checks unless a concern was flagged, HMRC has made it clear that questions around the customers behaviour and risk profile are to be considered on a continual basis. We recommend customers using Arcarta to use periodic checking on buyers on a minimum of a 12 month basis. Whilst this may sound intense, the depth of checks depends on the risk factors involved and can be adjusted accordingly.

Whilst Anti-Money laundering legislation and sanctions have dominated discourse on art market regulation in recent years, wider considerations around title, export compliance and provenance continue, with all the adjoining financial, legal and reputational risks. Timing is, again, worth a thought. Statutes of limitation, which set deadlines for bringing claims, and equitable doctrines such as laches, which look to bar claims where there has been unreasonable delay, make timely action paramount.

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Rather than viewing due diligence as a single event or point of investigation then, it feels increasingly helpful to view it as a layered process that develops alongside the transaction.

At the outset, relatively light-touch enquiries can be taken to identify obvious risks. Is the transaction likely to exceed the AML threshold? Are any of the parties subject to financial sanctions? Are there obvious gaps in provenance that need some closer attention? 

Collecting a few basic details early (a name and email) also gives you the opportunity to review market insights from Arcarta Predict to help understand a buyer's recent market activity.

As negotiations develop, the level of due diligence can increase, so that by the point of completion, all parties are confident that risks have been assessed to a proportionate level. The value of due diligence lies not simply in answering questions, but in asking them early enough to avoid walking into problems.