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Who must verify clients and why anti-money laundering rules apply to you

Works of art can be used as a tool for money laundering because they are portable across borders, have a subjective value, and the market is traditionally very discreet. When a criminal organisation wants to “clean” money, it can buy a work, sell it later through a complex network of intermediaries, and legitimise the proceeds.

To prevent this, regulators in the EU and in the Czech Republic have brought the art market under strict supervision, with the key threshold being a transaction value of EUR 10,000.

When exactly you must carry out client identification and due diligence

This is crucial, because you add up the amounts, not just individual items. If you carry out multiple related transactions with one client and their total reaches the threshold, the obligation also arises.

The rules are as follows:

Client identification (KYC) must be carried out if the value of the transaction reaches EUR 10,000 (approx. CZK 250,000). The natural person must be present, you must verify their identity from a valid ID document and record the identification details. If the transaction is suspicious, you must identify the client in all cases, regardless of the threshold.

Client due diligence is more in-depth and you must carry it out if the value of the transaction reaches EUR 15,000, if the client is a politically exposed person, or if the transaction shows signs of suspicion. You determine the purpose of the transaction, the nature of the client’s business, the origin of assets and funds, and the identity of the beneficial owner.

In practice, this means that if you sell a painting for EUR 8,000 to one collector and there is nothing suspicious, you do not have a statutory identification obligation under Czech AML rules. Once you exceed EUR 10,000, you must identify the client.

Czech law prohibits deliberately splitting transactions in order to avoid the thresholds, so if a client buys three works in one day, you must identify the client.

Identification in practice and what to verify

Identification is not just copying details; you must proceed thoroughly under Section 5 of the Czech AML Act. For natural persons, you must verify identity from a valid ID document, record personal data, verify politically exposed person status, and check sanctions lists.

For legal entities, you must identify the company, the natural person representing it, and above all determine and verify the beneficial owner. You must also record details of the ownership and management structure.

Determining the beneficial owner is critical, because many transactions run through complex structures and your task is to reach the natural person at the end of the chain.

Attorneys from ARROWS advokátní kanceláře can help you set up identification processes, including forms and checklists, so that you are prepared for an inspection by the Financial Analytical Office (FAÚ) in the Czech Republic.

Client due diligence and establishing the source of funds

If the transaction exceeds EUR 15,000, is suspicious, or involves a PEP, client due diligence comes into play. Identification tells you who the buyer is, while due diligence answers why they are buying and where the money comes from.

Due diligence includes establishing the purpose and intended nature of the transaction, the source of funds, and mapping the ownership structure.

The purpose and intended nature of the transaction explains why the client is buying this work and whether it fits their profile.

Establishing the source of funds is the most important part of due diligence. Czech law requires you not only to obtain the information but also to verify it adequately, and you must form a view as to whether the funds may originate from criminal activity.

For companies, you must map the ownership structure. An extract from the register is not enough where the owner is another company; you must go all the way to the natural person.

If due diligence cannot be carried out, you must not complete the transaction and you must consider reporting a suspicious transaction.

When you suspect money laundering

As soon as you notice that a transaction shows signs of suspicion under Section 6 of the Czech AML Act, you have a duty to report it to the Financial Analytical Office (FAÚ), the Czech financial intelligence unit. Indicators of suspicion may include avoiding identification, an unclear source of funds, or an extremely inflated price.

If you form a suspicion, you complete a Suspicious Transaction Report and send it without undue delay to the Financial Analytical Office.

If you file an STR, you must not disclose this to the client or to any unauthorised person. Revealing that an FAÚ investigation is underway is an administrative offence with a high fine and may jeopardise the investigation.

In the case of a suspicious transaction that is at risk of being carried out immediately, you may have a duty to postpone the transaction for up to 24 hours.

Practical risks and what you may face

Breaching the Czech AML Act has serious consequences, including fines, a ban on activity, reputational impacts, and criminal liability.

A fine imposed by the Financial Analytical Office can reach up to CZK 10 million, or potentially a multiple of the benefit obtained.

In serious cases, a trade licence may be revoked, which can be devastating for a trader.

The FAÚ may publish a decision on your breach, which may deter reputable clients.

If you knowingly assist money laundering or fail to report a criminal offence, you and your company may face criminal prosecution.

Table of practical risks

How to protect yourself and the basic steps

If you are an obliged entity under Czech AML rules, you must have a written document (SVZ) describing how you assess risks and how you proceed with AML checks. This document must be up to date and, in some cases, submitted to the FAÚ.

Having a form is not enough—you must verify the information from reliable sources. If a client claims to be the owner, check this in the register of beneficial owners in the Czech Republic. You must retain all documents for 10 years.

Stay vigilant, and if something about a transaction does not seem right, it is better to consult experts.

Special situations and politically exposed persons

PEPs are persons in prominent public functions, both in the Czech Republic and abroad, including their close associates and business partners. For PEPs, there is always an obligation to carry out customer due diligence and to establish the source of wealth.

Sanctions lists and international sanctions

As a trader, you must not do business with persons or entities on sanctions lists (EU, UN, national list). If you identify a match, you have a duty to freeze the assets and inform the FAÚ, and breaching these rules is a criminal offence under Czech law.

Price and forgeries as additional legal aspects

While the Czech AML Act addresses the laundering of proceeds, do not forget civil liability, because selling a forgery may constitute fraud. From an AML perspective, the sale of a forgery is a risk indicator often used for fictitious layering of funds.

Before purchasing, you should verify whether the work is not listed in stolen art databases, for example the Art Loss Register or the database of the Police of the Czech Republic. Purchasing a stolen work may expose you to criminal prosecution in the Czech Republic for money laundering or handling stolen goods.

Restrictions on cash payments

Do not forget Act No. 254/2004 Coll., on restrictions on cash payments. In the Czech Republic, you must not accept or make a cash payment exceeding CZK 270,000 (approx. EUR 10,500), regardless of your AML obligations.

ARROWS advokátní kancelář, a Prague-based law firm, provides comprehensive services in compliance and art law. We can assist you with auditing existing procedures, preparing the Internal Policies System (SVZ), employee training, setting up identification processes, and representation during FAÚ inspections.

Art trading is about beauty and investment, but also about responsibility. Compliance with AML regulations is now an essential part of professional trading, and ignoring the rules can be fatal for your business.

Our attorneys in Prague at ARROWS advokátní kancelář will help you set up processes so that your business is safe and compliant with Czech law.

If you want to be sure that your business is lawful, email us at consultation@arws.cz.

Most common legal questions

1. I run a small second-hand bookshop and sell inexpensive books. Do I need an SVZ?
If you do not trade in goods with a value of EUR 10,000 or more, you generally do not become an obliged entity under the Czech AML Act and you do not need an SVZ. However, be mindful of serial transactions and the cash payment threshold.

2. The buyer refuses to state the source of funds in a transaction for EUR 20,000. Can I sell to them?
No. If you are required to carry out customer due diligence (above EUR 15,000) and the client does not provide the cooperation necessary to verify the origin of funds, Czech law prohibits you from completing the transaction.

3. How can I safely check sanctions lists?
There are specialised software tools or publicly available databases (SanctionsMap.eu, etc.). We recommend conducting checks systematically. We can advise you on how to set this up.

4. What if I only find out after the transaction that it involved money laundering?
Immediately contact the FAÚ (the Czech Financial Analytical Office) by filing a Suspicious Transaction Report and consult an attorney on the next steps to minimise the impact on your business in the Czech Republic.

5. How often do I have to train employees?
Czech law requires employee training at least once every 12 months, and also whenever a new employee starts or when an employee’s job assignment changes.

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