Anti-Seizure Legislation of this sort is quite common. The Department of Culture Media and Sport (DCMS) held a consultation on the issue last spring, a summary of which is available here. The legislative proposal is an attempt to bring the UK in line with a great number of other nations, which do routinely provide anti-seizure protection for works of art which are exhibited on loan. I'm not sure what the proposal this letter refers to is based on, however this letter reveals a lack of understanding of how many of these anti-seizure provisions work, they do not always apply to stolen works, and anti-seizure provisions certainly do not mean UK institutions will be implicit in theft or nefarious activity.
For example, in the US, anti-seizure provisions do not always apply to stolen works. In New York, the Arts and Cultural Affairs Law 12.03, was changed in 2000 to limit its scope to civil proceedings only. Similarly, the Texas anti-seizure legislation adopted in 1999 under the Tex. Civ. Prac. & Rem. Code dictates that works of art on loan may not be seized, except for stolen artworks. In addition, the Federal Immunity from Seizure Act, 22 U.S.C. Section 2459 requires applicants seeking protection to certify that it has no reason to know of any circumstances with respect to the potential for competing ownership claims.
Again, I'm not aware of the specific provisions of this proposal, but if other recent cultural property legislation in the UK is any indicator, there might be serious unintended problems with it. The Recent Dealing in Cultural Objects (Offences) Act 2003 had a number of loopholes rendering it essentially useless. The essential issue here is whether UK museums will be able to compete with other museums in the world for traveling exhibitions. On balance, I think it does make sense to allow museums to display works, as it allows a greater number of visitors to view and appreciate works from other nations and artists.