As the battle against money laundering continues, Marcus Doherty discusses the new rules to combat tax evasion that take effect in June.
Money laundering, terrorist financing, and organized crime remain significant concerns for the world’s policymakers. According to the United Nations, an estimated $2 trillion is laundered every year.1 In response to these ongoing threats, the European Parliament passed the Fourth Anti-Money Laundering Directive (AMLD 4).
Historically the AML rules have focused on the proceeds of traditional criminal activity or terrorist-related financing. The new rules, which take effect in June 2017, are specifically designed to combat tax evasion. While the new requirements of the AMLD 4 build on previous directives, there are some important changes asset managers should prepare for.
NEW RULES FOR INVESTOR DUE DILIGENCE
Under the current rules, asset managers are required to conduct ongoing surveillance and due diligence for high-risk investors. For investors deemed low-risk, a simplified due diligence is permitted. However, AMLD 4 makes the requirements to assess low-risk investors more stringent. In order to classify investors as low risk, asset managers will have to demonstrate that they have considered factors related to customer, product, delivery channel, and geographic risk. The European Commission will publish a list of high-risk countries that have not implemented internationally agreed AML standards. For investors from these jurisdictions, extra checks and monitoring of transactions will be required to prevent, detect, and disrupt suspicious transactions. Asset managers may continue to rely on third parties for investor due diligence, except those established in high-risk countries. If they choose to rely on a third party, an asset manager must ensure the third party applies investor due diligence and recordkeeping requirements equivalent to AMLD 4, even if the third party is outside of the EU.
Asset managers will have to dedicate additional time and resources to conduct due diligence on their investors not only during initial onboarding but throughout the entire relationship. To prepare, asset managers should start to think about how they will build these additional assessments into their workflows.
RETHINKING CORRESPONDENT BANKING
In AMLD 4, the term “correspondent relationship” has been broadened from its traditional definition to capture “similar services” offered by financial institutions, such as fund distribution. An example of this would be when an underlying investor approaches a distributing bank to use that firm’s nominee holding in a fund in order to obtain a security in that fund. This kind of activity will now be considered higher risk and, in many cases, will require more due diligence by the transfer agent on behalf of the fund or asset management firm.
INCREASED OWNERSHIP DISCLOSURE
European Member States will be required to create national registers of beneficial owners for companies including funds. This policy is designed to ensure transparency around certain ownership structures, which is driven by the concern that complex company structures are being used to hide the true identity of beneficial owners to avoid taxes. Funds will have to implement controls to:
- Identify any person who has more than a 25% stake in a company as a beneficial owner
- Notify those identified that they are beneficial owners
- Report this information into the public register along with the ownership stake
Ireland and the UK have already taken steps to implement the beneficial ownership requirement while other jurisdictions, such as Luxembourg, still need to determine how they will maintain the public registers.
DEFINITION OF POLITICALLY EXPOSED PERSON EXPANDS
The definition of Politically Exposed Persons (PEP) will also change under AMLD 4. Under the new definition, PEP has been expanded to include any person who holds a prominent public function, regardless of their country of residence and their immediate family members and close associates. For asset managers, the challenge will be that the new definition of PEP will apply to existing investors as well. To comply, asset managers must remediate their current investors to ensure that they are appropriately applying the AML requirements to newly defined PEPs.
In order to implement the required changes, asset managers need to assess whether enhancements to their systems and controls are required. Policies and procedures will also need to be updated to capture risk assessments of all investors. Additionally, they will need to assess their existing investors to see if any remediation work is needed to bring them in line with the new rules.
Asset managers should think about appropriate solutions and engage with distribution partners now on how to manage the increasing workload. Asset managers, funds, and management companies must continue to be diligent and think about what might come next. The battle against money laundering is ongoing and AMLD 4 is just the latest step along the way.
Part of this article was originally published in the 2017 Regulatory Field Guide. The guide features insights from a number of our experts on important regulatory developments for asset managers in the year ahead. Visit bbh.com/regulatoryfieldguide to explore the guide.
1 United Nations Office on Drugs and Crime, Illicit Money: how much is out there?, 25 October 2011