Specific AML provisions for investment fund managers

Stéphane Badey: “The circular also tackles the recourse to intermediaries who carry out marketing and which act on behalf of clients.”
Stéphane Badey: “The circular also tackles the recourse to intermediaries who carry out marketing and which act on behalf of clients.”
(Illustration: Maison Moderne)

The recent CSSF Circular 18/698 is subtitled “Specific provisions regarding the fight against money laundering and terrorist financing applicable to investment fund managers (IFM) and entities carrying out the activity of registrar agent”, which is a strong statement that fighting money laundering and terrorism financing is close to the heart of the CSSF.

The circular also addresses a point often raised by professionals that the existing rules were not tailored for the investment fund industry. So, what is the news?

A clarification of the applicable rules

The circular starts by safely confirming that each IFM is subject to the AML/CTF Law (Law of 12 November 2004 on the fight against money laundering and terrorist financing), the CSSF Regulation No. 12-02 and the regularly published CSSF circulars on AML/CTF including for example the 11/519 on the risk analysis.

In addition, it is reminded that each IFM is also subject to the Law of 27 October 2010 relating in particular to the implementation of United Nations Security Council resolutions and acts adopted by the European Union containing prohibitions and restrictive measures in financial matters against certain persons, entities and groups (in the context of the fight against terrorist financing, as well as Articles 33 (1) and 39 (1) of CSSF Regulation No. 12-02 concerning the duty of constant vigilance in this context). It is also reminded that European Union regulations directly applicable under national law, or through the adoption of ministerial regulations, also apply to each IFM. 

Finally, should anyone have a doubt, the circular states that IFM must follow “guidelines for the securities sector which are soon to be issued by the Financial Action Task Force (FATF) and must also comply with CSSF Circular 17/661 adopting the joint guidelines issued by the three European Supervisory Authorities (ESA): European Banking Authority (EBA), European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA) on money laundering and terrorist financing risk factors, in particular chapter 9 of title III which covers providers of investment funds.

A clarification of the scope

The circular reaffirms that each IFM must implement due diligence measures regarding, in particular, clients, initiators of UCIs, portfolio managers to which they delegate the management and investment advisors and is also required to apply due diligence measures regarding the assets of the UCIs which it manages. For a market principally driven by UCITS funds, due diligence on assets was not high on the agenda of compliance officers, considering that investments are principally made in listed companies on regulated markets which require transparency rules. Not that nothing was done, but this was limited compared to the necessary due diligence required of buyers and sellers in the private equity and real estate world. With the increasing importance of the alternative markets and the potential AML risks associated to these types of underlying investments, the affirmation of this requirement was somehow expected.

Clarification of the AML obligations of the IFM 

The circular makes a distinction between four situations.

Case a) and case b) contemplate the situation where the IFM is in a direct relationship (i) with intermediaries who carry out marketing and which act on behalf of clients and/or (ii) with direct investors, with the difference that in case a) the IFM assumes the function of registrar agent and in case b) it does not.

Case c): the IFM is not in a direct relationship (i) with intermediaries who carry out marketing and which act on behalf of clients nor (ii) with direct investors and does not assume the registrar agent function.

Finally, case d), where the IFM does not exercise either the supplementary function of marketing UCIs which it manages or the function of registrar agent which can be the case for AIFM.

The circular places a number of obligations on the direct relationship between the IFM and the intermediary or the investor. Some of these obligations echo the more detailed provisions applicable to all delegates and the organisation of the marketing function. If anything, the circular is an acknowledgment that the AML risk is intimately linked to the distribution appetite. The more adventurous you want to be, the more risks you will take. 

Additional clarification will however certainly be required when it comes to the right AML measures to be applied on the scenarios a), b) or c) for the IFM to be in compliance with the circular.

For example, a common agreement on what is the definition of a “direct relationship” will be welcome. The ESA has provided a definition of what a customer is, that a direct relationship, distinguishing between i) a natural or legal person directly investing for its own account, ii) a financial institution acting under a discretionary mandate, iii) a financial institution acting on its own name but acting for its clients (i.e. nominee type) and iv) a financial institution customer where the financial institution is acting as an intermediary but is not the registered owner (i.e. third-party introducer type).

One would then think that a direct relationship is established when the investor is registered directly in the UCI registrar but case c) exposes the scenario where the IFM is not in a direct relationship with direct investors. Regardless the oxymora, it is a fact that a UCI with a good track record could receive unsolicited subscriptions and hence not be in a direct relationship with the investors prior to the subscription. This would also be true when there is an intermediary acting on behalf of its clients with whom the IFM has no relationship.

The circular is a reminder, if need be, that the registrar agent in the context of investment funds is a delegate of the IFM and the latter remains responsible from an AML perspective, whether it is having a direct relationship or not with its investors.

Stéphane Badey, partner, Arendt Regulatory & Consulting

In these latter cases, the AML/KYC framework must be detailed in a contract established between the registrar agent and the IFM so that the IFM can comply with its obligation as if it had established a direct relationship.

With this in mind, the circular is a reminder, if need be, that the registrar agent in the context of investment funds is a delegate of the IFM and the latter remains responsible from an AML perspective, whether it is having a direct relationship or not with its investors.

The circular also tackles the recourse to intermediaries who carry out marketing and which act on behalf of clients. This is the situation commonly referred to as “nominee” account.

In a nutshell, ESA guidelines seemed to indicate that when a financial institution is acting on behalf of clients, two scenarios must be considered. Either (i) the financial institution has a discretionary mandate over the client assets and, in such cases, the financial institution must be considered as the client or (2) the financial institution is acting upon client instruction and in this instance, information on the client of the financial institution must be escalated to the IFM to do the AML due diligence. The forthcoming FATF guidelines seems to stick with another recommendation on such “nominee” accounts which proposes to do enhanced diligence at the level of the financial institution without necessarily having access to the information of the underlying clients.

The circular seems to have opted for a position similar to the ESA requiring verifications and periodic assessments according to the risk to ensure that the intermediary complies at all times with the subscribed commitments, notably with respect to the communication, without delay and upon request, of the relevant identification data of its clients. 

Further analysis will certainly be required on that specific point to articulate in practice the different recommendations made by the ESA, the FATF and the CSSF.

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