Anti-money laundering: Money bags

With banks under global scrutiny for failing to comply with a growing raft of anti-money laundering regulations, Mark Latham investigates whether enough is being done to prevent similar failures in the asset management industry.

Globally, the amount of money laundered per year is estimated to be at least $1.6 trillion (€1.5 trillion), according to the United Nations – and, despite international efforts to reduce it, the aggregate amount is thought to be growing annually.

While the startlingly high figure, equivalent to 2.7% of global GDP, is only an estimate, the fact that other international bodies, such as the International Monetary Fund, have produced similar figures gives it some legitimacy.

Since it’s self-evidently illegal, it is perhaps not surprising that there are no figures or even estimates of the extent to which criminals launder money via managed investment funds.

The fact that many national regulators do not publish details of fines or other punishments they have issued for money laundering makes it all the more difficult to assess the scale of the problem.

Speaking under condition of anonymity to Funds Europe, one industry insider, a global head of compliance with a major European asset manager, said that it would be “virtually impossible” to stop the industry being used to launder money.

“It would, for example, be relatively easy to set up a property fund for the purposes of money laundering or to push money through a retail fund if somebody really wanted to go through a fund,” the person said.

Money laundering is most closely associated in the public mind with the banking industry, where failure to control money-laundering risks has led to massive fines in recent years for the likes of HSBC and Standard Chartered.

The most recent high-profile example, in January, resulted in Deutsche Bank being fined $630 million by US and UK regulators for failing to have a sufficiently robust regime in place to combat money laundering.

Since the release in 2015 of the Panama Papers – which saw the leaking of financial information about more than 214,488 offshore entities – the global fight against tax evasion and money laundering has moved up a gear.

As the threat of global terrorism continues to grow, the EU has since 2001 pushed through no fewer than three revisions to its original Anti Money-Laundering (AML) Directive of 1991.

The most recent revision, the fourth AML directive, came into force only last June. A fifth version – largely in response to issues thrown up by the release of the Panama Papers – is expected to be agreed by the end of June and includes a push for greater transparency.

Agathi Pafili, senior policy advisor at the European Fund and Asset Management Association (Efama), largely welcomes the fifth AML directive but worries that one of the proposed requirements – that a register of beneficial owners should be public – would raise data privacy issues. Like others in the industry Pafili believes that while highly regulated funds are unlikely to be the first choice of criminals looking to launder money, the possibility “cannot be completely ruled out”.

“As a sector, we can say that managed funds are not normally used as vehicles for money laundering,” she says.

“The industry takes the issue of money laundering very seriously and managed funds are a difficult vehicle to use for money laundering purposes – but in the vast majority of cases, I don’t think it is happening.

“The problem is not just identifying the end-investor but also on identifying the right entity in the distribution chain with a direct relation to the end-investor.”

Efama’s concerns about data privacy in the fifth revision of the AML directive are shared by Stéphane Badey, a partner with Luxembourg-based Arendt Regulatory & Consulting, who advises on regulatory compliance, data protection and anti-money laundering regulations.

The fact that managed funds are often sold through banks or other distributors gives them an extra layer of security, as checks into the identity of an investor in the case of suspicious activity could be initiated by the fund or the distributor (or, most likely, both).

“The weakness for funds is the intermediation which creates distance between the final investor and the management company,” he says.

Badey also points to the fact that investments in funds in Europe are often sold through banks or other regulated financial institutions, so the name of the beneficial owner will not appear on the register of the funds.

“Theoretically there might be money that is going through regulated funds, but I don’t think funds would be the vehicle of choice for money launderers,” he says.

“Nevertheless, we should never underestimate the extent to which funds could be targeted by money launderers.

“There are always loopholes and sometimes the robbers are ahead of the cops, but the industry takes the issue seriously. A lot is invested in software and training and everyone is aware of the damage to their reputation if things were to go wrong, but there is always more that could be done.”

Monique Melis, managing director within Duff & Phelps’ compliance and regulatory consulting practice, believes there is an over-reliance on administrators to take responsibility for AML compliance and that the fund industry as a whole “needs to step up its game”.

“I think that there is an over-reliance on administrators who might be in Ireland, the US, the Cayman Islands or Luxembourg to undertake anti-money laundering controls on behalf of managers,” she says.

“It is often just a tick-box exercise when it comes to fund managers fulfilling their obligations and that is potentially an area of weakness.

“The legislative framework is already there. What is needed is a culture change within firms. There needs to be a new focus on responsibility at the level of the fund manager.”

Despite considerable investment by the industry in computerised systems to detect suspicious transactions in recent years, Melis – who previously managed the transaction monitoring unit in the markets and exchanges division of the UK regulator, back when it was called the Financial Services Authority – says that transaction monitoring needs to be done more systematically than at present.

Melis also believes that the funds industry is trailing behind retail banking when it comes to combating money laundering.

“The controls at retail banks are stronger as they are the first entry point for potential money launderers,” she says. “There will be increasing pressure on the fund industry and administrators going forward.”

As money launderers become more sophisticated, they will find craftier ways to integrate their ill-gotten gains into the system and “might turn to funds, so the industry needs to be vigilant”.

Melis adds: “It is a common human failing not to carry out necessary background checks when it comes to asking customers direct questions like, ‘Where does the money come from?’ Unless it is actually pinpointed in law, that will remain a weak point in the AML regime.”

Like many others involved in the industry, Kelvin Dickenson, who is head of product strategy and management for compliance and data solutions at California-based compliance platform provider Opus, believes it is impossible to make an accurate assessment of the extent to which money is laundered through the fund industry, as criminal transactions are “invisible until they are caught”.

“It would, though, be fair to say that money laundering is more widespread than many involved in security believe,” he says.

“What is needed is to have robust know-your-client (KYC) processes in place. If we don’t know the extent of an individual’s wealth, we can’t say whether there is something suspicious in a transaction.

“Money is a bit like water: it will always find the path of least resistance and criminals are going to find ways that are possible to launder money through any and all means available.

“The reality we have to face is that criminals are becoming ever more sophisticated. That means that knowing who you are doing business with is critical, but without the right solution, KYC is difficult to do.”

According to Dickenson, this means that firms need software that constantly monitors all transactions, and that every trade needs to go through algorithms in order to identify suspicious activity.

He adds: “The industry needs to look out for vulnerabilities and manage risk, and continue to invest in technology to ensure that AML systems can act efficiently without being a burden for the business.”

©2017 funds europe



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