Funds Europe – Anti-money laundering attracts ongoing attention from regulators in the EU. It is understood that firms have a good deal of difficulty conforming to the required standards. What are the main pain points?
Callaly – Ireland has just passed the Criminal Justice Act, which will transpose the fifth EU anti-money laundering directive. We need to see what the guidance resulting from that looks like, but I know the whole industry is facing increasing challenges in relation to establishing beneficial ownership.
There are challenges with identifying senior managing officials – within corporates in particular – and then of course for high-risk third countries there are increasing demands placed on global asset managers to identify their clients.
Overall, it’s becoming more and more challenging, but I wouldn’t say that’s an Irish phenomenon. It’s clearly a European phenomenon.
Meehan – It seems to be to do with the ‘look-through’ and the beneficial ownership challenge. There is a very good process around this and the issue comes down more to the financial institution where there was standard due diligence in the past, looking at principals and beneficial owners. Now, with an enhanced look-through, this has become a challenge for everyone.
The key thing is that Europe takes a consistent approach, that there’s no regulatory arbitrage around AML requirements to make sure that everyone is on a level playing field.
McEvoy – Yes, it’s very important to create a level playing field across Europe. Of course, that doesn't necessarily mean it’s a level playing field globally, and so for investors and managers outside of Europe – especially if they’re working in Europe for the first time – they have to bridge this gap in understanding to know what the requirements are.
While on the one hand we’re achieving consistency across Europe, there’s certainly subjectivity within that. We are required to take a risk-based approach and that can leave items open for discussion, such as what precise documentation is required with regard to a particular investor with a certain risk rating in a particular location. Invariably, a manager may have a different view to a service provider or to an adviser. While that can create challenges, it does promote risk assessment throughout the system as opposed to mere box-ticking, which is the objective.
Kealy – I agree. This topic has to be Europe-centred in terms of its framing, rather than Irish-centric. The European Banking Authority has obviously been entrusted with more powers. Though probably falling short of direct supervision, they are responsible for investigating breaches and looking at national supervisors’ compliance with EU law.
My opinion is the majority of blue-chip firms would conform and would comply; however, the point is it requires an awful lot of effort to do so. Beneficial ownership involves looking through multiple layers of intermediaries. When it comes to institutional fund investors, it’s probably lower risk in terms of due diligence, but non-institutional investors, such as family offices, can be more challenging given their trust arrangements, which can have multiple layers.
Funds Europe – Do AML rules cause firms to turn away clients in any significant volume?
Callaly – We are more focused on categorising countries, and certain countries are just off limits for us as being too high-risk, so we try to avoid taking tough decisions on individual investors and are more focused on domiciles. This is not the only factor, though.
Meehan – There are different factors that drive the risk rating – so country risk and the investor type, for example. In general, most investors we deal with would understand the requirements and reasons, but specific and comprehensive information must be received, meaning it could take some time to obtain all documents required to set up an investor, especially where they are complex corporate structures.
Funds Europe – Is your sense that any of these rules actually catch criminals or prevent criminality?
McEvoy – At the very least, the AML rules are preventative. I think you have to work on the assumption that if all of the standards that are in place today were not there, or not there to the same degree, it would create an attraction for dirty money. We work mostly with institutional clients and fortunately, suspicious cases would be quite exceptional, but that’s potentially helped by the fact that there are significant preventative measures in place.
Meehan – This is part of the role of the fund administrator and the requirement and onus to focus on suspicious transaction reporting is high. It’s not just about getting the correct documentation upfront and checking beneficial ownerships, it’s about ongoing monitoring of the investor, depending on perceived level of risk; it’s about ongoing monitoring of their transactions and understanding the investor’s investing patterns. I think that’s an area where there’s more of a spotlight, to ensure all parties understand the type of transactions of the fund as well.
McEvoy – It’s a very onerous responsibility and failure on any of our parts to fulfil that function can be met with significant consequences.