Money laundering, and the possible financing of terrorism that stems from it, is a global issue that affects all countries. The true scale of money laundering is difficult to assess, but it is undoubtedly significant. The United Nations Office on Drugs and Crime (UNODC) estimates that somewhere between 2% and 5% of global GDP is laundered each year; equivalent to between €715 billion and €1.87 trillion annually, according to Europol estimates.
Prevention of money laundering is key, and it starts with the gatekeepers of the financial system: financial service providers and government bodies, among others. For organisations operating in that space, having an effective anti-money laundering (AML) system is a must – but outsourcing can be both a viable and sensible option, in order to mitigate risk.
Be aware of your obligations
For quite some time, we have been providing investor 'know your client' (KYC) services within our overall AML programme, as part of TMF Group's fund services offering to fund administration clients in regulated jurisdictions such as the Cayman Islands and British Virgin Islands.
In these regulated jurisdictions, performing KYC checks on investors in funds is an obligation, required by local regulations. In our experience, most fund managers rely on the fund administrators to perform this duty.
For non-regulated funds, for example US Delaware funds, there is no formal requirement to perform investor KYC checks, but fund managers of non-regulated funds need to have formal processes in place for these investor KYC services. The benefit of having an AML programme in these non-regulated jurisdictions is twofold:
- Sophisticated and institutional investors expect a fund manager to have such programmes in place. They expect that the other investors in the fund with them are compliant with all laws.
- A robust AML programme protects the manager from headline risk. It's the worst feeling to wake up in the morning and see the name of one of your investors on the front page of major newspapers. KYC/AML programmes protect managers from this kind of unwelcome surprise.
The overall benefit of a KYC/AML programme is to identify bad actors who may use investments in funds as a means of laundering money, thus eliminating the risk these bad actors being associated with the fund manager and other fund investors. As a matter of course, most if not all fund managers in the market have a KYC/AML programme of some description, be that in house or outsourced, and even though it may not be a requirement in some countries, it is expected by all investors who onboard into a fund.
Furthermore, fund managers may also have funds in non-regulated jurisdictions with regulated feeder funds (in Cayman Islands, for example), who need to fulfil the legal requirement to perform investor KYC checks on the feeder fund investors. This can expose fund managers to the risk of fines and possibly other sanctions from the foreign regulators.
Possible exposure to sanctions
We have experienced that more and more fund managers are looking for parties to assist with performing investor KYC checks. This trend has arisen for various reasons: internal governance rules, requirements from the bankers of investment funds, requirements of certain investors to have their co-investors checked. But above all, this trend has also been prompted by the risk of allowing 'political exposed persons' (PEPs) to invest in investment funds, if enhanced due diligence is not performed.
It has become more complex with recent sanctions imposed by the USA, United Kingdom, Europe, Cayman Islands and other countries. Fund managers need to make sure that investors are vetted against databases that are updated daily, in order to detect any possible hit.
A thorough, digital approach
TMF Group has systems in place to scrub investors data against PEP lists, check for heightened-risk individuals or organisations, such as state-owned enterprises, detect organised crime links, conduct extensive negative media research and also sanctions screening, which act as an early warning system for hidden risk. We provide investor KYC checks at onboarding and we also offer continuous monitoring of investor data. We run checks on any kind of investor and investment structure.
The benefits of digital governance for TMF Group's client and investor experience include next-level screening and compliance security, supporting evidence and risk-based operational monitoring to meet regulatory requirements in every location.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
