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AML guidance for the funds industry

Sectoral guidelines finally agreed

A major milestone was reached on 18 December 2013 with the official publication of the Irish Funds Industry Association’s (IFIA) sectoral AML guidelines after several years of discussions between industry, the Department of Finance and the Central Bank of Ireland (“CBI”).

The new sectoral guidelines are broadly consistent with the Core Guidelines but go to an additional level of detail tailored to meet the needs of the funds industry. The CBI has confirmed that it will “have regard” to these guidelines in assessing compliance with the AML requirements.

Overview

These new sectoral guidelines provide a more tailored approach to meeting AML due diligence requirements which recognise the unique operating model of the international funds industry. Key areas of concern, such as the timing and the level of customer due diligence (“CDD”) as well as reliance on third parties outside the State, have been addressed in the guidelines. It is important to note that the new guidelines do not constitute secondary legislation and that “Designated Persons” charged with ensuring compliance must always refer directly to the legislation when ascertaining their statutory obligations. These sectoral guidelines are also subordinate to the core guidelines applicable across all industry sectors. 

Key areas covered by the funds industry sectoral guidelines are further explained below and include:

  • Due diligence on nominees
  • Timing of customer due diligence
  • Risk assessments
  • Reliance on third parties
  • Suspicious transactions
  • Roles and Responsibilities

Due diligence

The potential treatment of intermediary or nominee accounts, which pool together several investor accounts, was probably the most contentious area of the core guidelines for the funds industry. Appendix 3 in the funds industry sectoral guidelines provides more clarity around the application of the risk based approach to these types of entities such that the administrative burden and overlap in due diligence can be reduced. A distinction is drawn between regulated nominees and non-regulated nominees – simplified due diligence can be applied to regulated entities but not to non-regulated entities. Appendix 1 includes a list of standard due diligence documents similar to that in the core guidelines and also provides additional suggestions for higher risk entities. Appendix 2 provides a list on third country equivalence with EU member state rules, which will be particularly helpful in the context of the international funds industry.

Timing of customer due diligence 

The AML legislation requires CDD to be collected prior to establishing a business relationship. There is an exemption from this requirement where there is “no real risk of money laundering or terrorist financing”. This exemption can only be applied where collection of CDD “prior to” establishing a business relationship would interrupt the normal conduct of business. This exemption is heavily relied upon within the funds industry and the sectoral guidelines note that no investor payments, including but not limited to redemptions or distributions, should be made until the appropriate due diligence is completed. Section 6 provides useful guidance on how to manage these circumstances prior to opening the account and after opening the account. Management of outstanding documentation should be clearly documented and included within approved AML policies and procedures.  Timeframes and escalations processes should also be documented.

Risk assessments 

Section 4 of the sectoral guidelines provides some very useful factors to be considered by the funds industry when completing a risk assessment. It concludes with an important note on “non-face to face transactions”. The funds industry in Ireland is predominantly on a “non-face to face” basis and the 2010 Act requires additional measures for such transactions. The guidelines concluded that “at least one” additional measure is required for non-face to face transactions. 

Reliance on third parties 

Under Section 20 of the 2013 Act, Designated Persons can rely on certain designated third parties to complete CDD. Section 7 of the sectoral guidelines provides a very useful approach to completion of due diligence on the third party prior to reliance on it. The guidelines also provide a useful list of items to include in an agreement where reliance is placed on a designated third party. Group introductions are commonly used in the funds industry. The guidelines identify these as a method of relying on another designated third party.  Such group arrangements should be treated in the same manner as an independent third party, i.e. there should be a formal agreement in place and the CDD measures required should be consistent with the AML legislation within the relevant group company’s jurisdiction.

Suspicious transactions 

Section 10 and 11 of the sectoral guidelines provide some relevant examples of suspicious transactions. Content from both sections should be used when developing training materials for staff. This is one of the key areas of focus for the CBI and can only be explained to staff through case studies and examples.

Roles and Responsibilities

Within the funds industry there are many parties involved in any one transaction. Section 2 of the sectoral guidelines documents the roles and responsibilities of the various parties and requires an “agreement” to be entered into with service providers, outlining the respective responsibilities in particular, where some activities are outsourced to another entity.  However, it should be noted that ultimate responsibility to comply with the Acts remains with all Designated Persons. Where an agreement is made for one party to report suspicious transactions to the authorities (to avoid duplication), this should be clearly documented and pre-approved by the Gardaí and the Revenue Commissioners.

Looking forward

The newly agreed sectoral guidelines provide very useful clarity in addressing AML requirements in a funds industry context. The length of time it has taken for the guidelines to be developed and agreed with the CBI highlights the challenges that can arise in trying to implement a single set of AML rules and interpretations across a diverse range of industry sectors. With the European Commission’s proposal for a Fourth AML Directive, AML is likely to remain a hot topic for industry in the years to come. 

Deloitte led the development of the core AML guidelines and continues to engage with industry practitioners on AML issues. We can assist you in addressing your requirements under the AML framework, including:

  • Facilitation of risk assessment
  • AML compliance review
  • Development of AML policies and procedures
  • AML training
  • AML board presentation etc.

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Sinead Ovenden

Director - Consulting

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Sean Smith

Director - Financial services

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Colm McDonnell

Partner - Enterprise risk services

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David Kinsella

Partner - Enterprise risk services

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