The new AML IV directive* ramps up responsibilities across the financial sector and service providers are keen to help. However, the impact on the cross-border fund distribution is particularly heavy, and Management Companies have specific needs that must be catered for on their investor base.
AML IV is more explicit than its predecessors, and more prescriptive in terms of the on-going monitoring of customers. For example, adequate, accurate, and current information will need to be held regarding beneficial ownership. For customer due diligence (CDD), clear evidence will be required why operators consider risk to be sufficiently low to justify the application of simplified CDD procedures, or why enhanced CDD measures were not applied..
Fund management companies often have to manage a dense network of know-your-customer (KYC) evidence trails, often with thousands of distributors and direct investors. These critical relationships soon become complicated, difficult to manage, and laden with risk, adding to the time needed to bring new business on board. It is frustrating to think that all this pains-taking investor identification work is being often duplicated across several Fund Managers.
There needs to be a way around this. “The fund industry should reflect on the opportunity to mutualize KYC and distributor due diligence activities,” noted a recent study from Deloitte “Europe’s fund expenses at a crossroads – the benefits of mutualizing the cost of distribution”. The report estimates €160m could be saved in this way just looking at the Luxembourg fund industry.
For example, a centralised KYC service could be a reliable, comprehensive “single point of truth” for documentation repository and due diligence. In this perspective, SWIFT has recently launched the SWIFT KYC Registry and over 1500 entities have started to use this centralised utility model. Initially, priority has been given to the specific needs of capital markets and cash correspondent banking, but now SWIFT has opened up its KYC Registry to support KYC compliance requirements for fund distribution and custody services.
However, given the pressure on costs and the extreme sensitivity of KYC, solution that goes beyond the document repository is needed for asset management. A dedicated infrastructure for funds could be augmented with centralised service for reputation risk management, geographical risk assessment, ultimate beneficial owner screening, KYC execution, risk modelling, risk scoring, and reporting. The result would be a reliable, mutualised solution at a manageable cost that would generate real benefits for the fund industry.
Olivier Portenseigne, Fundsquare
ALFI TASC member
* Directive (EU) 2015/849 “on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing” published 5 June 2015