Private fund managers and administrators are a major and important catalyst of global investment activity that operate in an extremely wide and diverse set of markets – and with highly varying degrees of risk. Indeed, with an estimated US$123 trillion in professionally-managed assets under management globally at the end of 2021, calling the fund management space large would be an understatement.
By their nature, fund managers carry out transactions with businesses and commodities that effectively span the entire range of the global economy, and are therefore subject to diverse and complex regulations, depending on their given investment activity.
As a fund manager’s primary objective is to identify and invest in rewarding and responsible targets for their own investors, they need to constantly ensure that their backers’ funds are being spent on targets that comply with the national, regional and global regulations they are subject to – while also falling within their predetermined risk parameters.
Complying with regulations is nothing new for fund managers, who have been subject to global and national Anti-Money Laundering (AML) regulations since they first started to take shape in the late 20th century.
Nevertheless, experience with regulatory compliance does not necessarily equate to an easier approach to regulatory responsibilities – expanding regulations that have become more complex, demanding and wide-ranging make the compliance burden increasingly hard to meet for many fund managers, in particular those with limited resources and/or wide global footprints.
In this article, we’ll be covering some of the key AML and Know Your Customer (KYC) regulations that apply to fund managers globally, as well as in some of the major centers that fund managers use as their bases.
AML and the Financial System
AML refers to a broad collection of laws, regulations and compliance mechanisms that are designed to prevent criminals and terrorists from using illegal funds in the financial system. According to the United Nations, laundered money makes up between 2% and 5% of global GDP – an eye-watering multi-trillion dollar figure.
As the global financial services industry continues to expand and become more internationalized – with investment funds increasingly looking to diversify their portfolios across sectors and national economies – the compliance challenge is becoming more complex and onerous. Despite international AML regulations and protocols such as those issued by the Financial Action Task Force (FATF), national AML regulations vary significantly across national jurisdictions.
In addition to the complexity of navigating these diverse regulations for fund managers with an international footprint, criminals are also exploiting the transnationalization of finance. In addition, the many new technologies that are constantly being developed for investing and transacting are constantly being used to illegally capitalize on loopholes, bypass AML laws and make the most of regulatory voids.
KYC & AML for Fund Managers
In order to meet the multi-layered and constantly-evolving AML requirements of overlapping regulatory agencies, financial institutions (FIs) such as fund managers need to carry out diligent and effective KYC and Know Your Business (KYB) processes on their investors, in order to ensure their services are not being used as a conduit for money laundering and other forms of financial crime.
An effective KYC/KYB program can generally be separated into three main components:
Customer/investor identity verification (IDV) – establishing and verifying the identity of a customer (by validating their government issued IDs and carrying out selfie checks if they are an individual, or running corporate registry screening and checks if they are a business)
Customer Due Diligence (CDD) – carrying out checks to ensure the customer has not been implicated in financial crimes in the past and is not on sanctions and other watchlists. This also includes ascertaining who a company’s UBOs are and assessing their risk profile.
Ongoing monitoring – carrying out checks at consistent intervals after they have been onboarded in order to ensure that their transactional behavior or status has not altered their risk profile.
AML Regulations in Fund Management Centers
Across the world, there are numerous jurisdictions that have established financial services-friendly legislation and fiscal regimes, including places such as the Cayman Islands, British Virgin Islands, Panama, Malta and Cyprus – among others.
Fund managers that are registered in these jurisdictions need to comply with the respective AML regulations of these countries. Let’s take a look at what some of these regulations and regimes involve.
We’ve recently published the first in a series of articles exploring AML and financial reporting regulations in various global jurisdictions, and the first location we covered was the Cayman Islands.
Having established itself as a global financial center over the past several decades, the Cayman Islands has been proactive in developing business-friendly and robust AML laws that are designed to strike a balance between client privacy and regulatory transparency, in order to secure consistent access to the global financial system for Cayman Islands companies.
Cayman Islands’ financial regulations are developed by the Cayman Islands Monetary Authority (CIMA) and include responsibilities for FIs and service companies to carry out wide ranging KYC/KYB on their clients, including the gathering of ultimate beneficial ownership (UBO) data and employing a risk-based approach.
British Virgin Islands
The BVI’s financial regulatory regime (BVI FSC) is framework is set out in its Anti-Money Laundering and Terrorist Regulations. This set of laws sets clear rules on the responsibilities of businesses and individuals to detect and prevent money laundering and terrorist financing. It also includes clear guidelines on how financial service companies need to carry out KYC processes such as customer screening, IDV, reporting of suspicious transactions, CDD and EDD, and ongoing monitoring of onboarded individuals.
Panama’s AML framework is set out in its ‘Adopting Measure for the Prevention of Money Laundering Terrorism Financing and Financing of Proliferation of Weapons of Mass Destruction and other Provisions’ law, and is regulated by the country’s Superintendent of Banks. For fund managers operating out of Panama, this law contains clear guidelines on the KYC, IDV and CDD/EDD processes that need to be carried out on their clients, as well as the ongoing monitoring responsibilities that are considered central to an effective KYC/AML regime in the country.
The Bahamas’ Central Bank carries the responsibility over the licensing, registration, regulation and supervision over FIs operating in the country. Its Banks and Trust Companies Regulation Act, 2000 (BTCRA) sets out the responsibilities of the Bahamas’ Inspector of Banks and Trust Companies to ensure that licensed FIs in the country have implemented effective KYC rules and processes, monitoring and reporting standards.
As an EU member state, Malta’s Prevention of Money Laundering Act and the Prevention of Money Laundering and Funding of Terrorism Regulations (PMLFTR) are closely modelled on the EU’s Anti-Money Laundering Directives (AMLD), the latest of which is 5AMLD. The country’s AML and CTF regulations are developed and enforced by the Malta Financial Services Authority (MFSA). FIs operating in Malta need to ensure they have implemented robust and effective KYC and AML processes that require IDV, CDD/EDD and continuous monitoring in line with the rest of the EU, which is well known for its stringent and proactive approach to compliance.
Another EU member state that has established itself as a financial center in the eastern Mediterranean, Cyprus’ AML framework is included in the country’s National Defense Authorization Act for Fiscal Year 2021 (NDAA) and is titled the Anti-Money Laundering Act of 2020 (AMLA). Cyprus’ AMLA is aligned with the EU’s AMLD laws and sets high standards for KYC/KYB, UBO identification, ongoing monitoring and suspicious transaction reporting.
Jersey’s AML regulatory framework is defined in its Money Laundering (Jersey) Order 2008 and is designed to mirror and enforce the FATF’s AML recommendations. The island territory’s financial services industry is regulated by the Jersey Financial Services Commission. Jersey FIs need to properly implement adequate and effective KYC/KYB, IDV and CDD/EDD as part of a risk-based approach. They also need to carry out ongoing monitoring and suspicious transaction reporting in order to ensure they are not being used as conduits for money laundering and other financial crimes.
The Financial Services Authority of Seychelles is responsible for developing and enforcing the island nation’s AML regulations. The financial hub in the Indian ocean follows the FATF’s recommendations and requires all FIs registered in the country to carry out the global regulatory watchdog’s full suite of AML checks, including KYC, IDV, ongoing monitoring and CDD/EDD.
How KYC-Chain can help
KYC-Chain’s end-to-end onboarding solution allows our clients to quickly and efficiently implement a full suite of KYC/KYB and AML processes as they onboard customers.
Our solution is easily customizable for multiple global jurisdictions, allowing FIs, fund managers and other financial or virtual asset service providers (VASPs) to ensure they are complying with the regulations of their home jurisdiction, as well as the laws of the markets they are operating in.
Using the latest technology for carrying out IDV and Liveness checks, customer data is checked across hundreds of government and international databases to verify authenticity, while ongoing monitoring can be preconfigured to be carried out at varying frequencies, based on a customer’s risk profile.
Are you a fund manager looking for a KYC/KYB solution to meet all of your AML requirements? Get in touch and we can start a conversation.