Obligations and responsibilities of fund boards are ever increasing. This is particularly evident with fund’s anti-money laundering (AML) compliance. With the imposition of new regulations, directives, and guidelines, these responsibilities continue to become more complex, technical, and exacting on fund boards. It is true that most funds appoint a transfer agent to maintain the register of shareholders and carry out the identification and verification procedures on the fund’s shareholders, however, the role and responsibility of the funds’ board of directors is equally important. Boards must define and document the roles and responsibilities of all key stakeholders in this complex process such as the money laundering reporting officer (MLRO), transfer agent, distributor, and the risk and compliance functions at its appointed asset management firm. It is a complex web, and appropriate allocation of responsibilities is a critical component of a well-functioning AML program.
While a transfer agent provides valuable support to a robust AML compliance program for a fund, the fund’s overall responsibilities for AML compliance extends from the fund board, senior management of the fund, fund MLRO, management company, distributors, and transfer agent.
The line between where each fund delegate picks up and what remains a direct obligation of the fund needs to be crystal clear. Unless the board wants to retain responsibility for all the activities necessary to support an AML compliance program, it should clearly delegate to another party and clearly document the respective obligations of each party within the overall process. These include activities such as preparing the fund’s AML policy and conducting every activity under it, such as approving all high-risk accounts, accounts associated with politically exposed persons and accounts associated with EU prescribed high risk countries. This topic has surfaced in the recent pandemic where processes and procedures needed to adapt to the fact that wet ink signatures and physical authorizations became impossible in certain circumstances and funds and their stakeholders needed to tweak existing processes to adapt to this new normal.
Knowing what your transfer agent is doing and not doing
The contract for transfer agent services is usually drafted using very high-level language. Relying only on the contract to clearly define what is under the transfer agent and what is not is insufficient. A good way to understand what is within the transfer agent’s remit is through its documented procedures. While asking and receiving a TA’s entire procedures manual may seem like a good idea at the onset, receipt of upwards of 500 or more pages of detailed procedures will quickly provide an unsavory reality check.
Another good way to understand what your transfer agent is doing and not doing is through a detailed service level agreement. However, these types of documents also have a lot of drawbacks, including constant review and upkeep by the fund’s senior management. Additionally, transfer agents typically do not have a lot of bespoke AML procedures – their procedures are generally consistent across the many funds for which they act. A standard operating model is good for the transfer agent and for the fund (regulators are always more interested in the exception and bespoke processes). It also is not a good use of the transfer agent’s time to create and maintain a service level agreement for every fund.
For these reasons, we believe the best way to understand what your transfer agent is doing (and not doing) for your fund, is to obtain a written summary of its key AML procedures. At BBH, we maintain this in the form of our Client Operating Guide. The Client Operating Guide is a summary of all our TA procedures, outlining what we do, what we don’t do, and, importantly, what we expect the fund to do. We update it as procedures change and distribute periodic summaries of the changes. This allows the fund to stay up to date on what we are doing in a timely and effective manner. It ensures the board can assess where the TA’s activities end and where the fund and board need to step in or appoint another delegate to cover.
We believe the clarity of communication around transfer agent activities is so important we have a dedicated transfer agent product team who is responsible (among others) for maintaining the Client Operating Guide, ensuring it is updated with material changes and distributed to fund clients. We also have implemented a quarterly newsletter, BBH T-UP, that highlights material changes to our procedures and trends in the TA industry – typically in advance of the change so funds can assess and in certain cases make updates to their procedures as well.
Clear expectations for senior management of the fund
However you ensure visibility about what your transfer agent is doing, there will always be activities that remain outside the scope of your transfer agent. Whatever remains under the fund, must be clearly understood by the board and either clearly delegated to another party — such as the fund’s MLRO, the distributor of the fund, or other senior management of the fund — or handled by the board itself. In any case where the responsibility has not been clearly delegated to another party (and adequate oversight taken by the board), it will be the direct responsibility of the board.
The fund’s AML policy is a perfect place to document the roles and responsibilities of its senior management — this means the MLRO and other senior management of the fund. All too often, the fund’s AML policy becomes a dumping ground for simply restating the fund’s obligations under the law or a litany of the detailed identification and verification measures undertaken by the transfer agent. Restating the practices of the transfer agent in the fund AML policy doesn’t do anyone any good for several reasons, but most importantly because the transfer agent is not governed by the fund’s AML Policy.
The transfer agent is governed by the contractual terms of its agreement with the fund and its own policies and procedures. Hence the importance of ensuring the transfer agent is continually providing written summaries of its procedures and communicating changes to those procedures to you timely and effectively.
Additionally, the law requires specific things of the senior management of the fund, including approving high risk accounts, accounts associated with politically exposed persons (PEP) and accounts associated with EU prescribed high risk countries (to name only a few). Your transfer agent is not a member of senior management of the fund (nor should it be)— senior management of the fund is any officer or employee with enough knowledge of the money laundering and terrorist financing risk exposure of the fund and enough seniority to take decisions affecting its risk exposure and includes the board.
Unless you specify who among the board, MLRO, and other senior management of the fund is responsible for these items, there will be confusion, delay, and potentially gaps in your compliance with the law. While these items specifically include approvals of high risk accounts, accounts associated with a PEP, correspondent relationships, and accounts associated with an EU prescribed high risk country, the board would be well-placed to clarify responsibilities around other high risk items like material deviations from customer due diligence requirements and payments on non-compliant accounts.
The board’s role over the fund’s AML compliance program can be complex. Ensuring allocation of responsibilities is clear among and between the transfer agent, MLRO, Board, and other senior management of the fund is the most effective way to eliminate some of the complexity. With clear responsibility comes improved communication, accountability, and, ultimately, compliance. Ensuring you have a sound grasp on what the transfer agent is doing — and not doing — is the first place to start.
In summary, who is responsible for the funds’ adherence to AML guidance and regulation is not a binary question, rather it is a confluence of lots of different stakeholders to the funds working collectively. And while the board can’t delegate the responsibility of AML oversight, it can instill robust governance that can help mitigate risk. For that reason, it is imperative that boards design an AML program where the allocation of respective responsibilities is crystal clear. At BBH, we recognize the importance of clear communication around the allocation of responsibilities and have assigned dedicated resources to ensuring this takes place in a manner designed to support the fund and board.
Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries. This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. Pursuant to information regarding the provision of applicable services or products by BBH, please note the following: Brown Brothers Harriman Fund Administration Services (Ireland) Limited and Brown Brothers Harriman Trustee Services (Ireland) Limited are regulated by the Central Bank of Ireland, Brown Brothers Harriman Investor Services Limited is authorised and regulated by the Financial Conduct Authority, Brown Brothers Harriman (Luxembourg) S.C.A is regulated by the Commission de Surveillance du Secteur Financier. All trademarks and service marks included are the property of BBH or their respective owners. © Brown Brothers Harriman & Co. 2020. All rights reserved. IS-06453-2020-08-07