One area where global regulators have been consistently raising the bar for asset managers is legislation to prevent money laundering and terrorist financing. In Europe, those efforts in 2020 will be primarily focused on clearly identifying certain beneficial ownership of investments and making sure that investors in EU prescribed countries are subject to extra scrutiny.
A major step in the crackdown was the adoption of the fourth EU anti-money laundering directive, known as AMLD 4, in 2015. The directive required managers in the EU to establish the ultimate beneficial owners (UBOs) of UCITS and AIF funds and called for the establishment of a registry of beneficial ownership that could be accessed by security authorities. With the adoption of AMLD 5 in July 2018, the regulations have been tightened even further, with the UBO registry becoming public in most cases. Member states were given 18 months to implement the latest AML directive, and the deadline for enabling legislation to be in place was January 10, 2020.
Identifying beneficial ownership
The EU above all other global policymakers have been most focused in requiring disclosure of beneficial ownership information relating to financial accounts. Not only is each country to set up a registry of beneficial ownership, but the EU is establishing a central registry for all 28 members (though whether the UK will participate after Brexit is an open question.) While the obligation to consult UBOs starts in 2020, the central registry for companies is to be up and running by March 2021.
According to the revised law, individuals who own more than 25 percent of a company are considered beneficial owners and must be identified. The law also provides for identification of the beneficiaries of a trust and controlling figures of a foundation. Trusts are more common in Luxembourg, where investments are more complex and more real estate focused.
When the beneficial owner of a company can't be properly identified, fund managers “having exhausted all other means of identification, and provided there are no grounds for suspicion, may consider the senior managing official(s) to be the beneficial owners,” ALMD 4 says.
The senior manager rule has also been implemented in Luxembourg and Ireland where many UCITS funds are registered. What that means for asset managers is they have to verify the senior managing official (SMO) of certain entity types and in some cases, validate the information provided by the investor. It will require looking through the company structure and validating what they have been told. Ongoing customer due diligence reviews will help monitor the accuracy and veracity of entries to these registrars.
The directives also specify that managers must carry out enhanced due diligence on certain corporate customers. They include corporates operating with nominee shareholders, where the beneficial owners are not clearly identified, and investors from 16 countries which have been identified by the EU as having deficient anti-money laundering rules in place. The higher degree of due diligence usually involves obtaining information about the source of funds for each investment being made by the higher-risk customer. Luxembourg allows nominee shareholding but also asks managers to request nominee shareholders to provide information on the UBO.
Another consideration for managers is the sharing of data about UBOs obtained as part of their anti-money laundering requirements. Under separate legislation called the Common Reporting Standard, European governments have agreed to provide information about financial accounts to tax authorities in other states who have adopted the rule.
Across each new version of AMLD, regulators continue to stress the importance of AML governance. This means firms need to:
- Understand their roles and responsibilities (and where they can delegate work but retain responsibility to third party providers)
- Instill well documented policies and procedures around AML
- Provide proper employee training and support
AMLD 5, 6, and beyond
After AMLD 4 was adopted, the EU also adopted a regulation on preserving the security of data for individuals in the 28 member states. Managers have to ensure that data is deleted after five years and that their sharing of information related to AMLD is compliant with the data regulation.
While managers are still working to implement AMLD 5, the EU also adopted AMLD 6 in December 2018, which will come into force in December 2020. The directive is aimed mainly at harmonizing laws in member states on money laundering and definitions of money laundering crimes. But AMLD 6 also introduces a relatively new concept of “failure to prevent money laundering,” which could expand the legal scope of money laundering prosecutions and require managers to take additional due diligence steps.
Interestingly, the UK has said it will opt out of AMLD 6 on the grounds that domestic legislation is already largely compliant with the directive. “The Government decided not to opt in as we did not consider that opting in would enhance the UK approach to tackling money laundering,” it said. But the decision raises a larger debate about Brexit: will the UK stay equivalent with European regulation on money laundering or diverge? If the UK diverges, it could become more difficult for UK firms to gain access to European capital markets. Ireland also has the option to opt-out, but it is unclear at this time if this will occur.
The EU continues to assess the AML regulatory landscape with some calling to retire the AML directives in lieu of direct regulation (similar to GDPR). Plans are also at advanced stages at the European Commission to create a supra-national AML regulator (with extra-territorial powers) under the authority of the European Banking Authority (EBA).