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ANTI-MONEY LAUNDERING

March 2017

With banks under global scrutiny for failing to comply with a growing raft of anti-money laundering regulations, Mark Latham investigates whether enough is

being done to prevent similar failures in the asset management industry.

MONEY BAGS

GLOBALLY, THE AMOUNT

of money laundered per year

is estimated to be at least $1.6

trillion (€1.5 trillion), according to

the United Nations – and, despite

international efforts to reduce it,

the aggregate amount is thought

to be growing annually.

While the startlingly high figure,

equivalent to 2.7% of global GDP,

is only an estimate, the fact that

other international bodies, such

as the International Monetary

Fund, have produced similar

figures gives it some legitimacy.

Since it’s self-evidently illegal,

it is perhaps not surprising that

there are no figures or even

estimates of the extent to which

criminals launder money via

managed investment funds.

The fact that many national

regulators do not publish details

of fines or other punishments they

have issued for money laundering

makes it all the more difficult to

35funds-europe.com

MASSIVE HAUL:The UN estimates that €1.5 trillion is laundered in a typical year.

assess the scale of the problem.

Speaking under condition of

anonymity to Funds Europe, one

industry insider, a global head

of compliance with a major

European asset manager, said that

it would be “virtually impossible”

to stop the industry being used to

launder money.

“It would, for example, be

relatively easy to set up a

property fund for the purposes

of money laundering or to push

money through a retail fund if

somebody really wanted to go

through a fund,” the person said.

MASSIVE FINESMoney laundering is most

closely associated in the public

mind with the banking industry,

where failure to control money-

laundering risks has led to

massive fines in recent years for

the likes of HSBC and Standard

Chartered.

The most recent high-profile

example, in January, resulted in

Deutsche Bank being fined $630

million by US and UK regulators

for failing to have a sufficiently

robust regime in place to combat

money laundering.

Since the release in 2015 of the

Panama Papers – which saw the

leaking of financial information

about more than 214,488 offshore

entities – the global fight

against tax evasion and money

laundering has moved up a gear.

As the threat of global terrorism

continues to grow, the EU has

since 2001 pushed through no

fewer than three revisions to its

original Anti Money-Laundering

(AML) Directive of 1991.

The most recent revision, the

fourth AML directive, came into

force only last June. A fifth version

– largely in response to issues

thrown up by the release of the

Panama Papers – is expected

to be agreed by the end of June

and includes a push for greater

transparency.

Agathi Pafili, senior policy

advisor at the European Fund and

Asset Management Association

(Efama), largely welcomes the

fifth AML directive but worries

that one of the proposed

requirements – that a register

of beneficial owners should be

public – would raise data privacy

issues. Like others in the industry

Pafili believes that while highly

regulated funds are unlikely to

be the first choice of criminals

looking to launder money, the

possibility “cannot be completely

ruled out”.

“As a sector, we can say that

managed funds are not normally

used as vehicles for money

laundering,” she says.

“The industry takes the issue of

money laundering very seriously

and managed funds are a

difficult vehicle to use for money

laundering purposes – but in

the vast majority of cases, I don’t

think it is happening.

“The problem is not just

identifying the end-investor

but also on identifying the

right entity in the distribution

chain with a direct relation to

the end-investor.”

EXTRA SECURITYEfama’s concerns about data

privacy in the fifth revision of

the AML directive are shared

by Stéphane Badey, a partner

with Luxembourg-based Arendt

Regulatory & Consulting, who

advises on regulatory compliance,

data protection and anti-money

laundering regulations.

The fact that managed funds are

often sold through banks or other

distributors gives them an extra

layer of security, as checks into

the identity of an investor in the

case of suspicious activity could

be initiated by the fund or the

distributor (or, most likely, both).

“The weakness for funds is the

intermediation which creates

distance between the final

investor and the management

company,” he says.

Badey also points to the fact that

investments in funds in Europe are

often sold through banks or other

regulated financial institutions, so

the name of the beneficial owner

will not appear on the register of

the funds.

“Theoretically there might be

money that is going through

regulated funds, but I don’t think

funds would be the vehicle of

choice for money launderers,”

he says.

“Nevertheless, we should never

underestimate the extent to which

funds could be targeted by money

launderers.

“There are always loopholes

and sometimes the robbers

are ahead of the cops, but the

industry takes the issue seriously.

A lot is invested in software and

training and everyone is aware

of the damage to their reputation

if things were to go wrong, but

there is always more that could

be done.”

Monique Melis, managing

director within Duff & Phelps’

compliance and regulatory

consulting practice, believes

there is an over-reliance

on administrators to take

responsibility for AML

compliance and that the fund

industry as a whole “needs to step

up its game”.

“I think that there is an over-

reliance on administrators who

might be in Ireland, the US, the

Cayman Islands or Luxembourg to

undertake anti-money laundering

controls on behalf of managers,”

she says.

“It is often just a tick-box

❱❱ IT WOULD BE RELATIVELY EASY TO SET UP A PROPERTY FUND FOR THE PURPOSES OF MONEY LAUNDERING OR TO PUSH MONEY THROUGH A RETAIL FUND IF SOMEBODY REALLY WANTED TO GO THROUGH A FUND. ❰❰

Anonymous

36 March 2017

ANTI-MONEY LAUNDERING

exercise when it comes to

fund managers fulfilling their

obligations and that is potentially

an area of weakness.

“The legislative framework is

already there. What is needed

is a culture change within firms.

There needs to be a new focus on

responsibility at the level of the

fund manager.”

Despite considerable

investment by the industry in

computerised systems to detect

suspicious transactions in recent

years, Melis – who previously

managed the transaction

monitoring unit in the markets

and exchanges division of the UK

regulator, back when it was called

the Financial Services Authority

– says that transaction monitoring

needs to be done more

systematically than at present.

Melis also believes that the

funds industry is trailing behind

retail banking when it comes to

combating money laundering.

“The controls at retail banks

are stronger as they are the first

entry point for potential money

launderers,” she says. “There will

be increasing pressure on the

fund industry and administrators

going forward.”

As money launderers become

more sophisticated, they will find

craftier ways to integrate their

ill-gotten gains into the system

and “might turn to funds, so the

industry needs to be vigilant”.

Melis adds: “It is a common

human failing not to carry

out necessary background

checks when it comes to asking

customers direct questions

like, ‘Where does the money

come from?’ Unless it is actually

pinpointed in law, that will remain

a weak point in the AML regime.”

THE INVISIBLE CRIMELike many others involved in the

industry, Kelvin Dickenson, who

is head of product strategy and

management for compliance and

data solutions at California-based

compliance platform provider

Opus, believes it is impossible

to make an accurate assessment

of the extent to which money

is laundered through the

fund industry, as criminal

transactions are “invisible until

they are caught”.

“It would, though, be fair to say

that money laundering is more

widespread than many involved

in security believe,” he says.

“What is needed is to have

robust know-your-client (KYC)

processes in place. If we don’t

know the extent of an individual’s

wealth, we can’t say whether

there is something suspicious in

a transaction.

“Money is a bit like water:

it will always find the path of

least resistance and criminals

are going to find ways that are

possible to launder money

through any and all means

available.

“The reality we have to face

is that criminals are becoming

ever more sophisticated. That

means that knowing who you are

doing business with is critical,

but without the right solution,

KYC is difficult to do.”

According to Dickenson, this

means that firms need software

that constantly monitors all

transactions, and that every

trade needs to go through

algorithms in order to identify

suspicious activity.

He adds: “The industry needs

to look out for vulnerabilities

and manage risk, and continue

to invest in technology to

ensure that AML systems can

act efficiently without being a

burden for the business.” fe

❱❱ IT IS OFTEN JUST A TICK-BOX EXERCISE WHEN IT COMES TO FUND MANAGERS FULFILLING THEIR OBLIGATIONS, AND THAT IS POTENTIALLY AN AREA OF WEAKNESS. ❰❰

Monique Melis, Duff & Phelps