The Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 as amended (the “Act”) imposes an obligation on funds to withdraw services from and ultimately discontinue the relationship with a non-AML compliant investor, where the non-compliance is the result of a failure of the investor to provide the information required by the fund. The standard approach to ensure compliance with this requirement has been the imposition of transaction blocks on a non-AML compliant investor’s account, preventing the investor from redeeming funds from the account and, where the failure persisted, also preventing the investor from making further subscriptions.
On 18th November 2015, the CBI issued a report (the “Report”) on Anti-Money Laundering/Countering the Financing of Terrorism (“AML/CFT”) compliance in the Irish Funds sector. The Report detailed the observations and expectations of the CBI based on inspections carried out in 2014.
The Report made it clear that the CBI did not consider the actions being taken by funds in relation to non-AML compliant investors to be adequate, and stated that simply blocking the accounts of non-AML compliant investors had incorrectly been considered to equate to the discontinuation of the relationship. The Report also set out expectations in terms of what the CBI expected to see included in AML/CFT policies including clear timeframes for boards to consider discontinuation and notifications to non-AML compliant investors. The industry has since continually debated how discontinuing a relationship would work in practice.
A number of difficulties were highlighted with the CBI’s interpretation. While requiring that “policies and procedures should clearly set out the ultimate action to be taken in order to discontinue the business relationship”, that ultimate action to be taken was not specified. The approach implied by this stance – to compulsorily redeem the investor and return monies – was problematic, insofar as it could be construed as possible facilitation of money laundering. Furthermore, an investor who had been compulsorily redeemed could potentially take legal action against a fund for loss of returns where the fund value subsequently increased.
In response to ongoing and widespread uncertainty, the CBI issued an AML/CFT bulletin (the “Bulletin”) in December 2017. The best interests of the investor are considered, and practical advice is offered to firms across all industry sectors.
The CBI reiterates in the Bulletin that the requirement to discontinue a relationship with a non-AML compliant investor is not something that can be ignored. It is a requirement under EU AML/CFT law, and forms part of the Financial Action Task Force’s (“FATF”) recommendations on AML/CFT, which Ireland and the EU have signed up to. There is an acknowledgement that, whereas the requirement appears to be simple, it can be problematic “where monies are payable to a customer”. The Bulletin makes it very clear that the CBI will not condone non-compliance with the legislation, but offers the following suggestions for dealing with non-AML compliant investors:
Firms must understand the magnitude of any AML/CFT deficiencies, and have remediation plans in place
- For new customers, firms should perform AML/CFT review prior to entering into the relationship — this is in line with the requirements of the 4th EU Money Laundering Directive which is expected to be implemented in Ireland in 2018
- Where firms opt to perform the AML/CFT review during the establishment of the relationship, they should be in a position to demonstrate to the CBI that there is no real risk of money laundering or terrorist financing (“ML/TF”)
- Contractual arrangements with investors should specify the consequences of failing to provide required AML/CFT documentation and information
- Firms should consider other sources that may be used to source outstanding information, e.g. public sources
- Firms should continue to consider the requirement to file a suspicious transaction report where customers fail to provide required AML/CFT documents and information.
Where firms have exhausted all possible options, and non-AML compliant investors remain, the CBI now, in a softened approach, recommends ensuring that the associated ML/TF risks are “appropriately managed”. Suggestions of what this might entail are that such accounts be flagged as “discontinued”, and “ring fenced from normal accounts”. It is also suggested that “more robust measures…be applied should the customer re-present”.
The Bulletin also advises that firms should implement processes that allow funds to be returned directly to the source from which they came. It is not clear from the Bulletin what these processes might be, or how this step could be performed without the fund risking facilitation of money laundering. At every step, the CBI reiterates in this Bulletin that compliance with AML/CFT obligations should be considered and balanced with the best interests of the customers.
While the Bulletin provides very welcome practical suggestions, and more certainty to firms on how the issue of non-AML compliant investors should be approached, it does leave the question open as to how the CBI expects firms to return monies to non-AML compliant investors. However, that question is less pressing now in light of the alternative and less drastic measures that are available to funds.
Download your copy of the Central Bank of Ireland Anti-Money Laundering Bulletin – December 2017
KB Associates’ Services
KB Associates offers a range of services to investment funds including:
- The provision of Money Laundering Reporting Officer (“MLRO”) services
- The provision of UCITS/AIF management company services
- The provision of designated persons to perform UCITS business plan and AIFMD programme of activity managerial functions
- The provision of UCITS/AIF operational support
- The provision of company secretary services.
If you would like to discuss any issues raised in this article or related to KB Associates’ services in general, please feel free to contact Mike Kirby (+353 1 667 1980), Peter Northcott (+44 203 170 8813) or Mike Parton (+1 345 946 4224).