Sectoral guidelines for investment firms – S+P Consulting
Sectoral guidelines for investment firms
EBA has published the final Guidelines under Articles 17 and 18(4) of Directive (EU) 2015/849 on simplified and enhanced customer due diligence. The Risk Factors guidelines give an overview on the factors credit and financial institutions should consider when assessing the money laundering and terrorist financing risk associated with individual business relationships and occasional transactions.
Investment management is the management of an investor’s assets to achieve specific investment goals. It includes both discretionary investment management, where investment managers take investment decisions on their customers’ behalf, and advisory investment management, where investment managers advise their customers on which investments to make but do not execute transactions on their customers’ behalf.
Investment managers usually have a limited number of private or institutional customers many of which are wealthy, for example high-net-worth individuals, trusts, companies, government agencies and other investment vehicles. The customers’ funds are often handled by a local custodian, rather than the investment manager. The ML/TF risk associated with investment management is therefore driven primarily by the risk associated with the type of customers investment managers serve.
Firms in this sector should consider the following risk factors and measures alongside those set out in Title II of these guidelines. The sectoral guidelines in Title III, Chapter 5, may also be relevant in this context.
Product, service or transaction risk factors
198. The following factors may contribute to increasing risk:
• transactions are unusually large;
• third party payments are possible;
• the product or service is used for subscriptions that are quickly followed by redemption possibilities, with limited intervention by the investment manager.
Customer risk factors – Sectoral guidelines for investment firms – Risk factors
199. The following factors may contribute to increasing risk:
• The customer’s behaviour, for example:
i. the rationale for the investment lacks an obvious economic purpose;
ii. the customer asks to repurchase or redeem a long-term investment within a short period after the initial investment or before the payout date without a clear rationale, in particular where this results in financial loss or payment of high transaction fees;
iii. the customer requests the repeated purchase and sale of shares within a short period of time without an obvious strategy or economic rationale;
iv. unwillingness to provide CDD information on the customer and the beneficial owner;
v. frequent changes to CDD information or payment details;
vi. the customer transfers funds in excess of those required for the investment and asks for surplus amounts to be reimbursed;
vii. the circumstances in which the customer makes use of the ‘cooling-off’ period give rise to suspicion;
viii. using multiple accounts without previous notification, especially when these accounts are held in multiple or high-risk jurisdictions;
ix. the customer wishes to structure the relationship in such a way that multiple parties, for example nominee companies, are used in different jurisdictions, particularly where these jurisdictions are associated with higher ML/TF risk.
• The customer’s nature, for example:
i. the customer is a company or trust established in a jurisdiction associated with higher ML/TF risk (firms should pay particular attention to those jurisdictions that do not comply effectively with international tax transparency standards);
ii. the customer is an investment vehicle that carries out little or no due diligence on its own clients;
iii. the customer is an unregulated third party investment vehicle;
iv. the customer’s ownership and control structure is opaque;
v. the customer or the beneficial owner is a PEP or holds another prominent position that might enable them to abuse their position for private gain;
vi. the customer is a non-regulated nominee company with unknown shareholders.
• The customer’s business, for example the customer’s funds are derived from business in sectors that are associated with a high risk of financial crime.
Sectoral guidelines for investment firms – Country or geographical risk factors
The following factors may contribute to increasing risk:
- The investor or their custodian is based in a jurisdiction associated with higher ML/TF risk.
- The funds come from a jurisdiction associated with higher ML/TF risk.
Sectoral guidelines for investment firms – Measures
Investment managers typically need to develop a good understanding of their customers to help them identify suitable investment portfolios. The information gathered will be similar to that which firms obtain for AML/CFT purposes.
Firms should follow the EDD guidelines set out in Title II in higher risk situations. In addition, where the risk associated with a business relationship is high, firms should:
- identify and, where necessary, verify the identity of the underlying investors of the firm’s customer where the customer is an unregulated third party investment vehicle;
- understand the reason for any payment or transfer to or from an unverified third party.
To the extent permitted by national legislation investment managers may apply the SDD guidelines set out in Title 2 in low-risk situations.
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