Investment managers use third parties — such as banks, broker-dealers, wealth managers and transfer agents — for a suite of services and transactions to facilitate a fund’s investment activities. These services may include custody, valuation of assets, marketing, securities lending support, regulatory advisory, legal documentation, fundraising, and/or anti-money laundering (‘AML’), know your customer (‘KYC’) and counter-terrorism financing (‘CTF’) checks, all of which raise operations and compliance challenges for the investment manager and the fund. In this paper, we have chosen to focus on the customer due diligence (‘CDD’) obligations associated with AML, KYC and CTF regulations.
Compliance with the CDD requirements of applicable AML/KYC/CTF regulations is a data heavy exercise as the subscription process for funds requires investors to provide a high volume of information to fund administrators. The information required can in some instances vary depending on the jurisdiction in which the fund, the investment manager and the fund administrator are each domiciled. Moreover, the manner through which this information is collected and how the specific questions are asked differ between jurisdictions.
In this paper we build on the recommendations made by the FATF in its Guidance on Digital Identity which introduced the concept of digital identity service providers by exploring the concept of national and regional AML/KYC/CTF (multi-country) centralised due diligence processors. These entities would perform AML/KYC/CTF checks on a prospective investor on behalf of the investment manager. This solution would address the lack of standardisation and the ongoing regulatory updates that are placing a significant cost and administrative burden on financial services firms and investors. In addition, this would also accelerate and enhance risk assessments of investors, investments, transactions, third parties and counterparties.
Managing Director, Global Head of Asset Management Regulation & Sound Practices
Associate Director, Asset Management Regulation
The paper suggests a range of options that could be implemented that would improve the CDD process and would create scenarios in which compliance with AML, CTF and KYC requirements are safeguarded, while strengthening the role of regulators as standard setters.
The options explored in the paper can operate in conjunction with each other or provide a building block for other, more transformative, solutions to be implemented.
Option 1: Allow a regulated entity performing its own due diligence to pool due diligence efforts within its own organisation:
This option would allow a regulated entity performing CDD with respect to multiple funds (and other investors where relevant) to only have to perform CDD once for each individual/entity as a single process. This would result in the investor being subjected to substantially fewer documentation requests and the regulated entity’s CDD process would be streamlined. In addition, regulators would have a better understanding of the investor than it would if multiple disparate files had to be accessed.
Option 2: Allow a regulated entity performing due diligence for others on an outsourced or delegated basis to pool due diligence efforts:
Fund administrators which perform due diligence for funds and investment managers on an outsourced/ delegated basis are typically required to perform CDD separately for each fund, regardless of any overlapping investors. If the fund administrator were able to apply pooled effort, it would reduce the documentation requests investors are subjected to while streamlining the fund administrator’s CDD process, resulting in significant cost savings.
Option 3: Allow a regulated entity to perform due diligence for others on a reliance basis with regard to the requirements of a single country:
A further improvement on options 1 and 2, and best operated in conjunction with those options, would be to establish a new regulated activity category for entities (i.e., a third-party provider) to perform CDD centrally and on a reliance basis for other regulated entities. These centralised due diligence processors (‘CDDPs’) would perform all of the CDD requirements for regulated entities while the underlying obligations on regulated entities would remain as a backstop. As the regulator will be directly supervising the CDDP, there can be closer supervision of the direct workings of the CDD and less variation in approach taken and judgment calls applied as fewer entities will be involved.
Option 4: Allow a regulated entity to perform due diligence for others on a reliance basis with regard to the requirements of multiple countries:
A logical extension of option 3 would be for the CDDP to seek authorisation from multiple countries to perform centralised CDD for regulated entities. These multi-country centralised due diligence processors (‘MCDDPs’) build on the digital ID ecosystem, as introduced by the Financial Action Task Force (FATF), by creating a standardised digital identity framework allowing MCDDPs to work within and across jurisdictions. Regulatory access would not be restricted, while efficiency would be further increased for investors and regulated entities using this facility.
Options 3a/4a: Use a digital solution to amplify Option 3 or Option 4:
This option would create a portable digital identity framework and allows the MCDDP, in addition to performing CDD on behalf of regulated entities, to use the unique ID code issued to the investor to be used at other regulated entities and would eliminate the need for a multitude of individual CDD checks having to be performed.
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