Practices and Recommendations aimed at reducing the risk of money laundering and terrorist financing in the Luxembourg Fund Industry

Transcription

1 Practices and Recommendations aimed at reducing the risk of money laundering and terrorist financing in the Luxembourg Fund Industry The practices and recommendations outlined in this document are adopted by the Association of the Luxembourg Fund Industry (ALFI), the Luxembourg Bankers Association (ABBL) and the Association of Luxembourg Compliance Officers (ALCO). December 2006

2 2

3 Table of contents I. Preamble... 4 II. Table of definitions... 5 III. Scope of the Practices and Recommendations... 8 IV. KYC obligations... 8 A. The Registrar and Transfer Agent... 8 B. The Global Distributor and the Distributors... 8 C. The Custodian... 8 V. Exemption from and Delegation of KYC requirements... 9 A. Exemption from identification... 9 B. Delegation of identification duties VI. A risk based approach A. Overview B. AML/KYC country risk assessment methodology C. Criteria to assess equivalence in terms of identification requirements D. Interpretation of equivalent identification requirements E. Country Classification F. Distributor due diligence G. Application of the risk based approach to the initial due diligence process H. Ongoing due diligence I. Additional risk factors/indicators VII. Contractual Equivalence A. Legal clauses for contractual equivalence between the Professional and the Distributors B. Delegation agreements VIII. KYC and certification requirements A. KYC checklist B. Certification...22 C. Rules for identification of Investors via incoming payments from or cheques drawn on banks located in equivalent jurisdictions IX. Monitoring of suspicious transactions A. Monitoring of suspicious transactions B. Monitoring of blacklists and Politically Exposed Persons Appendix 1: Country risk AML/KYC assessment criteria for jurisdictions for which the equivalence status is not granted automatically Appendix 2: Detailed KYC checklists Checklist Preliminary Step SUPRA NATIONAL ORGANISATION / GOVERNMENT DEPARTMENT / LOCAL AUTHORITY / UNIVERSITY

4 I. Preamble Luxembourg domiciled investment funds are promoted worldwide, with constantly growing trading volumes generated inside and increasingly outside the EU, the EEA and the FATF-countries. Language barriers, tax reporting requirements and local standards require the Luxembourg fund industry to review operating models, including anti-money laundering standards and practices, to remain attractive compared to other fund domiciles while maintaining high ethical standards. In consideration of: Directive 91/308/EEC of the Council of 10 June 1991 on the prevention of the use of the financial system for the purpose of money laundering; Directive 2001/97/EC of the European Parliament and Council of 4 December 2001 amending Council Directive 91/308/EEC on the prevention of the use of the financial system for the purpose of money laundering; Directive 2005/60/EC of the European Parliament and Council of 26 October 2005 on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing; Law of 12 November 2004 on the fight against money laundering and terrorist financing; CSSF circular 05/211 on combating money laundering and terrorist financing and prevention of the use of the financial sector for the purpose of money laundering and terrorist financing; professionals in the investment fund industry believe that anti-money laundering regulation needs to be applied consistently throughout the industry in order to uphold the reputation of the financial centre and to avoid regulatory arbitrage and competition based on differing interpretations of AML regulation. This document is to be considered as guidance on best practice for the Luxembourg fund industry in the light of the requirements of the law of 12 November 2004 on the fight against laundering and terrorist financing and the CSSF circular 05/211. It suggests a risk based approach in relation to customer identification and transaction monitoring in alignment with international standards, including the FATF recommendations, the European Directive 2005/60/EC on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing and the Wolfsberg Statement on Anti-Money Laundering Guidance for Mutual Funds and Other Pooled Investment Vehicles. It provides a methodology to assess the equivalence of legal and regulatory Know-Your-Customer requirements of foreign jurisdictions by comparing them to FATF standards. The extent to which actors in the fund industry follow the described practices and recommendations is under the responsibility of their respective governance bodies. The purpose of the document is furthermore to amend and replace the ABBL/ALFI Practices and recommendations aimed at preventing the use of UCIs for money laundering dated March 2000 and the ALCO document Money laundering prevention in the framework of the transfer agent of a UCI administered in Luxembourg dated May

5 II. Table of definitions ABBL ALCO ALFI AML CDD CTF Circular CSSF Custodian Association des Banques et Banquiers, Luxembourg Association Luxembourgeoise des Compliance Officers Association Luxembourgeoise des Fonds d Investissement Anti-Money Laundering Customer Due Diligence Combating Terrorist Financing CSSF circular 05/211 on combating money laundering and terrorist financing and prevention of the use of the financial sector for the purpose of money laundering and terrorist financing Commission de Surveillance du Secteur Financier Financial institution in charge of the safekeeping of the assets of the Investment Fund Distributor EEA EU FATF Global Distributor IMF Financial professional which distributes units or shares of Investment Funds European Economic Area European Union Financial Action Task Force on Money Laundering (GAFI) Financial professional which ultimately appoints and authorises all Distributors of an Investment Fund International Monetary Fund IML Institut Monétaire Luxembourgeois, now «CSSF» Investment Fund or Undertaking for Collective Investment (UCI) Investment fund domiciled and/or administered in Luxembourg Investments Investments and disinvestments in an Investment Fund 5

6 Investor KYC Law NCCT Nominee Account: Omnibus Account: Person, including ultimate economic beneficiaries and connected third parties (such as joint holders, proxy holders, etc.), who makes Investments Know Your Customer / Know Your Distributor Law of 12 November 2004 on the fight against money laundering and terrorist financing Non-cooperative country and territory (as defined by the FATF) Account opened in the name of a financial institution which, acting as the legal owner of such account, represents the underlying Investors. Account representing a global position opened in the name of a financial institution in a shareholder register, aggregating positions of underlying Investors. PEP Politically Exposed Person(s) Practices and Recommendations These joint ALFI / ABBL / ALCO practices and recommendations constitute guidance on best practice for the Luxembourg fund industry Professional Registrar and Transfer Agent Agent, which is not hereby expressly excluded from the scope of the Practices and Recommendations, representing or acting on behalf of an Undertaking for Collective Investment, including but not limited to: - credit institutions and financial services professionals; - management companies within the scope of the law of 20 December 2002 on Undertakings for Collective Investment or which conduct additional or auxiliary activities within the meaning of such law Professional whose activity consists in maintaining the Investment Fund s register, as such activity will be defined by law from time to time 6

7 7

8 III. Scope of the Practices and Recommendations The Practices and Recommendations apply to UCIs and all Professionals as defined in the Table of Definitions here above. IV. KYC obligations A. The Registrar and Transfer Agent Where the UCI s Registrar and Transfer Agent is not the same entity as the Global Distributor, the KYC obligations of the Registrar and Transfer Agent are limited to the verification of the identity of the Investors whose instructions (subscription forms, transfer and redemption orders) have not been submitted by a regulated and supervised financial professional subject to equivalent AML and CTF obligations 1. However, even though these Registrar and Transfer Agents have no responsibility in the due diligence process to be performed on appointed Distributors, they are obliged to perform an identification of the Distributor as per Section VI.F to ensure that the Distributor is subject to equivalent AML and CTF obligations. B. The Global Distributor and the Distributors Where the Registrar and Transfer Agent is not the same entity as the Global Distributor, it has in practice no or very little influence on the selection process of the Distributors and the inclusion of AML/KYC clauses in the distribution agreements signed between the Global Distributor and the appointed Distributors. It is the responsibility of the Global Distributor to develop and maintain a distribution network which complies with Luxembourg AML/KYC and FATF standards. The due diligence process at both the country and Distributor level should be performed under the responsibility of the Global Distributor. The board of directors of the UCI and/or, as the case may be, of its management company is responsible for the appointment of the Distributors and should take all appropriate measures to ensure compliance with Luxembourg AML and CTF requirements and standards. C. The Custodian The situation of the Custodian is different from the situation of the Registrar and Transfer Agent, the Global Distributor or the Distributor, without 1 See IML Circular 91/75, Chapter D, 2.3 8

9 prejudice to the case where the Custodian performs services as Registrar and Transfer Agent, Global Distributor or Distributor itself. The Custodian is not, in this capacity, a Professional in charge of KYC on Investors and is not in the scope of the Practices and Recommendations. The Custodian is in charge of the safekeeping of the assets of the UCIs. A Professional, acting in the sole capacity as a Custodian of a UCI, is not responsible for identifying the underlying Investors. V. Exemption from and Delegation of KYC requirements A. Exemption from identification In accordance with article 3 (5) of the Law and with the Circular, Professionals are exempted from the customer identification requirements where the Investor or Distributor is a local or foreign financial institution subject to equivalent identification requirements 2. This applies to local or foreign financial institutions investing either for their own account or for and on behalf of underlying Investors via Omnibus Accounts/Nominee Accounts. In addition, those Professionals are also exempted from customer identification requirements of Investors whose subscription request has been submitted via a financial institution. Financial institutions in this legal context are understood to be: Luxembourg credit institutions and financial services professionals subject to the law of 5 April 1993 as amended; Luxembourg insurance companies pursuant to the law of 6 December 1991; Luxembourg domiciled UCIs which market their shares/units themselves and which are subject to the laws of 20 December 2002 or of 30 March 1988 on undertakings for collective investment or the law of 19 July 1991 on undertakings for collective investment the securities of which are not intended to be placed with the public or to any other law which amends or replaces these laws from time to time; Equivalent foreign credit institutions, financial services professionals, insurance companies and UCIs established in a member state of the EU, the EEA, the FATF or other countries subject to equivalent identification requirements to those provided under Luxembourg law; and Branches and subsidiaries on which the above mentioned financial institutions possess the legal means to impose their will in terms of conduct of business, and notably with regard to subsidiaries by virtue of voting rights, contractual agreements or a provision of the articles of incorporation. 2 Section VI.C defines the criteria to assess equivalence in terms of identification requirements 9

10 In case of exemption, the Professional will not be obliged to obtain copies of the identification documents of the underlying Investors. This exemption further applies to financial institutions (and their branches and subsidiaries) located in non-equivalent countries, provided that they are subject to equivalent identification requirements by a group policy issued by their parent company located in a country subject to equivalent identification requirements to those provided under Luxembourg law 3. B. Delegation of identification duties In cases of delegation the Professional may not benefit from the KYC exemption status, but is permitted to delegate the material execution of the identification process to a Distributor, provided that he has previously contractually imposed equivalent identification requirements and that he ensures the Distributor s compliance with these requirements. Where delegation occurs, the Professional acting as the Global Distributor or as a Distributor should decide upon such delegation of identification duties by performing a risk assessment on the delegate Distributor which includes amongst other things the country risk and the level of regulation of the delegate. A risk assessment module that can be used is contained in Section VI.E. of this document. Namely it is permissible for a Professional to delegate his Investor identification duties to a local Distributor who: is not regulated, but located in an equivalent, low or medium risk country; and/or is regulated, but not subject to KYC requirements by regulation or group policy, and located in an equivalent, low or medium risk country. Furthermore, delegation, in these cases, implies that copies of the identification documents, which have been previously certified by the accepted delegate, are being sent to the Professional in order to control the completeness and adequacy of the identification documents. In the case of delegation, the Professional in Luxembourg must keep copies of the identification documents of the final Investors. In case such delegation is not made, the Professional remains responsible for the material identification of the underlying Investors. VI. A risk based approach 3 The recommended criteria to assess equivalence in terms of KYC are described in section VI.C. 10

11 A. Overview All Professionals are responsible for implementing measures to avoid money laundering and terrorist financing. The UCI has the ultimate responsibility for approving these measures. The implementation of a risk based approach, as advocated by the European Parliament and Council and the CSSF, in relation to the acceptance of the Distributor and identification of Investors, being direct Investors or Distributors, will assist Professionals in mitigating the risk of the UCI being misused for transacting illegal operations and being exposed to substantial legal and reputation risk. This section re-iterates the need for Professionals to perform enhanced due diligence on Investors and Distributors in order to fulfil their legal and regulatory obligations. It outlines country risk and Distributor risk as two risk types which need to be considered together rather than separate, i.e. the level of due diligence should not depend upon the country risk or Investor/Distributor risk alone, but should be deduced from the aggregated risk considering these two parameters taken together. New Distributor Country risk assessment Distributor risk assessment ACCEPTANCE YES Acceptable NO REFUSAL Legal agreements Ongoing due diligence 11

12 B. AML/KYC country risk assessment methodology This section outlines a recommended AML/KYC country risk methodology. Full equivalence in terms of identification requirements is automatically established for Distributors in EU, EEA and FATF countries. However, objective criteria need to be defined and checked to validate this equivalence for financial professionals and accepted delegates in other jurisdictions. It is worthwhile emphasising that this methodology is to be regarded as best practice only. Professionals are individually responsible for determining in each case whether any financial institution or accepted delegate is subject to equivalent Investor identification requirements to those provided under Luxembourg law. C. Criteria to assess equivalence in terms of identification requirements The objective is to assess the level of compliance of local regulation with the FATF recommendations in terms of KYC. In accordance with the country risk methodology described in section VI.D., the assessment of the level of compliance of local regulation with FATF standards is to be made by reviewing the reports published by the FATF, the IMF, the World Bank or EU regulators or, in the case where recent official reports are not available, by analysing the local AML regulations against FATF recommendations. The following table outlines such FATF recommendations dealing directly or indirectly with KYC requirements. FATF recommendations directly or indirectly relating to customer identification Money laundering offence Customer due diligence and Record Keeping 1 Scope of the criminal offence of money laundering 1 Predicate offences for money laundering cover all serious offences 5 Customer Due Diligence (CDD) 5.1 No anonymous accounts or accounts in fictitious 4 names allowed 5.2 CDD required when establishing client relationship i.e. account opening 5.2 Additional CDD required if doubt on adequacy or veracity of declarations and identifications 5.3 Identification based on reliable documentation or other independent sources 5.4 Identification of legal representatives (e.g. trustees, directors, signatories) or persons with power of attorney required 5.5 Identification of beneficial owners/economic beneficiaries required 5.6 Identification of owners/partners/shareholder/settlors of legal entities/arrangements required 5.7 Obligation to verify source of funds and wealth (risk based approach acceptable) 6 Politically exposed persons - Special measure for identification and monitoring 8 New technologies & non face-to-face business 8.1 Obligation to verify blacklists 8.2 Special identification measures for non-face-to-face business (i.e. certification of documents, use of independent sources) 9 Third parties and introducers 9.1 In case of delegation, Professionals relying upon a third party should be 4 i.e. accounts whose real accountholder and ultimate beneficiary are not known. 12

13 Reporting of suspicious transactions and compliance AML/CTF Procedures & Policies Other measures to deter money laundering and terrorist financing Measures to be taken with respect to countries that do not or insufficiently comply with the FATF recommendations required to immediately obtain from the third party the necessary information concerning certain elements of the CDD process, but not necessarily the copies of the identification documents 9.2 Would copies of ID be available on request (i.e. no banking secrecy issues or client waiver needed) 9.3 Do the third parties have to be regulated or supervised for AML & CTF or is a delegation agreement mandatory 9.4 Are these third parties and introducers located in equivalent countries or subject to contractual agreements 9.5 The ultimate responsibility for customer identification and verification remains with the Professionals relying on the third party 10 Record keeping - Identification data, account opening documents & transactions for at least 5 years 11 Unusual transactions - Identification of complex, large or exceptional transactions, researching background and keeping records 13 Suspicious transaction reporting 13.1 Obligation to report transactions linked to predicated offences or terrorism 13.2 Obligation to report transactions or attempts where there is reasonable ground to suspect them to be linked to predicated offences or terrorism regardless of the amount involved 15 AML & CTF procedures & policies 15.1 Obligation to establish & maintain AML & CTF policies & procedures 15.3 Obligation to train employees 15.2 Obligation to test compliance with laws, regulations, policies & procedures 17 Sanctions 17.1 Dissuasive criminal, civil and administrative sanctions available against natural & legal persons in case of non-respect of professional obligations or money laundering/terrorist financing 17.2 Has an authority been empowered to apply sanctions (e.g. supervisors or FIU) 17.3 Do the sanctions apply also to the directors and senior management of legal entities 18. Shell Banks - Dealing directly or indirectly with shell banks not allowed 21 Special attention for higher risk countries 21.1 Does the country make a difference between equivalent and non-equivalent jurisdictions 21.2 Obligation to verify transactions from non-equivalent/higher risk countries if they appear suspicious 21.3 Obligation to implement special counter-measures for non-equivalent/higher risk countries 23 Countries should ensure that Professionals are subject to adequate regulation and supervision and are effectively implementing the FATF recommendations 23.1 Are regulated and supervised Professionals subject to controls of their regulator/supervisor or an other third party mandated by the regulator/supervisor Special recommendations SR4 Report suspicious transactions linked to terrorism for CTF SR7 Strengthen customer identification measures for wire transfers, i.e. obligation to indicate either the account number of the remitter or its name (& address) The analysis of the level of compliance of local regulation with the FATF recommendations leads to the following classifications: o o Compliant, meaning that the recommendation is fully observed with respect to all essential criteria. Largely compliant, meaning there are only minor shortcomings, with a large majority of the essential criteria being fully met. o Partially compliant, meaning that the jurisdiction has taken substantive action and complies with some of the essential criteria. 13

14 o Non compliant, meaning that there are major shortcomings, with a large majority of the essential criteria not being met. Appendix 1 summarises the classification of a jurisdiction for which the equivalence status is not granted automatically on the basis of the level of tolerance of deviations from FATF recommendations directly or indirectly relating to customer identification ( low risk and medium risk grids). D. Interpretation of equivalent identification requirements Considering the Luxembourg fund industry s international distribution model, which is mainly based on the reliance upon local Distributors, it is crucial to determine under which circumstances Professionals are exempted from KYC requirements and/or to what extent they can rely on accepted delegates to perform the material execution of the identification on their behalf. For the sake of clarity of the interpretation of equivalence, the following should be considered: - The guidance is limited to individual jurisdictions and does not include Investors and financial intermediaries domiciled in these jurisdictions, i.e. it confirms the existence of equivalent identification requirements for certain jurisdictions, but does not assess the status of efficient implementation of these requirements by the financial intermediaries. - Equivalence has only a narrow application in that it serves simply to provide an exemption from the basic identification obligation ( ) not from the need for wider customer due diligence procedures as may be necessary to enable a firm to fulfil its responsibilities 5 to take utmost care in accepting Investors and selecting financial intermediaries and to perform additional due diligence where needed. - The decision to perform an enhanced due diligence on certain Investors and financial intermediaries is at the discretion of the Professional, irrespective of the AML/KYC country risk assessed by using a methodology such as that set out in section VI. E. Country Classification Following the adopted AML country risk assessment methodology, we recommend that the following distinctions be made: EU member states EEA member states FATF member states Jurisdictions presenting non-substantial FATF equivalent Low Risk 5 Appendix D JMLSG Guidance Notes Equivalence status of other countries or territories and those with material deficiencies as at October

15 deviations from FATF recommendations which can be solved contractually with the agent/distributor Jurisdictions presenting more substantial deviations from FATF recommendations which can be solved contractually with the agent/distributor Jurisdictions presenting substantial deviations from FATF recommendations which cannot be solved contractually with the agent/distributor Non-Cooperative Countries and Territories Medium Risk High Risk Very High Risk 15

16 Country Risk Assessment Member Countries of FATF/ EEA/EU Y Equivalent N NCCT Y Very High Risk N Former NCCT N Y N removed from the list less than 2 years ago Y High Risk Reports published by FATF (FATF style)/imf/ Worldbank/ EU-Regulator(s) (latest) available Y Level of compliance with FATF-recommendations 1, 5, 6, 8, 9, 10, 11, 13, 15, 17, 18, 21, 23 and SR 4, SR 7 in accordance with «low risk» grid Y Low Risk N N Equivalence of AML Regulations based on selected FATF recommendations Y Y Level of compliance with FATF-recommendations 1, 5, 6, 8, 9, 10, 11, 13, 15, 17, 18, 21, 23 and SR 4, SR 7 in accordance with «medium risk» grid Y Medium Risk N N High Risk High Risk 16

17 F. Distributor due diligence The due diligence methodology should not be limited to the strict technical identification of the Distributor and the verification of its financial license, but it should be an in-depth analysis, with the aim to assess the reputation, legal and operational risks inherent to the business relationship. The due diligence should also cover the Distributor s own distribution network, the Distributor s anti-money laundering and combating terrorist financing policies and procedures as well as its reputation. The scale of the initial level of due diligence process shall depend on the nature and qualification of the Distributor, its level of supervision and equivalence of the laws to which he is subject. Based on the country risk assessment and on the customer identification requirements of the Distributor, the following risk classification is established: Level of regulation of the distributor Unregulated and/or not subject by regulation or group policy to KYC requirements Cat 3 Cat 4 Only delegation No delegation Cat 2 Regulated, but n/a Omnibus/Nominee not subject by regulation accounts acceptable or group policy subject to contractual eq. to equivalent KYC Regulated & subject by Cat 1 regulation or group policy Omnibus/Nominee n/a n/a n/a to equivalent KYC accounts acceptable Equivalent Low Medium High Very High Jurisdictions Risk Risk Risk Risk Country risk Distributor risk-matrix Description of categories: 17

18 Category 1: Regulated Distributor located in an equivalent or low risk country which is subject by regulation or group policy to equivalent customer identification requirements. This category includes financial institutions as defined in section IV.A. The Professional is fully exempted from the identification of the underlying Investors. In this case the Professional is also exempted from customer identification requirements of Investors whose subscription request has been submitted via a financial institution. Category 2: Regulated Distributor located in a medium risk country which is not subject by regulation or group policy to equivalent customer identification requirements. An equivalence of customer identification requirements for these Distributors can only be obtained through sound contractual arrangements filling in any KYC legal and regulatory gaps identified during the country risk assessment. As a result, the Professional has to implement additional due diligence measures to enforce the application of the agreed customer identification requirements and monitor adherence. The Professional is fully exempted from the identification of the underlying Investors (including investors whose subscription request has been submitted via a financial institution), provided that equivalent KYC requirements have been contractually imposed and that compliance is monitored on a regular basis (cf. section VI.H). Category 3: Distributor which is not regulated and/or not subject by regulation or group policy to customer identification requirements and which is located in an equivalent, low or medium risk country. As opposed to categories 1 and 2, Distributors in category 3 shall not be authorised to maintain Omnibus Accounts/Nominee Accounts. The Professional is permitted to delegate the material execution of the identification process to such Distributor, provided that he has contractually imposed equivalent identification requirements. Copies of the identification documents, which have been certified by the accepted delegate, are to be sent to the Professional. Category 4: Any other Distributor which is located in a high risk or very high risk country (NCCT). Due to the severe AML/CTF weaknesses noted for these jurisdictions, the Professional would need to perform the identification of the underlying Investors. 18

19 G. Application of the risk based approach to the initial due diligence process It is recommended to the Professional to rely on the following documentation in order to perform the identification of and due diligence on the Distributor. The table in section VI.H. specifies the nature of the due diligence, i.e. desk reviews or on-site inspections within the Distributor s premises. CAT 1 CAT 2 CAT 3 CAT 4 I. Identification, verification of image and reputation Evidence of regulation x x x x List of authorised signatories x x x x Extract of a public register or equivalent evidencing the company s existence (except if evidence of regulation / x x x financial license confirms existence) List of directors x x Identification of shareholders x x Identification of signatories x x x of agreements Latest audited financial report x x Verification of reputation x x x x II. Organisation Company org-chart x x Distribution map (geographic distribution overview) x x III. Law and policy List of laws, circulars and other documents regulating x x N/A the distribution activity Description of the regulator supervision x N/A N/A Name of external audit company x N/A N/A Internal AML & CTF policy x N/A N/A 19

20 H. Ongoing due diligence The relationship should be reviewed by the Global Distributor on an ongoing basis to evaluate potential changes in relation to the Distributor s regulation and to prevent shortcomings or adverse developments. The Professional benefits from an exemption to know the underlying clients of Distributors belonging to category 1. The Professional is permitted to establish a full contractual equivalence with Distributors belonging to category 2; in such case he remains fully responsible for ensuring the Distributor s compliance with the contractual equivalence requirements and is exempted from the identification of the underlying Investors. Therefore it is recommended to the Professional to subject Distributors belonging to category 2 to regular due diligence reviews (remote or on-site inspections of the underlying Investors identity documentation). The initial and ongoing due diligence can also be performed by the fund promoter appointing the Global Distributor and the local Distributors. Irrespective of the category, it is advisable to monitor any changes in the Distributor s license and regulations as well as non-compliance with agreed customer identification requirements (ex.: shortcomings which are made public by a supervisory authority or the press). The following table illustrates the suggested risk based approach: Due diligence requirements: Cat. 1 Cat. 2 Cat. 3 Cat. 4 Distributor Every three years (unless the risks identified documentation Exemption in external audit AML/KYC N/A N/A Review certification would impose a higher frequency) External audit AML/KYC certification Exemption Every Year Verification of the completeness of Investor identification files On-site visits to verify AML/KYC compliance (frequency depends upon the risks identified) Exemption Exemption Review of a sample of identification files of underlying customers of Omnibus Accounts/Nominee Accounts (at distance) Only if: - Local Distributor is bound by secrecy laws - Issues noted during documentation review or highlighted by external sources (audit report, press, etc...) N/A because documents must be available in Luxembourg N/A because Professional must perform the identification of underlying Investors 20

21 I. Additional risk factors/indicators The methodology should take into consideration additional risk factors which are not included in the categorisation of Distributors, such as number of delegated tasks, type of underlying Investors, distribution channels (face-toface, internet, 3 rd -party agents), banking secrecy, money laundering investigations, operational weaknesses (ex.: number of not in good order applications) and others. These factors/indicators have to be considered when identifying the Distributor at the outset and when performing the periodic due diligence. VII. Contractual Equivalence A. Legal clauses for contractual equivalence between the Professional and the Distributors The due diligence on the Distributor (category 2) may have confirmed the deviations from FATF standards in terms of KYC or shown that the Distributor has already implemented additional measures to operate to a higher standard. UCIs or Professionals who would like more comfort about their Distributors AML / CTF practices (category 2) might consider doing so by amending their distribution agreements. In our experience these amendments take the form of further undertakings by the Distributors to uphold FATF standards in terms of KYC in addition to their obligations under their national laws and regulations. If the Distributors policies and procedures were already mitigating these deviations, the agreement should at least refer to these policies and procedures. The agreement should grant the Professional the right to obtain copies of or get access to the identification documents of the underlying Investors, their application forms, their exact holdings and any other information which might be relevant for the identification of the Investor upon request. If the transmission of Investor data to the Professional is impossible due to banking secrecy or, more generally, confidentiality laws, the Professional shall: either reserve the right to perform on-site inspections or mandate external auditors to verify compliance with the agreements; or ensure that the Investors agree to waive the banking secrecy. If these conditions cannot be fulfilled, the Professional should not authorise the Distributor to maintain Omnibus Accounts/Nominee Accounts. 21

22 B. Delegation agreements The delegated tasks should be defined in detail, taking into consideration Luxembourg and foreign standards. In particular, the delegation agreement should define which documents and information the accepted delegate should request and verify. VIII. KYC and certification requirements A. KYC checklist The Circular authorises the Professionals to perform the identification of the Investors on a risk based approach. Appendix 2 details the recommended identification requirements depending on the nature and qualification of the Investor. B. Certification Only bodies authorised in their respective countries can be accepted as certifying bodies. As a general rule, documents can be certified by the competent authority who issued them. Self certifications are not accepted except for corporate documents such as signatory lists, which have been prepared by the company itself and do not need to be registered with public authorities. C. Rules for identification of Investors via incoming payments from or cheques drawn on banks located in equivalent jurisdictions Most Investments are operated on a remote basis, i.e. there is no face-to-face communication between the UCI or the Professional and the Investor. The following procedure describes a pragmatic way to accept or make remote payments. In relation to direct Investors or Investors which are introduced by third parties who are not subject to equivalent customer identification requirements, Professionals have the following options: - The Professional can instruct the Investor s bank to debit the account to settle subscriptions via direct debit on the basis of a mandate granted by the Investor; or - The Professional can verify the Investor s identity based on the data on the cheque settling the first subscription; or - The Professional can obtain an original written statement from the financial institution which has released the payment and maintains a bank account in the name of the Investor, confirming the money has been debited from the Investor s bank account; or 22

23 - The Professional can verify the Investor s identity based on the information contained in the electronic transfer order received to settle the first subscription, provided that this data is available. The order has to state the name and bank account number of the remitter. The bank account number shall be identical with the bank account number declared on the application form. In case one of these conditions is fulfilled, the Professional will not be obliged to obtain a copy of the identification document of the Investor. For the avoidance of doubt, this exemption will not apply in case where funds are simply transmitted through a bank in an equivalent jurisdiction (correspondent bank relationship). IX. Monitoring of suspicious transactions The Professional shall remain responsible for ensuring the monitoring of transactions and for fully cooperating with the authorities, independently of whether he is exempted from the Investor identification or has delegated the material execution of the identification act to a third party. A. Monitoring of suspicious transactions Due to the limited knowledge of the Investor s source of wealth, especially in the case of Omnibus Accounts/Nominee Accounts, the Professional may not be able to detect Investments which are unusual for the investment profile of a unit or shareholder. Receipts/Payments: It is recommended to ensure that redemption proceeds are paid back to the initial subscriber. Thus, the avoidance of a third party payment will considerably reduce the risk that the Investment Funds might be used in the layering stage of a money laundering scheme. It is recommended that in principle the prospectus stipulates that third party receipts or payments will not be permitted. Transactions: Special care should by taken by the Professional when operating transactions at the following levels: 1. At dealing when requested to proceed to static data changes: Difficulties in obtaining identification documents Contradicting or inconsistent information provided by the Investor Frequent address changes P.O. box address only Frequent changes in payment details 23

24 Incomplete application details and lack of willingness to provide evidence or answers required 2. When analysing the transactions of an Investor: - In-out transactions for substantial amounts on a short term basis - Disproportionate transaction volumes, compared to usual transactions for individual Investors - Significant capital turnover on Omnibus Accounts/Nominee Accounts - Activation of dormant accounts - Request for part investment and return of surplus funds - Receipt of unexplained amounts, request to return amounts - Payment of redemption proceeds to a third party account, unconnected to the Investor s account - Transfer(s) of ownership. To be cautiously applied as some institutional Investors/omnibus/nominee holders frequently transfer positions to other counterparties - Several transfers from different individual accounts to the Investor s account - Frequent and large transfers arriving from different countries - Origin or destination of asset (money, securities) transfers to countries which are unrelated with the Investor s residence - Origin or destination of asset transfers to more sensitive jurisdictions - Subscriptions, transfers and redemptions by ordering banks located in non-fatf countries, acting on behalf of the Investors - Bearer securities with physical delivery The above list is not exhaustive. B. Monitoring of blacklists and Politically Exposed Persons The Professional in Luxembourg shall monitor blacklists on an ongoing basis. Any match should be duly validated and evidence of matching and associated verifications should be kept during at least five years after the occurrence. 24

25 Appendix 1: Country risk AML/KYC assessment criteria for jurisdictions for which the equivalence status is not granted automatically FATF recommendations directly or indirectly relating to customer identification Money laundering offence Customer due diligence and Record Keeping LOW-RISK 1 Scope of the criminal offence of money laundering Predicate offences for money laundering cover all serious 1.b offences 5 Customer Due Diligence No anonymous accounts or accounts in fictitious names 5.a allowed 6 CDD required when establishing client relationship i.e. 5.b account opening? Compliant Largely compliant Partially Compliant Noncompliant Not assessed 5.c Additional CDD required if doubt on adequacy or veracity of declarations and identifications? 5.d Identification based on reliable documentation or other independent sources? 5.e 5.f Identification of legal representatives (e.g. trustees, directors, signatories) or persons with power of attorney required? Identification of beneficial owners/economic beneficiaries required? 5.g Identification of owners/partners/shareholder/settlors of legal entities/arrangements required? 5.h Obligation to verify source of funds and wealth? (riskbased approach acceptable) 5.i Politically exposed persons - Special measure for identification and monitoring? 8 New technologies & non face-to-face business 8,1 Obligation to verify blacklists Special identification measures for non-face-to-face 8,2 business (i.e. certification of documents, use of independent sources) 9 Third parties and introducers In case of delegation, financial institutions relying upon a third party should be required to immediately obtain from 9.a the third party the necessary information concerning certain elements of the CDD process, but not necessarily the copies of the identification documents 6 i.e. accounts whose real accountholder and ultimate beneficiary are not known.

26 Reporting of suspicious transactions and compliance AML/CFT Procedures Policies & Other measures to deter money laundering and terrorist financing Measures to be t k ith 9.b 9.c 9.d 9.e Would copies of ID be available on request (i.e. no banking secrecy issues or client waiver needed?) Do the third parties have to be regulated or supervised for AML&CFT or is a delegation agreement mandatory? Are these third parties and introducers located in equivalent countries or subject to contractual agreements? The ultimate responsibility for customer identification and verification remains with the financial institutions relying on the third party Record keeping - Identification data, account opening documents & transactions for at least 5 years Unusual transactions - Identification of complex, large or exceptional transactions, researching background and keeping records 13 Suspicious transaction reporting 13.a Obligation to report transactions linked to predicated offences or terrorism Obligation to report transactions or attempts where are 13.b reasonable ground to suspect them to be linked to predicated offences or terrorism regardless of the amount involved 15 AML & CFT procedures & policies 15.a Obligation to establish & maintain AML & CFT policies & procedures 15.b Obligation to train employees 15.c Obligation to test compliance with laws, regulations, policies & procedures 17 Sanctions Dissuasive criminal, civil and administrative sanctions 17.a available against natural & legal persons in case of nonrespect of professional obligations or money laundering/terrorist financing? 17.b Has an authority been empowered to apply sanctions? (e.g. supervisors or FIU) 17.c Do the sanctions apply also to the directors and senior management of legal entities? 17.d Shell Banks - Dealing directly or indirectly with shell banks not allowed 21 Special attention for higher risk countries 26

27 Special recommendations for CFT 21.a 21.b 21.c a Does the country make a difference between equivalent and non-equivalent jurisdictions? Obligation to verify transactions from nonequivalent/higher risk countries if they appear suspicious Obligation to implement special counter-measures for nonequivalent/higher risk countries Countries should ensure that financial institutions are subject to adequate regulation and supervision and are effectively implementing the FATF recommendations Are regulated and supervised financial institutions, subject to controls of its regulator/supervisor or an other third party mandated by the regulator/supervisor? SR4 Report suspicious transactions linked to terrorism Strengthen customer identification measures for wire SR7 transfers, i.e. obligation to indicate either the account number of the remitter or its name (& address) 27

28 FATF recommendations directly or indirectly relating to customer identification Money laundering offence Customer due diligence and Record Keeping MEDIUM-RISK 1 Scope of the criminal offence of money laundering Predicate offences for money laundering cover all serious 1.b offences 5 Customer Due Diligence No anonymous accounts or accounts in fictitious names 5.a allowed CDD required when establishing client relationship i.e. 5.b account opening? Compliant Largely compliant Partially Compliant Noncompliant Not assessed 5.c Additional CDD required if doubt on adequacy or veracity of declarations and identifications? 5.d Identification based on reliable documentation or other independent sources? 5.e 5.f Identification of legal representatives (e.g. trustees, directors, signatories) or persons with power of attorney required? Identification of beneficial owners/economic beneficiaries required? 5.g Identification of owners/partners/shareholder/settlors of legal entities/arrangements required? 5.h Obligation to verify source of funds and wealth? (riskbased approach acceptable) 5.i Politically exposed persons - Special measure for identification and monitoring? 8 New technologies & non face-to-face business 8,1 Obligation to verify blacklists Special identification measures for non-face-to-face 8,2 business (i.e. certification of documents, use of independent sources) 9 Third parties and introducers 28

29 9.a In case of delegation, financial institutions relying upon a third party should be required to immediately obtain from the third party the necessary information concerning certain elements of the CDD process, but not necessarily the copies of the identification documents Reporting of suspicious transactions and compliance AML/CFT Procedures & Policies Other measures to deter money laundering and terrorist financing 9.b 9.c 9.d 9.e Would copies of ID be available on request (i.e. no banking secrecy issues or client waiver needed?) Do the third parties have to be regulated or supervised for AML&CFT or is a delegation agreement mandatory? Are these third parties and introducers located in equivalent countries or subject to contractual agreements? The ultimate responsibility for customer identification and verification remains with the financial institutions relying on the third party Record keeping - Identification data, account opening documents & transactions for at least 5 years Unusual transactions - Identification of complex, large or exceptional transactions, researching background and keeping records 13 Suspicious transaction reporting 13.a Obligation to report transactions linked to predicated offences or terrorism Obligation to report transactions or attempts where are 13.b reasonable ground to suspect them to be linked to predicated offences or terrorism regardless of the amount involved 15 AML & CFT procedures & policies 15.a Obligation to establish & maintain AML & CFT policies & procedures 15.b Obligation to train employees 15.c Obligation to test compliance with laws, regulations, policies & procedures 17 Sanctions Dissuasive criminal, civil and administrative sanctions 17.a available against natural & legal persons in case of nonrespect of professional obligations or money laundering/terrorist financing? 17.b Has an authority been empowered to apply sanctions? (e.g. supervisors or FIU) 29

30 Measures to be taken with respect to countries that do not or insufficiently comply with the FATF recommendations Special recommendations for CFT 17.c 17.d Do the sanctions apply also to the directors and senior management of legal entities? Shell Banks - Dealing directly or indirectly with shell banks not allowed 21 Special attention for higher risk countries 21.a Does the country make a difference between equivalent and non-equivalent jurisdictions? 21.b 21.c a Obligation to verify transactions from nonequivalent/higher risk countries if they appear suspicious Obligation to implement special counter-measures for nonequivalent/higher risk countries Countries should ensure that financial institutions are subject to adequate regulation and supervision and are effectively implementing the FATF recommendations Are regulated and supervised financial institutions, subject to controls of its regulator/supervisor or an other third party mandated by the regulator/supervisor? SR4 Report suspicious transactions linked to terrorism Strengthen customer identification measures for wire SR7 transfers, i.e. obligation to indicate either the account number of the remitter or its name (& address) 30