With many stock market indices near all-time highs, the wealth and asset management sector is under increased regulatory spotlight and firms are looking for more effective ways to protect against Anti-Money Laundering (AML) and financial crime. Compliance with AML, Know Your Customer (KYC), and sanctions requirements continue to be a key focus area for management. Firms are under pressure to demonstrate they have robust compliance frameworks in place to meet both regional and global regulatory requirements.
With total global assets under management expected to increase from $110 trillion in 2020 to $145 trillion in 2025, a corresponding increase in regulatory scrutiny is likely, including increased penalties and fines for non-compliance, deferred prosecution agreements, and targeted management accountability for AML and sanctions violations.
Like any other type of business in the financial services sector, asset management firms are subject to strict rules regarding money laundering and terrorist financing. The regulations in place vary among jurisdictions, so we have provided a snapshot of the regulatory requirements of some major markets.
AML for investment advisers in the U.S.
In the U.S., financial regulation is handled by several different agencies. In the case of asset and wealth management, the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed a set of anti-money laundering (AML) requirements for U.S. investment advisers in 2015. Under the proposed rules, advisers that are registered with the Securities and Exchange Commission (SEC) must establish AML programs and report suspicious activities related to money laundering and terrorist financing. These advisers must also comply with sections of the Bank Secrecy Act (BSA) that require them to assist government agencies in detecting and preventing money laundering.
But even five years later, this is only a proposal and not a requirement. According to a Senior Counsel at Norton Rose Fulbright, “Investment advisers currently are not subject by regulation to any federal AML compliance requirements, including the Customer Identification Program and beneficial owner requirements.”
While investment advisers might not directly have reporting requirements, many of their activities require the use of reporting entities; for example, executing trades and holding securities requires a broker-dealer platform. These platforms must ensure that any investment adviser they do business with isn’t dealing with accounts tainted by money obtained through money laundering or other illegal activities. There are also Office of Foreign Assets Control and SEC considerations regarding safeguarding client assets and protecting the integrity of the U.S. financial system.
As global business advisory firm FTI Consulting states, “In light of the increased pressure by the SEC, investment advisers may be better served viewing customer relationships through an AML lens, even if not currently required, since the fallout of failing to do so may already be at their doorstep.”
Registered investment advisor AML requirements in Canada
For Canadian asset management companies, the requirements are already well-established and overseen by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). Any individual or entity authorized under provincial legislation to provide portfolio management or investment advising services is considered a securities dealer under the Proceeds of Crime (Money Laundering) and Terrorist Financing Act. The act requires all securities dealers to have a compliance program in place and report any suspicious transactions to FINTRAC, keep detailed account records and verify client identities.
The Investment Industry Regulatory Organization of Canada, a self-regulatory industry body that oversees all Canadian investment dealers and trading activity, implemented Anti-Money Laundering Compliance Guidance, effective as of June 1, 2020.
AML requirements for asset managers in Europe
The European Union (EU) continues to expand the scope of its AML regulations. The 5th Anti-Money Laundering Directive (5AMLD), which came into force on January 10, 2020, extends requirements on:
- Customer Due Diligence
- Domestic and politically exposed persons
- Central registrars of beneficial ownership
- AML/KYC checks for majority-owned subsidiaries outside the EU
The 6th Anti-Money Laundering Directive (6AMLD) has already been passed by the EU, requiring organizations within all member states to implement the new regulations by June 3, 2021.
One key consideration is taking a risk-based approach to compliance. With technology and money laundering techniques changing rapidly, prescribing specific requirements becomes problematic. Thus, the EU approach is more about creating systems and mindsets that are more likely to be effective on an ongoing basis. The EU approach considers questions like, Do you understand who your client is, how they get their money and the risks they pose? What are your risk control procedures and how do you assess and maintain these procedures? Creating adaptable systems will help protect your organization from bad actors.
AML compliance for asset and wealth management companies in Australia
The Australian Transaction Reports and Analysis Centre (AUSTRAC) oversees compliance for asset management firms. Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, these companies are designated as financial services providers. Like other jurisdictions, asset managers in Australia must have an AML program in place, report suspicious transactions, and keep detailed account records. One notable difference is the availability of a government-managed online document verification system used in the Customer Due Diligence or KYC process.
Like banks, asset and wealth management companies are subject to the same regulatory requirements for AML/KYC compliance. Although there are still some differences among jurisdictions, there is a greater movement towards converging regulations internationally. There are certainly benefits to promoting greater cross-border compliance through harmonized rules.
Global asset and wealth management compliance
As the amounts of wealth under management increase globally, compliance requirements will also continue to expand. Additionally, the significant growth in digital applications makes it clear that firms wanting to expand should focus on digital onboarding processes that help ensure compliance and minimize customer friction.
This post was originally published on March 16, 2016. It has been updated to reflect the latest industry developments and best practices.