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Neil Jeans Money Laundering Prevention Compliance

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Anti-Money Laundering Issues for Hedge Managers, Brokers, Distributors, and Buyers. FOA Hedge Funds Seminar - 5 th October 2004. Neil Jeans Money Laundering Prevention Compliance. Anti-Money Laundering Drivers for Unregulated Funds.

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Anti-Money Laundering Issues for Hedge Managers, Brokers, Distributors, and Buyers. FOA Hedge Funds Seminar - 5th October 2004

Neil Jeans

Money Laundering Prevention Compliance

anti money laundering drivers for unregulated funds
Anti-Money Laundering Drivers for Unregulated Funds

The Hedge/Unregulated Funds Industry has unique issues with regard to Anti-Money Laundering Compliance.

The Unregulated Funds Industry has grown significantly over recent years.

The Unregulated Funds Industry perceived as having a “high” money laundering risk.

Funds routinely employ complex and opaque corporate structures, which make identifying the risks difficult and worry regulators.

The AML regulatory requirements are increasing generally, thereby increasing the risks associated with non-compliance.

Need for more sophistication around the identification of potentially higher risk clients driven by regulatory changes, including Section 326 of USA Patriot Act.

the unregulated funds puzzle
The Unregulated Funds Puzzle

Involvement of third parties in the management of the client

Opaque Ownership

Complex & Multi -Jurisdictional Structures

Inconsistent and sometimes inappropriate management

of the AML risks

Involvement of other regulated firms in transactions

Involvement

of

unregulated

third parties in transactions

Identification

and

Verification

of Identity

Issues

Investor

and Beneficial Owner Issues

Understanding of the actual risks vs the perceived risks

GEN0190n.ppt

the players their roles
The Players & Their Roles

Each of the players has unique roles. Although sometimes the roles can be blurred and may vary from fund to fund.

Investment Managers/Advisers

Ultimate Controller

Professional Fund Administrators

Executing Broker(s)

Clearing Broker(s)

Prime Broker(s)

Investors

how to do kyc for unregulated funds possibly
How to do KYC for Unregulated Funds – Possibly ?

Document the Client Structure.

This type of client is usually treated under the guidelines for unregulated & private entities. However, due to certain characteristics this type of client it is appropriate to apply a different verification standard focusing upon the fund itself, its managers/advisors, the funds ultimate controllers and, in special circumstances, its investors.

Standard requirements to obtain identity information.

Standard documentation requirements to verify the identity of the client.

Different focus for connected persons than Other Unregulated & Private Entities

Directors of the Fund, Fund Managers, and Ultimate Controllers treated as connected persons.

Investors treated as source of wealth – resulting in different requirements to identify Investors.

treatment of investors
Treatment of Investors

It is appropriate that a degree of due diligence is undertaken on relevant investors or that assurance is obtained that other parties have undertaken appropriate due diligence on “relevant” investors.

Investors in a fund could be viewed as representing the source of wealth/funds of the client.

Investors funds are managed for them, therefore investors do not have control over the funds.

Relevant Investors can be defined as:

A person (natural or legal) who holds assets in the fund equating to 10% or more of the total assets held by the fund, where that asset is represented as an equity holding in the fund vehicle, a loan to the fund vehicle, or contractual obligation between the investor and the fund vehicle or its managers.

treatment of investors1
Treatment of Investors

Investors in a fund could be viewed as representing the source of wealth/funds of the client.

Investors funds are managed for them, therefore investors do not have control over the funds.

  • The type of investor investing in the fund
  • must be established and will dictate the
  • due diligence required on the investors:
  • Where there is evidence that the fund is marketed to or has predominately (90%+) investors that are regulated or exchange listed entities or their subsidiaries - no further steps with regard to obtaining the identity information of all relevant investor need be undertaken.
  • In all other cases the relevant investors identity information must be obtained.
treatment of investors2
Treatment of Investors

Investors in a fund could be viewed as representing the source of wealth/funds of the client.

Investors funds are managed for them, therefore investors do not have control over the funds.

·Obtain the identity information of the relevant investors.

  • Where appropriate to do so, place reliance
  • on a third party regarding the due diligence of the relevant investors.
reliance on third parties
Reliance on Third Parties

In certain circumstances it may be appropriate to place reliance on others to meet the requirements, particularly the identification and verification requirements.

Appropriately regulated institutions acting as agent to funds.

Entities that are part of a group whose primary activity is appropriately regulated.

Unregulated third parties

where prime clearing broker is involved
Where Prime / Clearing Broker is Involved ?

Where the client has a clearing broker or prime broker relationship with an appropriately regulated firm that undertakes or becomes involved in the part of the transaction, usually to settle the deal.

The firm involved and in whose name the client is placing orders or transactions, and who the executing broker will be settling direct with.

Is it appropriate to factor in that another regulated firm is party to the transaction, when deciding what level of identity information and verification of identity is appropriate for the client placing orders?