Banking remains a more obvious route for financial crime, but money launderers are increasingly targeting asset management companies to hide the proceeds of their criminal actions.
Know your customer (KYC) checks on dubious wealth management clients have been lax, resulting in highly publicised fines for non-compliance. Robeco was fined €2m by the Dutch financial market regulator for insufficient protocols in one instance, while Sterling Asset Management suffered a $300,000 fine for failing to identify money laundering.
Problems are likely to grow in scope. PwC has estimated the exponential expansion of global assets under management, close to hitting the $145 trillion mark by 2025.
As the threat of money laundering becomes more tangible, those that fail to recognise the rising risk will open themselves to danger and possible prosecution, at both a personal and company level.
Why asset management is prone to money laundering
The increasingly lucrative nature of the sector has made it a bigger attraction to criminal gangs wishing to hide their dirty cash in plain sight, as well as the following:
- 80% of financial crime professionals within the sector believe the Covid-19 pandemic has had a detrimental effect, as asset managers spent less on proper anti-money laundering (AML) systems than higher-risk financial institutions.
- The asset management world is made up of a large network of registered companies and intermediaries, all with complex structures. Coupled with cross-border dealing, this creates an ideal environment for wrongdoers to launder illegal proceeds through numerous transactions.
- Client confidentiality and the privacy of high net worth individuals (HNWI) is a key aspect to the business. Often preferring to operate through offshore companies, this makes implementing suitable AML compliance measures more troublesome.
Another idiosyncrasy is that many jurisdictions allow investments in asset management products to be redeemed, or re-registered, through names of third parties. This makes illegal proceeds easy to mask and move around with a veneer of legitimacy.
Global regulators are taking serious interest in the sector’s compliance
The sector is facing a definitive moment to start taking action to reduce risk, with regulators around the world setting out standards to assist AML efforts.
The Financial Action Task Force – the global watchdog for AML standards – has highlighted how client relationships can be a risky web for asset managers; when HNWI and their large network of partners are all involved, ultimate beneficial ownership (UBO) and source of funds can be problematic to identify.
The UK’s Financial Crime Authority has also warned that many investment managers are not equipped to control bribery and corruption risks posed by third party relationships.
In 2020, the European Union’s (EU) 5th Anti-Money Laundering Directive (5AMLD) outlined multiple measures of AML regulation for asset managers, including checks on customer due diligence, or on majority-owned subsidiaries outside the EU. Investment companies must comply with these provisions according to the more recent 6th Anti-Money Laundering Directive (6AMLD) which came into effect last year.
Some individual EU member states, including Luxembourg and the Netherlands, have implemented their own additional AML compliance conditions following investigations into heightened money laundering risk.
The onus to remain compliant begins with asset managers
The law imposes a duty on asset managers to implement secure AML and combating the financing of terrorism (CFT) controls, and to report any suspicious activity to authorities.
Due diligence on all clients, including identifying source of wealth and beneficial ownership of third parties and offshore trusts, is required to reduce the risk of doing business with individuals laundering dirty cash. Problematic close-knit client partnerships can be handled more carefully by designated relationship managers.
Financial crime risk assessments are getting increasingly granular, so recruiting financial crime experts to understand risk within the sector is a must to ensure that AML activity is compliant.
Asset managers must see themselves as the first line of defence against money laundering. Lack of compliance can result in a criminal offence, even a five year prison sentence in extreme cases.
Understand the risk and act
Asset managers are under threat from criminal gangs exploiting the financial system in new ways. Now is the time to improve and streamline your AML processes.
Knowing how to identify risk, and assess and manage your compliance accordingly will help you combat any potential laundering activity.
To give a helping hand, we have put together an in-depth report on the AML vulnerabilities faced by asset managers.
In this spotlight report, we cover:
- Where asset management faces AML risk
- Why money laundering is on the rise
- How regulation is clamping down on compliance
- How automation can tackle risk
Automation can simultaneously bolster AML defences and improve efficiency
Criminals are enhancing their methods and means through technology, but these threats can also be combated from first sight using automation technology. The right technology can not only bolster AML defences, but improve compliance efficiency at the numerous stages in a client lifecycle, including:
- Initial onboarding and risk assessment
- KYC screening and ID verification
- Enhanced due diligence
- KYC remediation
- Ongoing monitoring / periodic reviews
With regard to the complex nature of asset management, there are specific advancements in technology which RiskScreen has developed, to:
- Perform initial and ongoing risk screening for HNWIs, corporates and third-party suppliers, against global sanctions, PEP and watch lists, using a configurable risk-based approach
- Navigate complex, cross-border corporate structures with network visualisations, including UBOs, directly within the onboarding process
- Perform electronic ID verification checks within the same workflow
- Automatically screen for adverse media across structured and unstructured data sources, to help reduce reputational risk and build and early warning system to risk
- Cater for the entire lifecycle, from initial onboarding and screening to ongoing monitoring, remediation projects all within one integrated platform
Manual solutions for AML are simply not enough – they take up valuable workload and are prone to human error. Any overlooked details can make your business liable to regulatory penalties.
As sophisticated criminals look to exploit asset managers as a means to launder illicit funds, it’s critical that they consider technology that can not only mitigate risk today, but they choose solutions that scale and protect against a growing number of external threats.