The modern world is increasingly striving to remove anonymity from financial circulation. It is almost impossible to find “bearer” accounts at banks and to be able to open bank accounts, without proving both identity and address.
Knowing who your customer is, to enact protocols to prevent financial crime is an ongoing challenge for financial institutions and fund management companies.
Regulations for Financial Institutions
Significantly, institutions such as fund management companies must comply with complex regulations for customer identity verification called Know Your Customer (“KYC”), and Anti-Money Laundering (“AML”). The below article will cover why it is essential for fund management companies, such as STAG Fund Management SCR S.A (“STAG”), to comply with KYC/AML when onboarding investors.
Objectives of KYC and AML Legislation
By way of background, KYC and AML have appeared in legislation worldwide over recent years. KYC is a principle of the activities for financial institutions such as banks, stock exchanges, bookmakers and fund management companies. It obliges them to identify individuals before conducting any form of financial transaction.
The goal of the policy is to; better understand clientele, monitor financial transactions, reduce client risk and prevent bribery and corruption.
The concept of AML has a longer history. It was officially established after the creation of the Financial Action Task Force on Money Laundering (“FATF”) in 1989.
FATF serves as an international ‘watch dog’ agency. It works with more than 200 countries and jurisdictions to set standards and prevent money laundering and other illegal activities worldwide. It provides outreach and training for government agencies and financial service providers for a better understand of best practices. This is the full mission of the non-governmental international organisation FATF.
The acronym can be found in many financial documents, manifestos of openness and company security policies, including those relating to Fund Management Companies.
Reasons for KYC and AML
The main reasons for KYC and AML are very simple:
- Individuals do not want to lose their money; and
- Governments are fighting illegal money and terrorist financing.
Criminals often face major obstacles on how to ‘use’ their ill-gotten gains. Accordingly, they will often target financial institutions. As a result, criminals are constantly looking for new ways to get their ‘dirty’ money into the financial system to legitimise or ‘clean’ it. AML policies therefore require companies to report when customers deposit or invest large quantities of money.
An effective compliance program helps provide assurance to both clients and investors, that they can do business confidently.
Common Features of KYC/AML Obligations in respect of Fund Management Companies
A common KYC/AML program for a Fund Management company in Portugal, such as STAG, includes:
- KYC during onboarding and throughout the entire investor lifecycle;
- Monitoring of financial transactions;
- Reporting of suspicious activity to regulators;
- Methodical record keeping that stands up to independent audits by Auditors, Banks and the Portuguese Fund Regulator, CMVM (“Comissão do Mercado de Valores Mobiliários”); and
- Policies and training to keep staff updated.
Non-compliance with KYC/AML laws and regulations can result in disciplinary fines, penalties, criminal proceedings, sanctioning, and damage to a company’s reputation.