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Buy-side firms: Your legal entity information must be up to date, always, say new rules

Neil Jeans

19 Jun 2015


Neil Jeans, Head of Policy & Standards, KYC as a Service at Thomson Reuters reveals what the buy-side needs to do under the FATF Recommendations and introduces a Special Report.

The Financial Action Task Force(FATF), established in July 1989 as a G7 initiative, develops policies to combat money laundering with the express aim of protecting the international financial system.  In terms of the current FATF Recommendations which were hammered out in 2012, there is now a minimum amount of basic information that all legal entities, including buy-side firms such as asset managers and hedge funds, must obtain, record and make available to a registry (such as Companies House in the UK) on an ongoing basis.

The key point for buy-side firms to take away is this: as a responder to know your customer (KYC) due diligence the onus is now on you to provide up-to-date identity documents to your bank or financial institution (FI) and, further, to alert them to changes as and when they occur. The onus is not on your bank or FI to request the necessary information and there could be legal implications for buy-side firms that do not maintain and update their records. Similarly, as a performer of KYC due diligence on your own clients, your clients/investors will be obligated by law to supply you with their up-to-date identity information.

Practical implications and concerns

This important change has far-reaching consequences for all buy-side firms – and indeed for your clients. In order to comply, firms will have to collate, verify, securely store, and deliver more corporate identity-related documentation than ever before. And this, in turn translates into more time, effort and resources being deployed in non revenue-generating activities, obstructing and prolonging business activities.

But the practical implications of the FATF Recommendations run far beyond simply collecting and collating the new documentation that will be required. Firstly, different banks and FIs will all interpret the new legislation differently, with many erring on the side of caution and requesting more information than is actually necessary. Secondly, the secure delivery of highly confidential information is challenging and even if secure delivery is achieved, firms have no control over who can access this information once they have released it. These are very real security concerns.

A global perspective

The Recommendations are already filtering into legislation around the globe. In Europe, the Fourth Money Laundering Directive (4MLD) has passed its final legislative hurdle and will become law across EU member states in two years following a vote in the European Parliament. It introduces key requirements around holding legal entity identity data, including beneficial ownership, and companies must be able to transmit this information effectively to ‘obliged entities’.

In Australia, the Australian Transaction Reports and Analysis Centre (AUSTRAC) amended its AML/CFT Rules in June 2014 to include, inter alia, the collection, monitoring and maintenance of information about beneficial owners, and details of the management and organizational structure.  The requirements extend to all legal entities.

In the U.S. the Financial Crimes Enforcement Network (FinCEN)’s proposed rules document also indicates a move towards more stringent customer due diligence requirements, including more information about beneficial ownership.

Other countries, as they prepare for the next round of FATF mutual evaluations (which assess a country’s compliance with the FATF Recommendations) are also moving to amend their legislation.

Next steps

It is clear that this is a global issue: those regions where there is currently no legal requirement for this enhanced information gathering and reporting can expect to be regulated in due course. My recommendation is that it would be wise for the buy-side to view these expected changes as a catalyst to put the right procedures in place now to collate, verify and maintain their identity information. Last-minute compliance is often difficult, especially if the requirements turn out to be more difficult to implement than was initially anticipated. Innovative solutions can significantly reduce the burden on the buy-side by providing technology to streamline the collection, maintenance, storage and secure distribution of confidential documentation. Holistic solutions, such as Managed Service from Thomson Reuters, are already helping buy-side firms to optimize their processes to the benefit of all stakeholders, comply with these new Recommendations and keep that all-important step ahead of the regulatory curve.

Read the full Special Report here

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