The JFSC consultation paper on proposals to provide additional guidance on the application of AML/CFT requirements to funds and fund operators, together with a draft of the proposed new section 14 of the Handbook.

The proposed new section does not amend any existing statutory obligations for funds or fund operators, and also provides practical guidance and greater clarity through the use of diagrams and flow-charts.

The new section is of relevance not just to funds and fund services businesses, but to a widely defined group of ‘fund operators’ who conduct ‘financial services business’ and includes the usual fund services businesses, but also other supervised/reguletrd persons (eg bankers, auditors, legal advisers and natural persons carrying on a single class (Class G directors) of trust company business.

The substance of the proposed new section includes detailed guidance about

• the application of CDD measures by funds and fund operators and helpfully sets out the distinction between the two, the former relating to the investors, while the fund operator’s obligations relate to the fund,

• the conduct of business risk assessments and customer risk assessments (in particular, with regards to factors which are required to be taken into account) and

• the application of simplified due diligence, reliance on obliged persons and outsourcing in the context of a fund structure.

UBO 3 TIER TEST

• the new section also provides clarity about the application of the Three Tier Test (i.e., for the identification of beneficial owners and controllers).

• A footnote confirms that whereas Tiers 1 and 2 are mandatory, Tier 3 is only necessary to the extent that no one is identified at Tiers 1 and/or 2.

• this update will be of interest not only to funds and fund operators but to anyone to whom the MLO applies.

Failure to complete CDD

There is a specific concession about the obligation to terminate a business relationship where there has been a failure to complete identification measures.

The new section recognises that

• this may be problematic where other legislative or regulatory requirements apply to the relationship between the fund and its investor(s) and / or
• where termination may have a prejudicial effect on the interests of other investors.

In such a case, it is proposed that termination of the business relationship could be delayed until compliance with the MLO does not conflict with another statutory or regulatory requirement and/or does not have any prejudicial effect on

the interests of other investors.

The guidance DOES HOWEVER indicate that businesses will still be obliged to manage the risk of money laundering or financing of terrorism.

This reflects the existing obligation to consider whether or not to make an SAR in this circumstance, which will still apply.

The impact will probably be that in most cases it will also be necessary to block any payments relating to the relevant investor’s units in the fund while continuing to attempt to complete Identification measures until termination can be properly effected without prejudicing other investors.