7 key anti-money laundering questions for UK asset managers

The world of finance thrives on transparency and trust. However, the ever-present threat of money laundering casts a shadow over this stability. For UK asset managers, robust anti-money laundering (AML) practices are not just a regulatory obligation, but a vital line of defence against financial crime.

This article delves deep into the crucial questions UK asset managers need answers to. We'll explore the fundamentals of AML, its significance, and the role of the money laundering reporting officer (MLRO). We'll also analyse the consequences of non-compliance and the importance of regulatory oversight, particularly for retail funds.

1. What is anti-money laundering & why is it so important?

Anti-money laundering (AML) refers to a set of regulations, policies, and procedures designed to detect and prevent the illegal generation of income and the movement of illicit funds through financial systems. It's crucial to combat crimes like money laundering, terrorism financing, and proliferation financing to ensure the integrity of financial institutions and maintain a stable global economy. AML measures help track and halt illegal financial activities, promoting transparency and accountability.

2. What does anti-money laundering mean to asset managers & why does it apply?

Asset managers must adhere to AML regulations to mitigate risk and ensure compliance. This involves implementing robust AML policies, conducting thorough customer due diligence, and promptly reporting suspicious transactions to regulatory authorities. Factors like complex fund structures, cross-border transactions, and inadequate due diligence processes can heighten money laundering risks for asset managers.

New regulations require asset managers to not only verify the ultimate beneficial owner(s), the source of funds and wealth but also to confirm the location, value and nature of assets held. Regulatory bodies like the FCA, as well as those in the Channel Islands and across Europe, emphasise high-risk factors (including jurisdiction links/reach), asset types and potential dual use goods. It's essential for asset managers to identify and understand the high-risk factors relevant to their operations, including the countries and business activities involved beyond just the incoming assets.

3. What is the role of a money laundering reporting officer within an asset management firm?

The money laundering reporting officer (MLRO) is responsible for overseeing and implementing AML, counter-terrorist financing (CTF) and proliferation financing (PF) measures. They ensure compliance with regulatory requirements, assess and mitigate risks, and report suspicious activities to relevant authorities. The role of a MLRO within an asset manager also involves scrutinising both the inflow of funds from investors and the outflow of funds and assets by the fund manager. It's essential to understand the financial products being invested in, such as trusts, securities, or offshore structures, and assess their associated risks and ownership. Their focus is on following the money and the control mechanisms in place to mitigate money laundering and terrorism activities.

4. What are the consequences of anti-money laundering non-compliance for asset managers?

AML non-compliance in the UK can lead to severe repercussions, including fines, imprisonment for individuals involved, damage to reputation, and potential loss of operating licenses. Moreover, failure to adhere to AML requirements can result in heightened regulatory scrutiny and ongoing monitoring.

Furthermore, aside from fines and sanctions, non-compliance can impact asset managers on a broader scale or within specific niches. With the current emphasis on environmental, social, and governance (ESG) obligations, asset managers face an additional layer of responsibility. Additionally, maintaining asset registers and verifying ownership and value are crucial aspects, especially concerning retail clients/funds.

5. How does regulatory oversight of retail funds help to mitigate AML risk?

Regulatory oversight varies between retail and institutional funds, necessitating careful adherence to relevant regulations. When dealing with retail funds, consumer protection is paramount as investors may lack the knowledge to fully understand their investments. Asset managers and financial advisors must thoroughly explain the risks and suitability of portfolios, ensuring investors comprehend factors such as potential returns, fees, asset depreciation, and liquidity. Failure to provide transparent guidance can lead to financial losses and regulatory intervention. These regulations not only safeguard investors but also mitigate AML risks for asset managers. Compliance measures include suitability testing and thorough onboarding processes to address the specific retail investor risks.

6. How can asset managers balance anti-money laundering risk & their commercial focus?

Asset managers are inherently focused on their business operations, needing to ensure both profitability and risk management. It's crucial for them to assess if they feel adequately protected and informed about the risks they face. By choosing the third-party service provider to outsource AML compliance, asset managers can gain a clear understanding of their assets and the AML, CFT and PF associated risks. Third-party service providers will issue independent effective guidance, ensuring internal efforts are focused on optimising commercial opportunities while balancing customer protection and risk.

7. How can Ocorian help asset managers adopt three lines of defence in their AML strategy?

Newgate Compliance is Ocorian’s independent risk and compliance subsidiary. We are a highly experienced financial crime team, offering an outsourced AML/CFT and PF compliance solution covering customer onboarding and periodic reviews; PEPs and sanctions screening; transaction monitoring; AML reporting and general financial crime advice.

We help businesses create robust frontline processes and procedures (line one) and work with you to create a comprehensive oversight function (line two). As businesses grow, we can advise on the level of oversight needed to demonstrate a risk-based approach to local and global regulators. Newgate can further audit your risk and compliance functions (line three). We are recognised by the FCA as independent for these purposes – including for Ocorian clients. For more information, reach out to the team.