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Alternative fund managers face a growing threat from money laundering risks

Alternative fund managers face a growing threat from money laundering risks

15 February, 2024

Alternative fund managers are concerned about the growing threat they are facing from money laundering risks and their organisation’s focus on Anti-Money Laundering (AML) management is set to increase over the next 24 months, according to new research* from Ocorian, a market leader in regulation and compliance services for funds, corporates, capital markets and private clients.

The international study, carried out among senior leaders and senior compliance and risk executives at alternative fund manager firms which collectively manage around US$132.25 billion AUM, found that almost three quarters (73%) have seen the level of AML risks increase over the past two years. Of these, 16% have witnessed a dramatic increase. Around 20% say the risks have stayed the same and only 7% say they have decreased.

70% subject to AML fines or sanctions in the last two years

Despite almost all (99%) saying senior management and the Board already take AML management seriously, almost three quarters (70%) admit that their organisation has been subject to AML fines or sanctions in the last two years. 4% admit they have received an information request or visit from the regulator in the last two years.

87% will focus more on AML management over the next 24 months

In response to these growing risks and the current level of fines they are already facing, almost nine in ten (87%) say that their organisation’s focus on AML management will increase over the next 24 months. Of these, almost a quarter (24%) say it will increase dramatically. Only 12% say it will stay the same.

More positively, Ocorian’s study found that the majority (93%) of respondents feel their staff receive adequate training to mitigate AML, although there are still 6% who don’t feel the training is adequate.

Alternative fund managers are looking at other ways in which they can improve their AML defences in a cost-effective way, and around 94% have considered using an AML software solution to streamline their internal processes to increase efficiencies.

Calling in the experts

Joe French, Managing Director and Head of Financial Crime, at Ocorian, said: “Almost three-quarters of alternative fund managers interviewed for our survey have already been subject to AML fines or sanctions, and despite the general consensus that firms are taking anti-money laundering seriously, the level of AML risks is only expected to increase.

“When we saw the high number of fines, it did make us wonder why these firms haven’t already sought independent review to enhance their AML infrastructure. If you think there’s a problem, why are you not having someone come in to help you address it?

“It is encouraging that the majority of firms are increasing their focus on AML management over the next 24 months but all too often, how they go about executing this in practice can bring difficulties. Finding and hiring the right compliance staff takes time and money, and global firms have the additional challenge of needing to stay ahead of the latest regulation in each jurisdiction they operate. It’s positive to see that alternative fund managers are open to other ways in which this can be achieved, including using AML software solutions.”

Combat financial crime

As well as having over seven years as part of Newgate Compliance, Joe French has 13 years’ experience with HM Revenue & Customs leading intelligence teams which developed domestic and international criminal and civil cases in relation to money laundering, fraud, and cybercrime.

Joe added: “As alternative fund managers look to increase their focus on AML, we recommend following three lines of defence approach to protect their businesses – firstly, implement robust procedures, policies and training; secondly, comprehensively monitor these; and finally, review and challenge through an independent audit.”

Ocorian’s three lines of defence approach to tackle risk and compliance challenges:

  • Line one: create clear and robust frontline processes and procedures, supplementing this with both online and face to face training programmes for staff.
  • Line two: build and empower a comprehensive compliance oversight function which monitors and assesses the processes and procedures, as well as advising and supporting staff and senior managers to comply with the firm's obligations.
  • Line three: seek review and challenge of the firms AML framework via annual independent audits.

Assisting with a broad range of compliance services Ocorian’s subsidiary compliance consultancy service, Newgate Compliance, delivers pragmatic and flexible solutions to help clients meet often complex, evolving and increasing regulatory obligations. The team led by industry experts and ex regulators helps clients with the submission of regulatory authorisation applications, provision of Money Laundering Reporting Officers (MLROs), the implementation of compliance frameworks and governance structures, as well as regulatory and compliance training for employees. Newgate is experienced in supporting firms globally for over ten years, whether assisting with first, second or third lines of defence.

*Ocorian commissioned independent research company PureProfile to conduct a global study (across the US, UK, Germany, Brazil, Singapore, Hong Kong, UAE, Turkey, Quatar, Saudi Arabia and Mauritius) of 101 senior executives, regulation and compliance executives working at alternative fund manager firms (including private equity, venture capital, real estate, infrastructure, private debt, renewables and hedge funds) during January 2024.