06 July 2020

EFAMA Response to the ESAs draft guidelines on “The Risk Factors Guidelines’’

We believe it is important to ensure that a proportionate approach is taken in the review of such guidelines and that effort and resources are only expanded where they have maximum real impact in preventing ML/TF.

For the appropriate application of any AML rule, and more specifically due diligence requirements to investment funds, it is crucial to consider the different distribution and business models related to the distribution of units/shares of investment funds (direct distribution model and intermediation model) and the different intermediaries which are used for distribution purposes.

The business relationship between the asset management company, the intermediary and any underlying customers will affect a number of AML/CFT obligations and outcomes. We would like to draw the attention to the 2018 FATF Guidance for a risk-based approach for the securities sector which addresses these specific cases and should be taken into account in the drafting of any further piece of legislation. Finally, it must be borne in mind in this context that the key factor for identifying a beneficial owner in accordance with the definition of ‘beneficial owner’ in Art. 3 (6) of Directive (EU) 2015/849 is the ultimate ownership or control that a customer/investor has over a company.

For this reason, and as expanded further in our response, we consider particularly problematic the request in point 16.20 for the fund or fund manager to “take risk- sensitive measures to identify, and verify the identity of, the investors underlying the financial intermediary, as these investors could be beneficial owners of the funds invested through the intermediary.”

Where the intermediary is an AMLD regulated entity, i.e. an obliged entity under AMLD and supervised by a national competent authority, it is already required to perform their due diligence process on its customers. Requiring asset managers to perform diligence duties on the intermediaries’ customers would imply that regulators consider that intermediaries are underperforming when it comes to their own diligence duties and asset managers are asked to take over this responsibility. At the same time, such a duplicative process for the same underlying investor will unnecessarily increase the burden for all financial institutions involved and distract all important resources from other higher risk areas. As acknowledged by the abovementioned FATF Guidance on securities, undertakings for collective investment don’t always have access to the information related to the identity of the investor due to the different distribution and acquisition models. Also, there are legal constraints linked to banking and data privacy that would impede the fund manager’s ability to perform such a verification at the level of the intermediary’s clients....

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