Link n Learn 2018 AML/CTF 27 th September 2018

Transcription

1 Link n Learn 2018 AML/CTF 27 th September 2018

2 Getting Started Here with you today Agenda Bastien Collette Director Advisory & Consulting AML/CTF Luxembourg Laura Wadding Director, Investment Management, Ireland Sinead Carey Senior Manager, Advisory and Consulting, Ireland Helene Fosset Analyst, Advisory and Consulting Luxembourg Overview of partial AMLD4 transposition in Luxembourg Law of 18 February 2018 partially transposing AMLD4 Ongoing AMLD4 transposition: Beneficial Owners registries Hot Topic AML Assurance Beneficial Ownership Q & A 2

3 Overview of partial AMLD4 transposition in Luxembourg 3

4 Overview of partial AMLD4 transposition in Luxembourg Law of 23 December 2016 Implementing the 2017 tax reform CSSF Circular 17/651 Providing details on certain provisions of the AML/CFT Law ( AML/CFT GDR ) to predicate tax offences AMLD4 Law of 13 th February 2018 Laws of 10 th August 2018 Transposing most of AMLD4 provisions Reinforcing FIU status and amending cooperation with authorities obligations Preparing trustees to gather information on the beneficial owners ( BO ) of Trusts Bill of Law 7217 On the obligation to gather information of the BOs of registered entities Prospect AMLD5 Prospective bills of Law Bill of Law 7216b implementing BO s registry regarding trust, etc. Tax & Consulting 4

5 Law of 18 February 2018 partially transposing AMLD4 5

6 Law of 18 February 2018 partially transposing AMLD4 Key points The Law of 13 February 2018 transposed most of AMLD4 provisions 28 April April 2017 I.R.E opinion Bill of Law publication 25 July 2017 Chambre du Commerce opinion 14 September 2017 Ordre des Experts- Comptables opinion 25 October 2017 Conseil de l ordre du barreau opinion 8 November 2017 Chambre des métiers opinion 15 December 2017 Conseil d Etat opinion Luxembourg legislative framework 13 February 2018 Publication of the Law 25 June 2015 Regulation came into force 26 June 2017 Transposition deadline EU legislative framework Risk-based approach New definitions Customer due diligence Internal organization Obliged entities Introduction of new and improvement of riskassessment obligations for professionals (on a case-bycase basis) Etc. Introduction and amendement of several key definitions: Credit and financial institutions Beneficial owner, Trust and company services providers Politically exposed persons Etc. NDD: extend the scope of CDD measures, insurance specificities, timing of CDD measures etc. SDD: legal hypothesis where SDD may be applied replaced by list of potentially lower risks in annex III, etc. EDD: new measures for countries with AML/CTFdeficiencies /PEP/ crossborder correspondent relationship, etc. Enhancement of internal organisation obligations and group-wide policies, controls and procedures Introduction of whistleblowing mechanism Etc. New obliged entities: Individuals exercising Family Office activities Bailiffs (huissiers de justice) Threshold reduced from EUR to EUR for natural and legal persons trading in goods Etc. 6

7 Law of 18 February 2018 partially transposing AMLD4 Key definitions (1) Key definitions amendments Politically Exposed Person: Domestic PEPs included Prominent members of international organizations Family members broaden Article 3 (9)(10) AMLD4 Senior management: Means an officer or employee with sufficient knowledge of the institution s money laundering and terrorism financing risk exposure and sufficient seniority to take decisions affecting its risk exposure, and need not, in all cases, be a member of the board of directors Article 3 (12) AMLD4 Improvement of the PEP definition of the Law of November 2004 as amended in order to comply with the AMLD4 definition amendments although domestic PEPs were already included in the Law Introduction of the definition of senior management into Luxembourg Law using the exact wording of the Directive Difference with AMLD4: family members include brother(s) and sisters(s) 7

8 Law of 18 February 2018 partially transposing AMLD4 Key definitions (2) Key definitions amendments Correspondent relationship: Means: (a) the provision of banking services by one bank as the correspondent to another bank as the respondent, including providing a current or other liability account and related services, such as cash management, international funds transfers, cheque clearing, payable-through accounts and foreign exchange services; (b) the relationships between and among credit institutions and financial institutions including where similar services are provided by a correspondent institution to a respondent institution, and including relationships established for securities transactions or funds transfers; Article 3 (8) AMLD4 Beneficial Owner: Ownership percentage threshold set up to 25% by the 3 rd AML Directive is an mere indication of direct or indirect ownership and shall be considered amongst other factors Where no natural person is identifiable who ultimately controls or owns a corporate entity, the senior managing official(s) shall be considered as such Identifies potentials BO in cases of corporate entities, trusts and similar legal arrangements foundations Article 3 (6) AMLD4 Introduction of the definition of correspondent relationship into Luxembourg Law using the exact wording of the Directive Entire transposition of the new improved definition of the Beneficial owner 8

9 Law of 18 February 2018 partially transposing AMLD4 Lower risks factors Annex II AMLD4 III Law 13/02/2018 Non-exhaustive list of factors and types of evidence of potentially lower risk: 1. Customer risk factors: Public companies listed on a stock exchange and subject to disclosure and transparency requirements; Public administrations or enterprises; Customers that are resident in geographical areas of lower risk as set out in point (3); Etc. 2. Product, service, transaction or delivery channel risk factors: Life insurance policies for which the premium is low; Insurance policies for pension schemes if there is no early surrender option and the policy cannot be used as collateral, a pension, superannuation or similar scheme under conditions; Financial products or services that provide appropriately defined and limited services to certain types of customers, so as to increase access for financial inclusion purposes; Low AML/CTF products; Etc. Member States; 3. Geographical risk factors: Third countries having effective AML/CFT systems; Third countries identified by credible sources as having a low level of corruption or other criminal activity, Etc. Amendments made by the Law of 13 February Previous legal hypothesis providing for SDD measures are replaced by the factors of potentially lower risks set out in Annex III. 2. SDD measures regarding low-risk cases in relation to electronic money amended. 9

10 Law of 18 February 2018 partially transposing AMLD4 Higher risks factors Annex III AMLD4 IV Law 13/02/2018 Non-exhaustive list of factors and types of evidence of potentially higher risk: 1. Customer risk factors: The business relationship is conducted in unusual circumstances; customers that are resident in geographical areas of higher risk as set out in point (3); Legal persons or arrangements that are personal asset-holding vehicles; Companies that have nominee shareholders or shares in bearer form; Businesses that are cash-intensive; Unusual or excessively complex ownership structure. 2. Product, service, transaction or delivery channel risk factors: Private banking; Products or transactions that might favor anonymity; Non-face-to-face business relationships or transactions, without certain safeguards; Payment received from unknown or unassociated third parties; New products and new business practices. 3. Geographical risk factors: Countries identified as not having effective AML/CFT systems or as having significant levels of corruption or other criminal activity; Countries subject to sanctions, embargos or similar measures; Countries providing funding or support for terrorist activities. Amendments made by the Law of 13 February Obligation to take into account at least the factors of potentially higher risks set out in annex IV when assessing the risk attached to a customer. 2. Extension of the EDD measures regarding correspondent banking and PEP: Introduction of EDD measures regarding PEP identified as BO of an insurance contract or other type of insurance (timing of CDD measures, etc.); Minimum period of 12 months after the PEP office termination during which the professional must still apply DD measures based on the risk(s) of such customer; Inclusion of domestic PEP. 3. Improvement of the EDD measures regarding countries or territories which do not or insufficiently apply AML/CTF measures. 10

11 Law of 18 February 2018 partially transposing AMLD4 Record-keeping of due diligence information Preexisting AML/CTF regulatory framework Law of 13 February 2018 Professionals are required to keep the due diligence documents and information for use in any investigation into, or analysis of, possible money laundering or terrorist financing by the responsible Luxembourg authorities: (a) For CDD: a copy or the references of the documents required, for a period of at least five years after the business relationship with their customer has ended (b) In the case of business relationships and transactions: the supporting evidence and records, consisting of the original documents or copies certified for a period of at least five years following the carrying-out of the transactions or the end of the business relationship Without prejudice for longer record keeping periods prescribed by other laws Source: Article 3 (6) Law of November 2004 Key actions required Adapt the record-keeping length and apply such length also as from the end of the concluded transaction carried out on an occasional basis Apply record-keeping obligation not only to documentation but also to CDD information Obligation to delete personal data at the end of the five years (with exceptions) The article provisions are repealed and rephrased by a new article: The objectives of the article are still the same: a) Regarding CDD measures: include in the record keeping a copy of the information necessary for professionals to comply with their CDD obligations (including measures taken to identify the beneficial owners of trusts and similar legal arrangements) b) Archive supporting documentation and transactions records necessary to identify and retrace transactions A new obligation to delete personal data at the end of the five years record keeping obligation has been introduced except: Where longer record keeping delays are prescribed by other laws When Control Authorities require an additional period of five years (where necessary to perform their AML/CTF duties) When such conservation is necessary for implementing efficient internal measures of prevention and detection of ML/TF, an additional period of five years can be applied by the professionals 11

12 Law of 18 February 2018 partially transposing AMLD4 Data protection introduction Preexisting AML/CTF regulatory framework Law of 13 February 2018 No specific article dealing with data protection regarding due diligence measures performed by the professional Personal data shall only be processed by professionals in the context of the prevention of money laundering and terrorism financing and are not subject to subsequent processing for any other purpose Professional must communicate to their new clients the information required on the rights to information acquired by such clients before entering into a new business relationship or to carry out a transaction on an occasional basis. Such information shall contain a particular general warning regarding professional legal obligations regarding personal data processing The employee responsible of data processing shall limit data protection rights of a concerned person when such measure is necessary to: a) Allow professionals, the Financial Intelligence Unit, a Control Authority or a Self-Regulatory Body to accomplish their AML-CTF duties Key actions required Adapt policies and procedures in order to comply with the new requirements regarding the protection of personal data Adapt account opening documentation (e.g. terms and conditions, etc.) in order to inform their prospective clients on the protection of personal data regarding AML/CTF matters b) Avoid obstacles to intelligence application, analyses, investigations or official or judiciary proceedings of measures taken to comply with AMLD4 and in order not to compromise the prevention and detection of cases of MT/TF and related investigations. 12

13 Law of 18 February 2018 partially transposing AMLD4 Training & whistleblowing amendments Preexisting AML/CTF regulatory framework Law of 13 February 2018 Obligation to provide adequate and appropriate AML/CTF trainings Obligation for relevant employees to be aware of and trained in respect to the provisions of the law of 2004 as amended so as to recognize operations which may be related to ML/TF and instruct them on how to proceed in such cases Etc. Sources: Article 4 (2) Law of November 2004, Article 7 Grand Ducal Regulation 2010 and Article 46 CSSF Regulation Key actions required Obligation to provide AML/CTF trainings to all employees shall be adapted to the risks, nature and seize of the professionals Put into place whistleblowing procedures respecting the above mentioned requirements The Article 4 Law of 2004 pre-existing provisions regarding the obligation to provide adequate and appropriate AML/CTF trainings are replaced by: The obligation to train their employees must be adapted to the identified risks, nature of activity, and seize of the professional Such measures shall include training participation in order for their employees to understand potential suspicious operations and to instruct them on the way to process with them Control authorities, self-regulatory bodies and the FIU shall ensure that professionals have access to up-to-date information on criminals practices in relation to ML-TF and on hints allowing to identify suspicious transactions Introduction of whistleblowing mechanisms that is appropriate and proportional procedures allowing their staff to internally report any violation to AML/CTF obligation by an independent specific and anonymous channel 13

14 Law of 18 February 2018 partially transposing AMLD4 Group-wide policies amendments Preexisting AML/CTF regulatory framework Law of 13 February 2018 Obligation to coordinate AML/CTF policies with branches and subsidiaries abroad communicating relevant policies and procedures to the branches and subsidiaries of financial institutions The customer due diligence requirements with which the branches and subsidiaries in third countries shall comply include all of the customer due diligence requirements and particularly enhanced due diligence measures Where the minimum requirements for the fight against money laundering and terrorist financing of host countries differ from those applicable in Luxembourg, branches and subsidiaries in host countries shall apply the higher standard, to the extent that host country laws and regulations permit Sources: Article 4 Law of November 2004, Article 4 Grand Ducal Regulation 2010 and Article 38 CSSF Regulation Obligation to put in place group-wide policies and procedures (notably regarding data protection) Branches and subsidiaries in another EU member states must comply with national provisions transposing AMLD4 Regarding branches and subsidiaries located in third and non equivalent countries: Application of the most thorough AML/CTF regulatory provisions Compliance with AMLD4 risk assessment, due diligence, internal organization and cooperation requirements are mandatory Application of additional measures where the laws of the foreign country do not allow the implementation of group-wide procedures Key actions required Comply with the new policies and procedures requirements laid down above and consult with the parent financial institution if the professional is part of a group 14

15 Ongoing AMLD4 transposition: Beneficial Owners registries 15

16 Ongoing AMLD4 transposition: Beneficial Owners registries Trusts beneficial owners registry 6 December 2017 Bill of Law published 6 February 2017 Institut des réviseurs d entreprises opinion 20 February 2018 Commercial chamber s opinion 19 March 2018 Bar association s opinion 29 June 2018 Bill divided into two projects 26 March 2018 Chamber of trade s opinion 10/08/2018 Law of 10/08/2018 regarding trustees obligations to gather and keeping information required by article 31 AMLD4 The trustees must prepare themselves to the implement of the BO registry 26 June 2017 AMLD4 transposition deadline 30 May 2018 AMLD5 published Bill 7216b implementing the BO registry 1. New obligations for trustees Nature of the obligation: obligation to collect and keep data relating to the beneficial owners of trust for which they act as trustee Data collected on the following actors of the trust: Settlor, trustee(s), the protector(s) (if any), the beneficiary(ies) or any other person exercising actual control over the trust Trustees shall provide the collected information, upon request, to national authorities 2. Registry of beneficial owners of trusts In-scope trusts: Every trust which trustee is established in Luxembourg and generating tax consequences Examples information that will be recorded: For natural persons: Name, forename, nationalities, date and place of birth, country of residence, private or professional addresses, national or foreign identification number For legal persons: Legal name, address of the registered office, the matriculation number of the legal person 3. Access to information National authorities in the performance of their duties (as for now) AMLD5 new requirements: Full access granted to further competent authorities (tax authorities, supervisors of obliged entities, etc.) Limited access granted to any natural or legal person that can demonstrate a legitimate interest and Any natural or legal person that files a written request in relation to a trust which have a controlling interest in any corporate other than entities subject to beneficial owner registration 16

17 Ongoing AMLD4 transposition: Beneficial Owners registries Legal entities beneficial owners registry Bill of Law 7217 still under discussion 1. Registered entities obligations Obligation to get and keep accurate and upto-date information on beneficial owners at their registered office during five years after dissolution or cease of existence of the registered entity Obligation to provide National Authorities with the information on their legal ownership on simple request 2. Registry content 1) Name 2) Forename(s) 3) Nationality(ies) 4) Date of birth, Place of birth 5) Country of residence 6) Private or professional address whether foreign or Luxemburgish 7) Identification number for person recorded in the National Natural Person Registry 8) Foreign identification number for nonresident natural person not recorded on such registry. 9) Nature of effective interests held 10) Scope of effective interests held 3. Access to information Two types of access: Full access is granted to National Authorities in the performance of their duties and staff members of the judicial administration named by the Attorney General, state prosecutors or investigating judges depending of their roles and responsibilities Restricted access to general public (including obliged entities) that excluded access to Address(es) Identification number for person recorded in the National Natural Person Registry Foreign identification number for non-resident natural person not recorded on such registry Disclaimer: This bill has not yet been transposed into Luxembourg Law 17

18 Hot Topic 18

19 Hot topic 2017 CSSF annual report Regulator sanctions: total amounts Major increase of sanction amount Major increase of AML/CTF amount of sanctions in 2017: Highest fine pronounced: EUR 8,9 mio to a credit institution EUR 2 mio sanctioned 9 obliged entities during the Panama Papers review, among them, 4 credit institutions Regulator inspections Cumulated on-site inspections AML/CTF inspections Ad-hoc inspections 2017 AML/CTF vulnerabilities AML/CTF vulnerabilities highlighted in the 2017 CSFF annual report: Lack of documentation to assess the tax transparency of the client Lack of due diligence measures to understand the ownership structure of the client, especially in case of bearer shares Insufficient information regarding source of funds Insufficient information regarding the purpose and intended nature of the business relationship Absence of or late suspicious declaration report to the FIU No corroborative evidence / critical analysis to assess the coherence of particular transactions Etc. Source: 19

20 Hot topic 2016 FIU (C.R.F) annual report Suspicious declaration report evolutions Key figures 1 1) Breakdown of suspicious declaration by obliged entities: For all financial institutions: 84,76% are sent by electronic money institutions For all designated non-financial businesses and professions: 41,96% are sent by certified accountants Money-Laundering Terrorism financing Total Money-Laundering Terrorism financing Total Source: 2 2) Suspicious declaration reports transmitted to the public prosecutor: Around 1,8% transmitted for prosecution For all financial institutions reports, 87,07% comes from credit institution For all designated non-financial businesses and professions, 44,4% comes from certified accountants Major operation behind the suspicious transaction report is international transfer for 21,49% of transmitted reports Suspect nationality and country of residence is unknown for 46% of the transmitted reports On the transmitted 1,8%, 52,69% reports are related to the predicate offense of fraud Larger illegal proceeds amount of transmitted reports come from corruption as predicate offense (EUR 806 mio representing 70,43%) 20

21 Hot topic Key elements to be transposed (AMLD5) 1. Scope of obliged entities Introduction of new obliged entities and specification of the scope of regulation of pre-existing obliged entities 6. Identification of bank account holders New obligation to identify owners of bank accounts, payments accounts and safe deposit boxes in a retrieval system / registry 2. Customer due diligence New prohibition of anonymous safe-deposit boxes, promotion on electronic identification new diligences measures when senior official identified as BO and identification and verifications of identity improvements 3. Simplified due diligence Electronic payments amendments 7. Identification of owners of real estate New obligation to identify owners of real estate 8. FIUs effectiveness and efficiency Enhancement of cooperation between FIUs and obliged entities 4. Enhanced due diligence Identification of High risks ( HR ) countries with new associated due diligence measures, introduction of new factors of potentially higher risk situations and enhancement of PEP identification 5. Beneficial owners registers Enhancement of the efficiency of BO registers for corporate and other legal entities and BO register for trusts and similar legal arrangement 9. Competent authorities cooperation Cooperation between competent authorities supervising credit and financial institutions and other authorities bound by professional secrecy, between competent authorities of the member states ( MS ) or in different MS 10. Reporting employees protection Strengthening of the protection of employees reporting suspicious acts No tipping-off rule specified 21

22 Hot topic A new directive under discussion (AMLD6) The EU Commission is already considering a 6 th AML/CTF Directive Proposed amendments Harmonization of the 22 predicate offences Harmonization of the definition, scope and sanctioning of money laundering offence Enhance cooperation between national police forces Add new predicate offenses (environmental crimes, cybercrime) Recognition of self-laundering Criminalize aiding, abetting and attempting to commit an offence of money laundering Improvement of penalties: o Minimum penalty of 4 years for serious money laundering cases o Organized criminal gangs and offences committed by individuals in the course of their duties are aggravating factors enhancing incurred penalties o Complementary penalties for individuals convicted of money laundering: prohibition to work in the public sector Enhance corporate responsibility and obligations Improvement of the procedure: o The prosecution of a money laundering offense will not imply a predicate conviction for the primary offence nor the identification of its perpetrator o For predicate offences committed in another Member State or third country, the offence will need to be illegal in both the home State and the other jurisdiction 22

23 AML Assurance 23

24 AML Assurance The role and expectations of the Third Line of Defence There are a number of stakeholders who seek assurance that the anti-money laundering/counter-terrorist financing (AML/CTF) program and risk assessment are compliant to the regulatory requirements. They are also eager to establish whether the policies and procedures that are in the AML/CTF program are effectively operational and that the controls in the program are also in place and operating effectively. Regulatory Mandate: Independent audits have been mandated by various jurisdictions in their laws and regulations. These audits provide the participants in the financial markets with a fresh and independent perspective on the operations undertaken by an institution that address the policies, procedures and controls that are presented in the AML/CTF program and the methodologies employed to address the policies, procedures and controls Boards and Senior Management: An independent audit can provide the institution with a clear outline of matters that need urgent attention to ensure regulations are complied with, matters that also help to raise the standards to what may be considered at the time as best practice for the prevention of money laundering, the financing of terrorism, as well as fraud and financial crime. Others: Other stakeholders that may rely on the audit are the board, the shareholders of the institution, the staff who are employed by the institution, the compliance officer of the institution, the clients and the suppliers of the institution 24

25 AML Assurance Independent AML Assessment Key Considerations for institutions Corporate governance The work conducted by independent audit, along with any internal audits should be used by the board and senior management to assist the process of corporate governance. In this process, the board and senior management should ensure the auditors that are engaged review the internal controls and that the processes employed within the AML/CTF program comply with the applicable codes, standards of current professional practice and that the auditors certainly understand their duties that are inherently involved in the audit. Professional Judgements The professional judgements that are developed throughout the audit form the essence of the authority that the ultimate results of the audit are reliant upon. The auditor/audit team should not only possess the qualifications to perform the audit, but must also demonstrate the experience and the character to deliver judgements which accurately reflect the effectiveness of the AML program considering all matters that are of interest to the regulators and to the client. In some jurisdiction the specific legislation may prescribe qualifications or minimum criteria required to be satisfied when selecting an independent auditor. Key professional judgements are made based on the knowledge, skills, mindset of the auditor and on the quality control processes employed by the auditor Regulatory expectations Given the significance of AML and the continued efforts to improve the expectations inherent in the regulatory expectations and industry practice, institutions need to be aware of the current hot topics with regard to independent assurance that are cause of concerns for regulators. Some of the more common of these have been inexperienced or inadequately trained testers; audit coverage that was inadequate or not appropriately risk based; insufficient transaction testing; limited understanding and inadequate testing of automated account monitoring systems; and deficient follow-up on previously identified issues 25

26 AML Assurance Key areas of focus for Independent Assessments 1. AML/CTF Governance including Board oversight 2. AML Risk Assessment The audit should ensure the risk assessment has developed risk ratings that are reasonably determined according to the context of the reporting entity. Each of the risks determined in the assessment should also be linked to the other processes articulated in the AML/CFT program that are affected by the determined risks. 3. Evaluation of AML Policies and Procedures 7. High Risk Customers and PEP s Identification, approval, on-going monitoring 8. Sanctions screening 9. SAR Reporting 10. Reliance on Third Parties Are they comprehensive, customized up-to-date, approved, understood and used? 4. AML Compliance Program 11. Record-keeping Identification of High risks ( HR ) countries with new associated due diligence measures, introduction of new factors of potentially higher risk situations and enhancement of PEP identification 5. Customer Identification Program Enhancement of the efficiency of BO registers for corporate and other legal entities and BO register for trusts and similar legal arrangement 6. Ongoing AML transaction monitoring 12. Reporting 13. AML Culture Transaction monitoring methodology, process and procedures 26

27 Beneficial Ownership 1. Background 2. What is Beneficial Ownership? 3. What upstream changes are expected? 4. Identifying the Beneficial Owner of a Fund 5. What happens if there is no beneficial owner identified? 6. Notification Requirements 7. What are the challenges for funds? 8. What is the Funds Industry position? 9. Conclusion 27

28 Background The need for accurate and up-to-date information on the beneficial owner is a key factor in tracing criminals who might otherwise hide their identity behind a corporate structure. MLD4 Under existing AML legislation, designated bodies are required to identify customers and their beneficial owners. Applying a risk based approach to the identification and verification of entity investors in funds, it is acceptable to apply simplified due diligence to specified persons (other regulated entities), and an industry wide approach to intermediaries which includes reliance on third parties, undertakings from the parent companies of nominee entities, branch and subsidiary introductions etc. In effect this means that the beneficial owner of an entity investor will not always be known. This is only relevant where the entity investor (the registered owner) holds more than 25% of the shares in issue, but becomes more complex in a Nominee situation where an underlying investor could hold more than 25% of the shares in issue, but has invested through multiple Nominees each holding less than 25% of the shares as the registered owner. The requirement for an Irish company to maintain a register of its beneficial owners was introduced in the Fourth AML Directive ( the Directive ) and transposed into Irish legislation in 2016 under The European Union (Anti-Money Laundering: Beneficial Ownership of Corporate Entities) Regulations 2016 ( The Regulations ). These regulations expressly give effect to the Article 30 (1) of the Directive requiring corporate or other legal entities incorporated in the State to obtain and hold adequate, accurate and current information in respect of its beneficial owners. This is seen as a necessary first step in achieving compliance with the remainder of Article 30, which has yet to be transposed. The implementation of Article 30(1) and the manner in which it has been transposed in Ireland is not without its challenges from a legal and practical perspective those challenges, which we will discuss, are having an impact on the transposition of the rest of Article

29 What is Beneficial Ownership? The Regulations refer to the Directive for a definition of beneficial ownership, as set out overleaf. This definition requires the beneficial owner to be a natural person, who owns OR controls the relevant entity (directly or indirectly). The focus is primarily on shareholders and not on directors or managers. However, a director or other senior managing official of a relevant entity can be treated as the beneficial owner if the true beneficial owners can not be determined (having exhausted all possible means and provided there is no grounds for suspicion). Companies listed on an EU stock exchange AND therefore subject to the Transparency Directive (or equivalent), are out of scope. 29

30 What is Beneficial Ownership? Directive 2015/849 Beneficial owner means any natural person(s) who ultimately owns or controls the customer and/or the natural person(s) on whose behalf a transaction or activity is being conducted and includes at least: (a) in the case of corporate entities: (i) the natural person(s) who ultimately owns or controls a legal entity through direct or indirect ownership of a sufficient percentage of the shares or voting rights or ownership interest in that entity, including through bearer shareholdings, or through control via other means, other than a company listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a natural person shall be an indication of direct ownership. A shareholding of 25 % plus one share or an ownership interest of more than 25 % in the customer held by a corporate entity, which is under the control of a natural person(s), or by multiple corporate entities, which are under the control of the same natural person(s), shall be an indication of indirect ownership. This applies without prejudice to the right of Member States to decide that a lower percentage may be an indication of ownership or control. Control through other means may be determined, inter alia, in accordance with the criteria in Article 22(1) to (5) of Directive 2013/34/EU of the European Parliament and of the Council (3); (ii) if, after having exhausted all possible means and provided there are no grounds for suspicion, no person under point (i) is identified, or if there is any doubt that the person(s) identified are the beneficial owner(s), the natural person(s) who hold the position of senior managing official(s), the obliged entities shall keep records of the actions taken in order to identify the beneficial ownership under point (i) and this point; (b) in the case of trusts: (i) the settlor; (ii) the trustee(s); (iii) the protector, if any; (iv) the beneficiaries, or where the individuals benefiting from the legal arrangement or entity have yet to be determined, the class of persons in whose main interest the legal arrangement or entity is set up or operates; (v) any other natural person exercising ultimate control over the trust by means of direct or indirect ownership or by other means (c) in the case of legal entities such as foundations, and legal arrangements similar to trusts, the natural person(s) holding equivalent or similar positions to those referred to in point (b); 30

31 What upstream changes are expected? The Regulations apply to a company formed under the Companies Acts, including investment companies and ICAVs. Trusts and Partnerships are currently out of scope. It is expected that Trusts will be brought into scope under new Legislation. Regulations requiring the submission of beneficial ownership information to a central register (maintained by the CRO for companies), have yet to be transposed (expected Q4 2018) The 5 th AML Directive proposes additional changes Lowering of the 25% threshold to 10% in certain circumstances (depending on risk) Making the central register available to more public agencies European Commission thinking is evolving on this topic, so further regulation could be developed in due course to amend and/or augment requirements. 31

32 Identifying the beneficial owners of a fund Investment companies and ICAVs are in scope of the Regulations. The requirement is set at the Umbrella level. We have set out some potential scenarios for certain types of investors as follows: Individuals If a natural person owns more than 25% of the shares in issue, that person will be deemed to be Beneficial Owner under the Regulations. Umbrella Fund 100% shares in issue Sub-fund A 50% SIS Sub-fund B 30% SIS Investor A 25% sub-fund A Investor B 10% sub-fund A Investor A 15% sub-fund B Investor A has a combined total of 27% of the shares in issue of the umbrella Sub-fund C 20% SIS Investor C 1 % sub-fund C Investor A 50% Sub-fund C 32

33 Identifying the beneficial owners of a fund Corporate Entities If a company, investing in its own right, owns more than 25% of the shares in issue, further steps must be taken to establish the beneficial owners of that company (i.e. the natural person that owns more than 25% of that company). If there is no beneficial owner of that company, the director or other senior managing officials of that company are named as the beneficial owners. If that company is listed on a regulated market that is subject to disclosure requirements consistent with Union law or subject to equivalent international standards which ensure adequate transparency of ownership information, there is no requirement to identify the beneficial owner and therefore, it is not clear how the Regulations are to be applied. Other Funds (FoF) If the company is another fund, further steps must be taken to establish the beneficial owners of that fund. Whilst silent on this specific topic, the Regulations would suggest that if there is no underlying beneficial owner in this scenario, the Directors of the FoF would be named as the beneficial owners. 33

34 Identifying the beneficial owners of a fund Intermediaries (e.g. Nominees) If an intermediary e.g. a Nominee Company, acting on behalf of an underlying investor, or pool of underlying investors, holds more than 25% of the fund, further steps must be taken to establish if any of the underlying investors hold more than 25% of the shares in issue of the fund (and not of the intermediary). A challenge arises where by several Nominee companies hold shares in the Irish fund, and underlying those holdings, a natural person indirectly holds more than 25% of the shares in issue of the Fund. If no underlying investors indirectly hold more than 25% of the fund, it is not clear how the Regulations are to be applied as this would simply suggest that there is no beneficial owner to be named. It does not make sense that the Directors or Senior Management of the Nominee Company would be named as the beneficial owner as they are only acting as an intermediary. 34

35 What happens if there is no beneficial owner identified? Having exhausted all efforts to determine the beneficial owners of the fund, where a beneficial owner can not be identified, or where there is doubt as to the whether a natural person is a beneficial owner, the Directors of the Fund should be named as the beneficial owners. If there are no beneficial owners (no shareholders with more than 25%), because they don t exist, it would appear that the details of the Directors should be recorded i.e. there is no current concept of a Nil Return. 35

36 Notification Requirements If there is reasonable cause to believe that a natural person is a beneficial owner, a notice under Regulation 6 is required to be served to the person, and it is an offence not to do so. If there is reasonable cause to believe that another person (corporate or natural person) has the knowledge as to the identity of the beneficial owners, a notice under Regulation 8 may be served. This is effectively an information gathering exercise which is a right rather than an obligation on the fund, and may be relevant in the context of intermediary relationships. 36

37 What are the challenges for funds? There are a number of additional operational challenges for funds, some of which are outlined below: Beneficial ownership of funds can change daily. Reporting requirements for non resident beneficial owners could include passport details - data protection issues will need to ironed out. Onerous notification procedures where a beneficial owner is identified. Conflicting AML and Company Law requirements. Inconsistent approach across fund types Unit Trusts and Common Contractual Funds are not currently considered to be relevant entities. Classification of ETF s is not clear. Treatment of intermediaries where there are no beneficial owners is not clear. Once notified by the fund, a beneficial owner, who is a natural person, must confirm that they are a beneficial owner of the server of the notice (the fund). In the case of a fund, this person may not know whether they are a beneficial owner or not. 37

38 What is the Funds Industry position? Irishfunds has been liaising with the Department of Finance since the Regulations came into effect, with a recent meeting in October 2017 Operational challenges for funds set out, including limited ability of investors to exert any influence on a fund, intermediation of funds industry, role of directors, conflict between the Regulations and current AML requirements. Some considerations for future legislative amendments include: Inclusion of wording to align the Regulations to the AML requirements e.g. include wording such as in so far as collected under AML risk based approach - Approach taken by Germany Removal OR minimisation of the notification process Discussions are ongoing. 38

39 Conclusion There are several practical considerations that render the Regulations difficult to apply in their current state. There is currently no one size fits all solution i.e. the Regulations do not allow for the assumption that there are no beneficial owners on the basis that it is difficult to identify them. All reasonable efforts must be made. Guidance and/or amendments to the Regulations will be necessary to ensure a consistent approach for funds. More information required on exchanges that are subject to Transparency Requirements or Equivalent will the DoF issue a list? Is there potential for listed funds to be de-scoped? Notwithstanding all of the above, there are steps that funds can take today to assess the share ownership of the fund in order to meet the requirements of the Regulations in so far as this is achievable i.e. Assess the % of shares held by the Registered Owners (the names on the register). Search for direct individual shareholders with great than 25% of the shares in issue. Classify entity investors as corporate investors, fund of funds, or intermediaries (to the extent possible), focussing on entities which greater than 25% of the shares in issue to determine appropriate treatment. 39

40 Q&A 40

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