FII lobby sets out best practices to prevent money laundering

Industry body ASIFMA has come out with a report on best practices for anti-money laundering (AML) and Know Your Client (KYC) requirements in Asia.

The report proposes a set of best practices to harmonise and standardise the application of certain key areas of AML/KYC requirements in Asia, based on industry feedback from a focused workgroup of ASIFMA members, from both the buy and sell side. 

It focuses on nine areas that are jurisdiction-neutral, although the reference is largely drawn from industry consensus of best practices currently applied by members in Hong Kong and Singapore.  

Some recommendations are similar to Securities and Exchange Board of India’s (Sebi’s) current requirements such as on identification of beneficial owners owning more than 25 per cent, undertaking KYC based on risk profile and the recent Sebi requirement asking for details of persons in control.

“Many of the AML/KYC implementation issues remain high on the global agenda - and for good reason,” said Mark Austen, chief executive of ASIFMA. “Differing guidelines and regulations among jurisdictions in Asia as well as divergent interpretation of these guidelines and regulations among financial institutions have led to fragmentation, inconsistencies and varying practices among firms.  We have developed this report to help guide the region’s response to these issues and institute a more consistent set of best practices.”

The number of employees working on KYC compliance in financial institutions rocketed from an average of 68 in 2016 to 307 in 2017. Despite the increase in headcount, about a third of FIs reported that resources remained the biggest challenge for KYC and the customer due diligence (CDD) processes, with another third considering the volume of regulatory change to be the key challenge in the KYC process.

“In a region with more AML laws, more active enforcement and regulatory attention than ever before, harmonisation is no longer desirable but critical,” said Will Hallatt, partner at Herbert Smith Freehills, which co-authored the report. 

According to the best practices guidelines, if the fund manager or administrator confirms there is an investor holding 25 per cent or more of the issued capital or voting rights, the FI may verify the investor's identity through written confirmation from the manager/administrator, verify the investor's identity using public availability sources or in high risk situations, the firm may seek to verify the investor through ordinary documentary evidence.

“In addition to identifying and verifying beneficial owners, FIs should take reasonable measures to verify identity of any individual who exercises ultimate control over the management of a corporation,” the guidelines state.

Sebi recently tightened some KYC rules for foreign investors. According to the new rules, in an FPI structured as a company, a person owning 25 per cent would be considered the beneficial owner (BO). If structured as trust or partnership entity, the threshold is 15 per cent. If the fund originates from a high-risk jurisdiction, any person owning 10 per cent stake or more in an FPI would be considered a BO. Also, all investors from such jurisdictions would have to comply with the KYC requirement for category-III FPIs.