Money Laundering: Sectoral Guidance for Investment Management firms

June 2006

This guidance, which is specific to the discretionary and advisory investment management sector of the financial services industry, is supplemental to the main summary of JMLSG Guidance "Summary of the Revised Guidance for the UK Financial Sector of the Joint Money Laundering Steering Group (JMLSG) in the Prevention of Money Laundering" (the "Main Summary Guidance"). It should be read in conjunction with the Main Summary Guidance at all times.

MONEY LAUNDERING RISKS OF INVESTMENT MANAGEMENT
Investment Management Firms typically deal with low volume, high value business. The typical customer base includes high net worth individuals, trusts, companies, government bodies, pension schemes, charities and certain pooled investment vehicles. There is therefore a likelihood of there being a detailed understanding of the customer's personal, and anticipated transaction, profiles under the FSA Know Your Customer (KYC) principle.
The general risk of Money Laundering in the sector is therefore low. Firms should, however, be aware that this risk might be higher in some circumstances, such as where the client is an offshore trust/company, Politically Exposed Person (PEP) or from what the Financial Action Task Force (FATF) deems to be a higher risk jurisdiction.
VERIFICATION OF IDENTITY
2.1. Private Individuals
2.1.1 Standard Verification
The standard verification procedures summarised in the main part of this guidance document are adequate in respect of lower risk categories of UK individuals. Extra measures will only be required where there is increased risk for any reason, e.g. jurisdiction.
2.1.2 Politically Exposed Persons (PEPs) and High Risk Clients
Clients with a high political profile, their immediate families and known close associates, are deemed to present a high risk to Money Laundering and terrorist financing, as a result of their position, making them vulnerable to corruption by others. In addition, clients with such businesses as gambling, armaments and money service should also be considered high risk.
In respect of such persons, firms are urged to have in place additional measures which should include:
- Having in place and following, appropriate procedures to determine whether a customer is a PEP;
- Ensuring senior management approval is obtained before accepting such a person as a client;
- Taking appropriate measures to establish the source of the funds; and
- Ensuring that enhanced monitoring is undertaken commensurate with the risk assessed.
2.2. Pension Schemes and Charities
For UK pension schemes and charities the object of the verification process is to ensure that:
- The customer exists;
- The customer is officially approved by its recognised body; and
- The individual with whom they are dealing has the appropriate authority to act on their behalf and issue instructions.
Verification should be by:
- Confirming their approval or registration with their appropriate body such as the Charities Commission; and
- Obtaining written authorisation, or checking with others in authority at the relevant organisation, to ensure that the individuals with whom it proposes to deal have authority to issue instructions.
Additional verification may be required for overseas customers. The nature of this will depend on factors such as the type of customer, geographic location and the risk deemed to be posed as a result of these.
2.3. Trusts, Corporate Customers and Other Entities
2.3.1 Trusts
The identity of any trustee who has authority to give instructions regarding the portfolio should be verified. The nature of the verification measures should reflect the different money laundering or terrorist financing risks that are posed by the wide variety of trusts in the market-place. A distinction should be drawn between simple funds and more complex funds. Funds may be considered more complex due to the fact that they are geographically based in other countries, have links with other countries, or due to them having many layers and therefore being attractive to disguise funds within.
In respect of trusts, firms should, as standard:
- Obtain the following information as part of their due diligence:
  - Full name;
  - Nature and purpose;
  - Country of establishment;
  - Names of all the trustees;
  - Name and address of any protector or controller; and
- Verify the identity of all trustees with authority in respect of the trust.
Where the risk presented is assessed so that a higher-level verification is warranted this should include (where appropriate) searching an appropriate register in the country in which the trust is established or by reviewing a copy of the instrument that created the trust.
Other information that could be considered to enable identity to be adequately verified for higher risk customers includes:
- Details of the source of the funds;
- Geographic location/domicile of the business;
- Nature of the business;
- Operating address of the business; and
- Details of the names or classes of the beneficiaries.
2.3.2 Corporate Customers
Standard Evidence Required
Verification should be adequate to ensure that the firm fully understands the legal form, structure and ownership of the company and that information is sought on the reasons for seeking the product or service.
The following identity information should be obtained by the firm on all companies:
- Full Name;
- Registered Number;
- Registered Office and Country of Incorporation;
- Trading Address.
In addition, for private companies the firms should obtain the:
- Names of all directors;
- Names of all beneficial owners with more than a 25% shareholding.
This identity information should be verified by:
- A search on the relevant company register;
- Confirmation of the company's identity by its listing on a regulated market; or
- Checking a copy of the company's Certificate of Incorporation.
In addition to establishing the identity of the company, the firm should take reasonable steps to ensure that the person with whom it is dealing is who they say they are and are authorised by the company to issue instructions on behalf of the company.
Publicly Quoted Companies etc.
Where the customer is:
- A publicly quoted company subject to public disclosure rules; or
- A majority-owned and consolidated subsidiary of such a publicly quoted company; or
- Subject to the licensing and prudential regulatory regime of a statutory regulator.
only the standard evidence detailed above is required.
Private Limited Companies
Where the company is well known and reputable then, as with public limited companies, the standard evidence, as set out above, may well be sufficient.
Where the company is less well known then:
- A company search should be undertaken to ensure that the company has not been, nor is in the process of being, struck off, dissolved or wound up;
- Consideration should be given to the need to verify the identities of the:
  - directors (in accordance with the requirements for individuals set out in the main guidance);
  - beneficial owners of the company with more than a 25% stake (whether or not such holding is direct);
  - those authorised to give instructions for the movement of funds or assets.
Governmental and Supranational Organisations
The approach to the verification of these organisations should be tailored to the specific circumstances of the customer.
For public sector bodies, governments, state-owned companies and supranationals the following identification information on the entity should be obtained:
- Full Name;
- Nature and Status;
- Address;
- Home State Authority;
- Names of Directors;
- Sufficient information to enable ownership to be understood.
Verification should also be undertaken on:
- The identities of directors and any other person with whom the firm deals; and
- The existence and identity of the organisation.
2.3.3 Third Party Investment Vehicles
The firm should carry out appropriate due diligence to verify the form, status and purpose of the vehicle and also to establish the identity of those in control.
The firm should also be alert to the possibility that it may be required to take a closer look at the identity of the underlying investors in such vehicles where the vehicle operates in less stringent conditions than those applied by a regulated entity or on a regulated market or exchange.
2.4. Partnerships and Unincorporated Businesses
These entities require different treatment to other entities due to the fact that there is an underlying business.
2.4.1 Standard Evidence
Well known, reputable organisations with long histories and substantial information on them and their principals will only require standard evidence comparable with that which is required for publicly quoted companies (see above).
Professional firms that are partnerships should have their regulated status confirmed by reference to the membership directory of the relevant professional organisation.
2.4.2 Non-Standard Evidence
Where the partnership or unincorporated business is smaller and less well known and not subject to rigorous levels of accountability, the firm should establish and verify the identities of the principal beneficial owners, shareholders and controllers who have authority to operate an account or give the firm instructions.
Firms should always ensure that the individual with whom they are dealing is appropriately authorised to act and issue instructions on the partnership's behalf.
TIMING OF VERIFICATION
Verification of identity should take place before any services are provided.
MONITORING
As an aid to monitoring, the firm should establish as part of getting to know the customer, the frequency and amount of fund movements that are anticipated. Any transactions, which would reasonably be considered to be inconsistent with the customer's circumstances or usual behaviour, should be investigated.