Funds need to consider the appointment of Anti-Money Laundering (AML) Officers carefully. AML Officers play a critical role in combating the acts of Money Laundering, Terrorist Financing and Proliferation Financing and ensuring an entity is compliant with its regulatory obligations. The roles continue to evolve with updates to regulations, standards and expectations. In addition, the emergence of new asset classes can carry unique challenges in themselves which AML Officers need to be mindful of when performing an overall risk assessment. Here, Geoff Ruddick, Leo Kassam and Laura McGeever, experienced professionals at Paradigm Governance Partners, highlight some of the key items for consideration when selecting and interacting with AML Officers.
The roles of Anti-Money Laundering (AML) Officers, which include the Anti-Money Laundering Compliance Officer (AMLCO), Money Laundering Reporting Officer (MLRO) and Deputy Money Laundering Reporting Officer (DMLRO), are challenging and involved. AML Officers must navigate the regulations and apply them in their establishment and oversight of a comprehensive AML program.
Changes to the AML legislation and regulations are not only driven by the Cayman Islands Monetary Authority (CIMA), but also by the recommendations of the Financial Action Task Force (FATF) and other intergovernmental organizations.
The 2018 update to the AML regulations and guidance notes sought to identify natural persons to hold these roles. The named officers are identifiable, accountable and serve as the point of contact for the regulatory authorities. The AML Officers assist in bridging the gap between the Board and those responsible for undertaking the customer due diligence (CDD) to ensure a robust AML framework exists, is being followed, and is truly effective.
To date, there have been further issuances and amendments to the guidance notes including, but not limited to:
- Assessing risks and applying a risk-based approach
- Proliferation financing
- Virtual asset service providers
- Ongoing monitoring
- Targeted financial sanctions
Key responsibilities of AML Officers
- Oversee the AML Compliance Program as it relates to money laundering, terrorist financing, proliferation financing and targeted financial sanctions.
- Devise a suitable methodology to identify, assess and manage AML risk.
- Conduct and periodically update an entity level risk assessment – key factors to be considered include sector, investor/customer, geography/domicile, delivery channels, products and services, (inclusive of inherent risks).
- Identify residual risks that may impact the entity.
- Maintain various logs i.e. Suspicious Activity Report (SAR) Log, Financial Reporting Authority (FRA) reporting Log, Declined Business Log, Complaints Log, Frozen Assets Log, AML Training Log.
- Provide and make ongoing recommendations to the Board.
- Understanding the sanction screening process used by those undertaking CDD.
Ongoing oversight and monitoring
- Periodically review the entities’ AML policies and procedures to take account of any changes in the AML framework.
- Test a sample of investor files from those undertaking the CDD i.e. the Administrator/Registered Transfer Agent.
- Test a sample of investment counterparties and associated screening process.
- Conduct on-site / virtual on-site visits to the Administrator.
- Prepare questionnaires for the Investment Manager concerning their approach to mitigating AML/CFT/PF risks.
- Evaluate emerging risks which may impact the entity over its lifecycle.
- Engage with those charged with governance through reporting and attendance at Board meetings.
Communications and engagement
The AMLCO should have unfettered access to all information necessary to effectively perform the AML/CFT/PF/TFS (Combating the Financing of Terrorism) function. In the instance of a fund with an appointed administrator undertaking its CDD the AMLCO should have access to shareholder information to investigate high risk attributes and test whether the CDD on file is in line with Cayman AML requirements. Furthermore, additional consideration should be given to non-Cayman based administrators whose policies and controls may require further enhancements to comply fully with Cayman standards. In these instances, a gap analysis may be required.
It is also worth noting that the ‘customer’ in the context of the regulations is not just investors but any party the entity with which the entity has a business relationship. This encompasses investment activities and requires oversight of policies and procedures around such relationships.
AML Officers should regularly attend Board meetings to speak directly with those charged with governance. Written or verbal reporting should be provided which gives the Board an opportunity to discuss interactions with AML Officers and third parties, pending AML compliance items, SAR and updates to the legal and regulatory landscape as it pertains to AML.
Expertise and experience
The AML Officers should be at senior management level and have sufficient industry experience. They should be suitably qualified and have the ability and authority to discharge the functions.
AML Officers must have sound knowledge of the AML regulatory framework (local laws and guidance notes as well as international standards and advisories from the FATF, Organisation for Economic Co-operation and Development (OECD), UN, the European Union etc).
Independent / no conflicts
Considerations should be given to the independence of AML Officers in the context of having an autonomous role and being independent of those undertaking the day-to-day operations around customer due diligence. Avoiding conflicts of interest is critical.
- AML Officers must obtain confirmation that Cayman specific AML training is taking place on an annual basis with those charged with governance as well as key personnel.
- The AML Officers may also be able to offer and facilitate training for operators of Cayman structures.
- An experienced AMLCO should be fully informed about current legal and regulatory updates, changes in guidance notes, advisories from international bodies such as FATF, OECD and the Office of Financial Sanctions Implementation (OFSI).
- Personnel connected to the entities should be aware of the contact details of the AML Officers.
- It is advantageous to have an appointed MLRO based in the Cayman Islands who is adept in the drafting and submission of SARs.
- The MLRO will need to have ongoing dialogue with the FRA as the competent authority in relation to open SARs.
- The MLRO will be the point of escalation for any SARs to take steps to address these in a reasonable and timely manner.
Questions for consideration
- Do you have the contact details of the AML Officers?
- Is the administrator and its personnel aware of who the AML Officers are and do they have their contact details?
- Has the Board carefully assessed the biographies of the AML Officers to determine if they have the appropriate expertise and experience to perform the role?
- Do the AML Officers have capacity?
- Do AML Officers attend Board meetings and provide quality reporting?
- Are you comfortable with their oversight and testing of the AML program?
- If the roles are being performed by the investment manager, are they aware of their responsibilities and staying abreast of the Cayman regulatory regime?
Items to remember
- Ensure a formal AML services agreement is in place outlining the scope of the role of the AML Officers.
- Ensure the named officers have been formally appointed by the Board and this is recorded in the minutes / resolutions.
- Ensure that the relevant filings have been made with CIMA via the REEFS portal to communicate the named AML Officers.
The ultimate responsibility for AML compliance rests with the Board so it is of paramount importance that the Board is comfortable that the AML Officers are applying the proper oversight and reporting to those charged with governance on a regular basis.
Emerging trends and AML considerations
There are increasing challenges around AML for certain strategies such as digital assets and private equity investments given the complexities around custody and ownership as well as the associated controls and cash movements related to these assets.
The value of experienced AML Officers cannot be underestimated given the AML Officers’ involvement in the oversight of the AML process and interactions with service providers. They should provide independent and valuable feedback to the Board on the AML risks and controls. They should ensure that appropriate procedures are in place and are being adhered to and that those procedures are in line with the regulations. Failure to do so could mean enforcement and or administrative fines under the AML regulations.
Paradigm has an experienced team who have extensive industry experience which spans AML & KYC, risk and portfolio management, regulatory compliance, operations and administration, and governance as a whole. Our officers have been in the trenches, have a detailed understanding of the industry, the requirements, the regulations, and have the experience necessary to be effective AML officers and help navigate any AML issues. Let us know how we can help.