On 18 November 2015, the Central Bank of Ireland (CBI) published a report of its observations on Anti-Money Laundering (AML), Countering the Financing of Terrorism (CFT) and Financial Sanctions compliance by Funds and Fund Service Providers in Ireland. The report is based on the outcome of on-site inspections undertaken by the CBI during the course of 2014 in relation to the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended by the Criminal Justice Act 2013) (CJA 2010). The report particularly focuses on the Irish Funds sector, however many of the matters raised are also relevant to the broader Irish financial services sector.

Report overview

The topic of AML and CFT remains a matter of utmost priority for the CBI, which is evidenced by the content of the report. The report identified various key issues, which each should be carefully considered by Funds and Fund Service Providers:

  • Governance and compliance
  • Customer due diligence
  • Identification and escalation of suspicious transactions
  • Terrorist financing
  • EU financial sanctions

Governance and compliance

Risk assessment

The CBI expressed concern that the CJA 2010 was not being properly implemented, and that money laundering and terrorist financing risk was not being properly assessed. Additionally, that risk assessments were being performed only as a “one off” exercise, rather than ongoing and in a timely manner. 

Outsourcing

The CBI identified a lack of oversight from Funds of Service Providers carrying out AML and CFT functions on their behalf. The CBI was concerned that Funds overly rely on third parties to conduct elements of Customer Due Diligence (CDD) in circumstances where the arrangement with the third party does not fully meet all required conditions. The report noted that Funds should be monitoring the Service Provider through policies and procedures, training and assurance testing.

Roles and responsibilities

The report highlighted a lack of sufficient resources assigned to address AML and CFT duties. The CBI noted the insufficient evidence that all members of the Fund’s board and/or staff at the Fund had received instruction in the law relating to AML and CFT issues, and also identified a lack of oversight of Service Providers carrying out AML and CFT functions.

Policies, processes and procedures

The report illustrated that documented policies and procedures were not being adhered to in all cases, and noted the insufficient evidence of effective on-going monitoring of investor transactions. Additionally, it identified that insufficient documentation was being retained to support the application of simplified CDD.

The CBI was concerned by the lack of procedures and controls for the cessation of the provision of services to, or discontinuing business relationships with, investors who have failed to provide the required or updated client due diligence documentation or information requested by Funds.

Training

While also covered in the above sections, the CBI also separately identified the lack of on-going AML training for Fund Board members, and the lack of evidence being sought that Service Providers had received sufficient AML and CFT training.

Customer due diligence

On-boarding customers

The CBI noted some inefficiencies in the on-boarding process of Politically Exposed Persons (PEPs), including the failure to sufficiently identify, verify and document source of funds and source of wealth, and the failure to document senior management approval.

The CBI was also concerned with the incorrect application of simplified CDD and failure to retain evidence to support simplified CDD, as well as with the incorrect application of the CJA 2010 (Section 33 (8)(b)) with respect to the approach to discontinuation of business relationships and the measures taken in response.

Ongoing monitoring

The CBI identified the lack of evidence of effective on-going monitoring of investor transactions, and a lack of evidence that new PEPs (and existing investors re-categorised as PEPs) are subject to senior management approval and the completion of enhanced due diligence.

Reliance on third parties

The CBI was concerned with the reliance on third parties to conduct elements of CDD in circumstances where not all the conditions set out in the CJA 2010 (Section 40(4)) have been fully met, including that caveats have been used by the Fund on which reliance is placed.

The CBI also highlighted the lack of regular assurance testing on third parties who undertake due diligence, to ensure data can be retrieved quickly and without undue delay and that the quality of the underlying documents obtained is sufficient.

Identification and escalation of suspicious transactions

The report identified weaknesses in the suspicious transaction reporting processes and procedures, and the record keeping associated with these reports, including:

  • Reliance on outsource providers for policies and procedures
  • Failure of staff to adhere to procedures
  • Failure to have effective transaction monitoring systems in place
  • Failure to retain transaction monitoring records

Additionally, the report specified a requirement that where the underlying predicate offence for a suspicious transaction report (STR) (for example fraud or theft) is identified, in addition to the STR, that offence should be reported separately to An Garda Síochána.

Terrorist financing & EU financial sanctions

While there were no specific findings around Terrorist Financing, the CBI outlined its expectations that preventative measures should be taken with respect to Terrorist Financing, commensurate with risk.

The CBI specified that Funds must have an appropriate framework in place to ensure compliance with all applicable financial services regulations, particularly a freezing requirement, prohibition on making funds and resources available, and obligations to notify the Competent Authority.

How can we help?

Undoubtedly, the topic of AML and CFT remains a high priority on the Central Bank of Ireland’s agenda. On review of the report, it is clear that the CBI is dissatisfied with the implementation of AML and CFT requirements across the Funds industry, and it has indicated that significant improvements are required.

The CBI outlined in its report that it expects Funds and Fund Service Providers to work closely with each other to ensure that appropriate measures are in place to mitigate the risk of AML and CFT. The CBI also expects all Funds and Fund Service Providers to carefully consider the issues raised in the report, and to use the report to inform the development of their AML, CFT and Financial Sanctions frameworks.

The report can be viewed by following the link here.