The Central Bank of Ireland (Central Bank) issued its Report on Anti-Money Laundering, Countering the Financing of Terrorism and Financial Sanctions Compliance in the Irish Funds Sector. The report is based on funds sector on-site inspections carried out by the Central Bank over the course of 2014, supplemented by risk evaluation questionnaires completed by funds and fund service providers and submitted to the Central Bank for assessment. While the funds sector in Ireland is the specific focus of the report, many of the issues raised are relevant to the broader financial services sector in Ireland. This is the third in a series of reports issued by the Central Bank on the topic of AML/CFT this year.

Brian Mc Dermott, Head of Asset Management & Investment Funds at A&L Goodbody notes that;

"The Report makes for interesting reading for the funds sector and contains some critical messages around the level of oversight, supervision and engagement required by funds and funds services providers. Many of the issues identified reflect the issues identified by the Central Bank earlier this year in the context of reports in the Retail Banks and Credit Union Sectors. These included: concerns around lack of rigour relating to risk assessments and failure to update and review such assessments; lack of board oversight and engagement generally with the risk assessment; weaknesses in CDD procedures and particularly CDD remediation and on-boarding of PEPs and inadequate training. Some of the findings are described as being more prevalent in the funds sector than in other sectors. In my view, some of the expectations articulated by the Central Bank relating to appropriate levels of compliance may present particular and unique challenges for investment funds.

Certain parts of the Report are of particular interest from this perspective;

  • Customer CDD and the timing of CDD checks in the investment funds context. The practice of availing of the exemption provided by section 33(5) of the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (as amended by the Criminal Justice Act 2013) (CJA) is found to be more frequently used in the funds sector.
  • The prescriptive expectation around Section 40 reliance letters in terms of strict compliance with the paper trail envisaged by the legislation and the need for spot checks and testing.
  • The Central Bank identified a lack of procedures and controls for ceasing the provision of services to, or discontinuing business relationships with, investors who have failed to provide the required or updated CDD (Section 33(8) CJA).  This provision presents particular challenges for investment funds which deal with shareholders/ unitholders, rather than customers, Do such funds have the power to compulsorily redeem their investors? If so, when and at what price should that be done? Can they pay out the redemption proceeds to investors whose CDD may not be complete? If not, who should hold the proceeds, are they protected as client assets, can whomever holds them charge for the service and who should pay for that? "