Implications of AML Registration Requirement for Fund Subsidiaries
The Fourth EU Money Laundering Directive (“4MLD”) was finally transposed into Irish law with the enactment on 14 November 2018 of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2018 (the “2018 Act”).
The Act, which was commenced on 26 November 2018, amends the Criminal Justice (Money Laundering and Terrorist Financing) Act 2010 (the “2010 Act”) to incorporate the requirements of 4MLD into the existing legislative framework.
The Act has also created a new requirement for certain unregulated entities, including subsidiaries of investment funds that invest in loans, to register with the Central Bank for anti-money laundering (AML) and countering the financing of terrorism (CFT) purposes. These subsidiaries must also make a declaration that they have an appropriate AML/CFT framework in place to comply with the Act.
Who is in-scope?
To be in-scope, a subsidiary must be undertaking certain activities (“Schedule 2 Activities”) in Ireland and not otherwise be regulated by the Central Bank. For loan fund subsidiaries the most relevant Schedule 2 Activities are:
- lending (in our opinion this includes both loan origination and the acquisition of loans by assignment, but would not include investment in loans via sub-participation); and
- trading for own account or for account of customers in (a) money market instruments (cheques, bills, certificates of deposit, etc.), (b) foreign exchange, (c) financial futures and options, (d) exchange and interest-rate instruments, and (e) transferable securities.
Are there Exemptions?
Yes. A subsidiary will be exempt from the new registration requirement if it comes within certain exemptions. In the case of fund subsidiaries, the most relevant one is if the subsidiary only carries out the Schedule 2 Activities listed at 2 above and the subsidiaries’ customers (if any) are members of the same group as the subsidiary. In our view, if subsidiaries are engaged solely in the activities at 2 above, they should not have any “customers” within the meaning of the exemption and so should not be subject to the registration requirements.
How does a subsidiary register?
The Central Bank has published Guidance in relation to the registration process.
What information must be provided?
An in-scope subsidiary will need to confirm the following via the Registration Form:
- its contact details;
- its principal business address;
- contact details for its lawyers;
- its legal status;
- its CRO registration number (if applicable);
- its LEI code (if applicable);
- confirmation as to which Schedule 2 Activities it carries on;
- its business profile (including total number of customers, types of customers to whom it provides Schedule 2 Activities, geographic location of customer base, geographic location of business activities, employee numbers, types of distribution channels used, total Schedule 2 Activity-related assets, and total Schedule 2 Activity-related turnover). In the context of the Schedule 2 Activity of lending, “customer” means the borrowers under the relevant loans;
- details of its group structure;
- if it is a special purpose entity; and
- whether it mainly engages in securitisations, whether it’s a Section 110 company, and whether it already engages in statistical reporting to the Central Bank.
The subsidiary must then declare that it has an appropriate AML/CFT framework in place and confirm that it has taken and will continue to take reasonable steps to ensure the fitness and probity of its board members, MLRO, and owners and beneficial owners.
Are there ongoing obligations?
If the subsidiary:
- offers new, or discontinues existing, or materially change its Schedule 2 Activities;
- undergoes an (in)direct change in ownership;
- changes its legal name, trading name, address or principal contact details; or
- undergoes other material changes,
it must notify the Central Bank via email.
2010 Act Requirements
Unregulated entities affected by the new registration requirements were already subject to the requirements of the 2010 Act and so should have a relevant AML/CFT framework in place. In the case of loan fund subsidiaries, they should be subject to the AML/CFT framework adopted by the regulated fund parent. The obligations under the 2010 Act include:
- carrying out customer due diligence (CDD) on their customers and monitoring customers on an ongoing basis;
- identifying beneficial owners;
- adopting and maintaining AML/CFT policies and procedures;
- reporting suspicious transactions;
- training staff;
- keeping records; and
- carrying out financial sanctions screening.
2018 Act Requirements
In-scope subsidiaries should review their existing frameworks and immediately address the following to ensure that their AML/CFT systems and controls are compliant with the 2018 Act:
- conduct and document a business risk assessment;
- refresh internal polices, controls and procedures to reflect the new requirements;
- update internal AML training manuals and materials; and
- carry out customer risk assessments when new products or services are being provided (to new or existing customers).
In practice, this should mean that the updated policies and procedures adopted by the regulated parent fund should be adopted as well by its subsidiaries.
The registration requirement is now in force, and as part of that requirement, in-scope subsidiaries will need to confirm to the Central Bank that their AML/CFT framework is compliant with the 2018 Act.
The net effect of the new registration requirement is that the Central Bank will have considerably more direct oversight of subsidiaries that provide Schedule 2 Activities. It is inevitable that subsidiaries who register with the Central Bank will be subject to AML-focused inspections in due course.