The finance sector is continuously blemished by the flow of illicit funds through its systems. However, criminals are increasingly making asset management companies their new route for money laundering. Due to glaring flaws in their AML compliance programs, wealth administrators are facing severe penalties. Robeco paid €2 million to the Dutch financial market regulator and Sterling Asset Management Company was fined $300,000, both for insufficient mechanisms to identify money laundering.
Asset management companies require AML verification solutions to secure their operations against financial criminals. As they deal with high-value clients and provide assistance for their resources, integrating efficient fraud prevention mechanisms is a must-have. This blog entails laws by regulators for wealth administrators and how automated AML compliance solutions help defy them.
Assets Management Companies – Reasons for Increase in Money Laundering
Criminal threats are increasing for wealth administrators as they fail to recognize loopholes in their progressive capabilities, banking counterparts, and AML processes. The global assets under management are exponentially rising, and their worth is close to hitting $145 trillion by 2025.
Endangered by financial crimes, asset management companies are also facing severe prosecution. Similarly, they face in-house and market-level reputational damage. As money laundering risks become more tangible, this industry needs to integrate efficient AML solutions as countermeasures. With solutions like ongoing customer identity verification, resource management, suspiciousness detection, and efficient due diligence, AI-powered digital onboarding services enable asset managers to stay ahead of fraudsters. They further counter the following:
Asset management companies are highly lucrative which makes them an attraction for criminals. They can simply hide their proceeds of crime in plain sight and escape anti money laundering regulatory checks. Moreover, wealth administrators spend less on establishing effective AML processes. Hence, inefficient fraud prevention mechanisms are incapable of identifying high-risk transactions, assets, and customers.
Asset management companies have to face various complexities while allowing investments, re-registration, and redemption across various jurisdictions. Similarly, AML screening regulations vary within different regions, such as Europe and have distinct requirements from US anti-money laundering standards. This helps criminals mask their source of funds and conceal illicit assets.
Wealth administration companies comprise a huge network of intermediaries, making the management structure more complex. Furthermore, coupled with cross-border customers and financial dealings, lax AML compliance programs provide criminals with a safe exit.
Steps Taken by Global AML Monitoring Regulators
In order to combat the flow of illicit funds through wealth administration firms, legal bodies are putting necessary requirements in place. Regulators are scrutinizing asset management companies to prevent money laundering. Hence, they should build effective anti-money laundering compliance programs to stay in line with legal standards. The next section provides insights into authorities’ setting out strict AML security standards.
Financial Conduct Authority (FCA)
The UK’s legal financial regulator warns asset managers of high-risk resources, investments, and other activities. Furthermore, as per FCA’s guidelines, the current AML compliance programs are not competitive in identifying bribery or corruption. Therefore, asset management companies with set-ups within the UK are required to obtain license permission under Part 4A of Article 51ZA. This statute is a part of the Regulated Activities Order in this region.
FCA mandates asset management companies to stay aware of changing anti-money laundering regulatory landscape. Furthermore, they should identify high-risk resources, prepare suspicious activity reports, and submit them to the regulator.
Financial Action Task Force (FATF)
The global AML security watchdog, FATF, has been making efforts to combat financial crimes for ages. Considering the increase in money laundering through asset management companies, it is attracting strict scrutiny for this industry.
As per the FATF’s 40 Recommendations, wealth administrators should perform due diligence, evaluate risk scores, and validate Ultimate Beneficial Owners (UBO). Establishing an efficient AML compliance program is a liability for asset managers in order to identify risky partnerships. Furthermore, ongoing monitoring of investments and customers’ activities also serves as a money laundering preventive measure.
European Banking Authority (EBA)
The European Union (EU) has been enforcing a series of fraud prevention regulations to combat financial crimes across every industry. Similarly, its Fifth Anti-Money Laundering Directive (5AMLD), put forth in 2020, outlines requirements for asset managers regarding due diligence and identity verification. Moreover, it also mandates AML monitoring of majority-owned subsidiaries outside the jurisdiction of the EBA.
Since the Sixth Anti-Money Laundering Directive (6AMLD), the EU has enforced stringent measures for asset managers. Furthermore, the penalties are also increased in case wealth administration companies fail to establish AML compliance programs.
Summarizing the Facts
Criminals are coming up with more advanced fraud schemes to exploit asset managers and invest their malicious resources. Therefore, wealth administration companies need to incorporate automated AML solutions for deterring money laundering threats. These AI-powered IDV services provide instant screening against adverse media, worldwide sanctions, and global watchlists. Hence, establishing automated AML systems enhances asset management companies’ accuracy and efficacy.