Response to consultation on Guidelines on risk factors and simplified and enhanced customer due diligence
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Legal & General is one of the biggest providers of index-tracking investments in the UK, managing £274.7 billion as at 30 June 2015.
Legal & General welcomes the opportunity to respond to the ESA’s consultation. We fully support the draft ESA guidelines and believe they are conducive to firms adopting risk based, proportionate and effective AML/CTF policies and procedures. Overall the guidelines take a sensible approach, although they are repetitive in some areas and scant in detail in others, such as in Title III, chapter 9.
Our comments as follows are around the main sections relevant to our organisation, Title II being the general section and the following chapters in Title III:
o chapter 1 covering correspondent banks and other correspondent relationships
o chapter 7 covering life insurance
o chapter 8 covering investment managers
o chapter 9 covering providers of investment funds but noting that currently chapter 9 has to be referred to alongside chapters 1 and 8 as well.
Errors and areas Legal & General suggest that should be changed, with accompanying rationale and suggested amendments:
PAGE 6 – BACKGROUND
o the last sentence of the first paragraph needs rewording, as it reads as if FATF itself was adopted in 2012 – whereas it is ‘the FATF Recommendations adopted in 2012’ that the guide is meant to be referring to.
PAGE 11 – DEFINITIONS
o highlight in the definition of ‘Firms’ that this is referred to in the 4th Directive as ‘Obliged Entities’.
o insert a definition for ‘legal persons’ which is referred to in the guide e.g. on page 15.
PAGE 10 – SECTION 10, FIRST BULLET POINT OF ‘BUSINESS WIDE RISK ASSESSMENT:
o end of the second sentence, ‘…… or delivery channels they use to service their customers’. please add ‘distribution’ and ‘sales’. e.g. reword to , ‘…… or distribution and delivery channels they use to sell to their customers and also those channels to service their customers. ‘ This will make the sentence more inclusive of chapter 7, to which chapters 8 and 9 also cross refer.
PAGE 15 – SECTION 19, FORTH BULLET – as already mentioned, please insert a definition for ‘legal persons’ here or in the definitions on page 11.
PAGE 16 – SECTION 21 – SECOND BULLET - please include an example. Fourth bullet point – from an investment management company perspective, please also include an example on why this is a risk factor and/or how this is to be treated as all traded companies to some degree or other will have nominee shareholders even to the extent of ones run by the company themselves e.g. Company A’s Corporate Sponsored Nominee accounts through a company such as Capita. In principle, hidden ownership is a risk, but given its prevalence, it would not make a useful indicator in its own right, in such circumstances.
PAGE 24 – SECTIONS 47 AND 48 are repetitive and could be combined.
PAGE 25 – SECTION 49 – could open-source (e.g. information on the internet) be used to establish source of total wealth, providing this is substantiated if there are any anomalies? (link to second part of section 57 on page 28)
PAGE 32 – CHAPTER 1 – CORRESPONDENT BANKS - make it clear in the title of this chapter that this also covers ‘other correspondent relationships’ e.g. add ‘and other correspondent relationships’ to the end of the title.
o SECTION 75 – including a definition of ‘nesting’, e.g. ‘the layering or tiering of correspondent relationships’
PAGE 65 CHAPTER 7 – LIFE INSURANCE –
o SECTION 174 – add that the beneficiaries may change during the term of the policy and may never benefit.
PAGE 66, SECTION 177, II – ‘free look’ note that to have such a requirement in the Distance Marketing Directive.
o PAGE 67, SECTION 179, II – could this be enlarged to also cover state owned entities.
o Could CHAPTER 7 clarify the requirements under CDD, EDD and SDD, where a life insurance product pays out to the trustees or Personal Representative (PR) (a PR being the executor or administrator of a decease’s estate), who will then distribute the funds according to the will (or member state law if no will) or the trust?
Legal & General believe that greater clarity is required as to the product provider’s/life insurer’s responsibility with regards to identifying the underlying beneficiaries. This is not clear in 185 or the other relevant parts of section 7. We believe this clarification should show that the provider/ insurer’s responsibility is to identify and verify the trustees or PR and only go beyond this level to identify the ultimate beneficiary, where a payment is made directly to them. The rationale for this being as follows:
• The product provider/life insurance company have the legal ownership relationship with the personal representative (PR) (the executor or administrator of the estate) or if there are trustees, the legal relationship is with the trustees. It is then the PR or the trustee who has a beneficial ownership relationship with the beneficiary of the trust or the estate.
• Where trustees have the discretion to apply a policy’s proceeds, even if they advise the provider/insurer of the beneficiaries details at claim stage, the trustees could still change their minds and pay someone else up to 125 years in the future.
• For a policy with an investment element, the trustee may be surrendering/redeeming the funds from the provider/insurer, to reinvest elsewhere, as opposed to distribution to any beneficiaries.
• Where dealing with the PR of an estate, the beneficial entitlement can be disclaimed or varied, making it impossible for the provider/insurer to know with certainty who the ultimate beneficiary is.
o SECTION 188 – IX – insert an example of beneficiary’s beneficial owner e.g. if the beneficiary is an entity, the natural person(s) who are the owner/controllers …cross ref to 4MLD….
o SECTION 189 - Simplified Due Diligence – it is not clear whether there is the requirement to determine if the customer or beneficiary is a PEP ( as in x under 188 EDD), if SDD applies?
• Chapters 8 and 9 – please add clarification that the cross reference to chapter 7 should include the same requirements for beneficial owners and beneficiaries.
CHAPTER 8 SECTORAL GUIDELINES FOR INVESTMENT MANAGERS
PAGE 73 – section 190 - The definition should also include management of assets under instruction from the customer according to a set mandate or execution only instructions.
o SECTION 193 - Further considerations would be:
If the product or service allows Straight Through Processing" where transactions are carried out directly by the client with no or limited intervention by the investment manager.
Where the product or service offered allows quick, often overnight, transactions such as treasury services using short term, cash like instruments allowing investment and redemption within a 24 hour period.
o SECTION 194 - Under "Customer's nature" – please add ‘the customer is a Nominee company with unknown underlying investors’.
o SECTION 194 AND/OR 196 - please add ‘where the client wishes to structure the relationship in such a way that multiple parties e.g. nominee subsidiaries are used in varying jurisdictions (particularly if they are higher risk jurisdictions with each party playing a different role, for example where funds or assets are received from subsidiary A but any proceeds are required to go to subsidiary B, both in different jurisdictions’.
o PAGE 75 – SECTION 198 – please give clarification here as it is implied that by requiring verification of underlying investors for unregulated investment vehicles that there is no requirement to verify underlying investors of a regulated vehicle.
o SECTION 199 - please give examples of such low risk situations in investment management, for which SDD could be applied.
CHAPTER 9 INVESTMENT FUNDS
PAGE 76 –
o SECTION 201 - Correction "Retail funds are often conducted" to "Retail fund investments are often conducted".
o SECTION 203 - suggest adding ‘where the product or service offered allows quick, often overnight, transactions such as treasury services using short term, cash like instruments allowing investment and redemption within a 24 hour period’.
o SECTION 204 - An indicator of lower risk for a fund would also be one where the trading in the fund a relatively illiquid e.g. the fund only deals on a weekly/monthly basis or the underlying assets in the fund prevent rapid removal of proceeds e.g. a restricted property fund where sale of the underlying property is needed for redemptions.
o PAGE 77 - SECTION205 - I) suggest adding "… without clear understandable rationale." at the end which also matches with the intention of point ii).
o PAGE 78 – SECTION 210 - Spelling error in fourth bullet "tequiring" should be "requiring". Further, the consultation suggests ”obtaining approval from senior management at the time of the transaction when a customer uses a product or service for the first time;". Although this may be a final stage of an EDD process, obtaining approval from a senior manager should not be considered as EDD itself, but in addition to. Providing this as an example may move firms to using this to avoid more intensive methods.
o PAGE 79 – SECTION 212 – suggest rewording to more clearly define the difference between an intermediary dealing as principle (for their own benefit) or dealing as agent (for their customers), e.g. reword as follows:
"Where a firm uses a financial intermediary to distribute fund shares, for example a regulated platform, a bank or a financial adviser, that intermediary may be regarded as the firm’s customer provided that the intermediary acts on its own account as the direct counterparty of the firm. However, where the intermediary receives from its customer a mandate to manage their assets or carry out one or more investment transactions, the firm should treat the intermediary’s customers as the fund’s beneficial owners."
PAGE 82 - 5.1 IMPACT ASSESSMENT
In answer to the impact questions, we prefer the following options:
Consistency with international standards - Option 2
Structure - Option 2
Addressees - Option 3
Level of prescription - Option 2"
a) Do you consider that these guidelines are conducive to firms adopting risk-based, proportionate and effective AML/CFT policies and procedures in line with the requirements set out in Directive (EU) 2015/849?
The Legal & General Group, established in 1836, is one of the UK’s leading financial services companies. As at 30 June 2015, the total value of assets across the group was £714.6 billion, including derivative assets. We also had over nine million customers in the UK for our life assurance, pensions, investments and general insurance plans.Legal & General is one of the biggest providers of index-tracking investments in the UK, managing £274.7 billion as at 30 June 2015.
Legal & General welcomes the opportunity to respond to the ESA’s consultation. We fully support the draft ESA guidelines and believe they are conducive to firms adopting risk based, proportionate and effective AML/CTF policies and procedures. Overall the guidelines take a sensible approach, although they are repetitive in some areas and scant in detail in others, such as in Title III, chapter 9.
b) Do you consider that these guidelines are conducive to competent authorities effectively monitoring firms’ compliance with applicable AML/CFT requirements in relation to individual risk assessments and the application of both simplified and enhanced customer due diligence measures?
Yesc) The guidelines in Title III of this consultation paper are organised by types of business. Respondents to this consultation paper are invited to express their views on whether such an approach gives sufficient clarity on the scope of application of the AMLD to the various entities subject to its requirements or whether it would be preferable to follow a legally-driven classification of the various sectors; for example, for the asset management sector, this would mean referring to entities covered by Directive 2009/65/EC and Directive 2011/61/EU and for the individual portfolio management or investment advice activities, or entities providing other investment services or activities, to entities covered by Directive 2014/65/EU.
We believe this approach does give clarity on the scope of application of the AMLD to the various entities subject to its requirements, subject to the correction of errors, amendments as suggested below and an enlarged section for 9 (investment funds) to remove the current requirement to cross refer alongside chapters 1 and 8 as well.Our comments as follows are around the main sections relevant to our organisation, Title II being the general section and the following chapters in Title III:
o chapter 1 covering correspondent banks and other correspondent relationships
o chapter 7 covering life insurance
o chapter 8 covering investment managers
o chapter 9 covering providers of investment funds but noting that currently chapter 9 has to be referred to alongside chapters 1 and 8 as well.
Errors and areas Legal & General suggest that should be changed, with accompanying rationale and suggested amendments:
PAGE 6 – BACKGROUND
o the last sentence of the first paragraph needs rewording, as it reads as if FATF itself was adopted in 2012 – whereas it is ‘the FATF Recommendations adopted in 2012’ that the guide is meant to be referring to.
PAGE 11 – DEFINITIONS
o highlight in the definition of ‘Firms’ that this is referred to in the 4th Directive as ‘Obliged Entities’.
o insert a definition for ‘legal persons’ which is referred to in the guide e.g. on page 15.
PAGE 10 – SECTION 10, FIRST BULLET POINT OF ‘BUSINESS WIDE RISK ASSESSMENT:
o end of the second sentence, ‘…… or delivery channels they use to service their customers’. please add ‘distribution’ and ‘sales’. e.g. reword to , ‘…… or distribution and delivery channels they use to sell to their customers and also those channels to service their customers. ‘ This will make the sentence more inclusive of chapter 7, to which chapters 8 and 9 also cross refer.
PAGE 15 – SECTION 19, FORTH BULLET – as already mentioned, please insert a definition for ‘legal persons’ here or in the definitions on page 11.
PAGE 16 – SECTION 21 – SECOND BULLET - please include an example. Fourth bullet point – from an investment management company perspective, please also include an example on why this is a risk factor and/or how this is to be treated as all traded companies to some degree or other will have nominee shareholders even to the extent of ones run by the company themselves e.g. Company A’s Corporate Sponsored Nominee accounts through a company such as Capita. In principle, hidden ownership is a risk, but given its prevalence, it would not make a useful indicator in its own right, in such circumstances.
PAGE 24 – SECTIONS 47 AND 48 are repetitive and could be combined.
PAGE 25 – SECTION 49 – could open-source (e.g. information on the internet) be used to establish source of total wealth, providing this is substantiated if there are any anomalies? (link to second part of section 57 on page 28)
PAGE 32 – CHAPTER 1 – CORRESPONDENT BANKS - make it clear in the title of this chapter that this also covers ‘other correspondent relationships’ e.g. add ‘and other correspondent relationships’ to the end of the title.
o SECTION 75 – including a definition of ‘nesting’, e.g. ‘the layering or tiering of correspondent relationships’
PAGE 65 CHAPTER 7 – LIFE INSURANCE –
o SECTION 174 – add that the beneficiaries may change during the term of the policy and may never benefit.
PAGE 66, SECTION 177, II – ‘free look’ note that to have such a requirement in the Distance Marketing Directive.
o PAGE 67, SECTION 179, II – could this be enlarged to also cover state owned entities.
o Could CHAPTER 7 clarify the requirements under CDD, EDD and SDD, where a life insurance product pays out to the trustees or Personal Representative (PR) (a PR being the executor or administrator of a decease’s estate), who will then distribute the funds according to the will (or member state law if no will) or the trust?
Legal & General believe that greater clarity is required as to the product provider’s/life insurer’s responsibility with regards to identifying the underlying beneficiaries. This is not clear in 185 or the other relevant parts of section 7. We believe this clarification should show that the provider/ insurer’s responsibility is to identify and verify the trustees or PR and only go beyond this level to identify the ultimate beneficiary, where a payment is made directly to them. The rationale for this being as follows:
• The product provider/life insurance company have the legal ownership relationship with the personal representative (PR) (the executor or administrator of the estate) or if there are trustees, the legal relationship is with the trustees. It is then the PR or the trustee who has a beneficial ownership relationship with the beneficiary of the trust or the estate.
• Where trustees have the discretion to apply a policy’s proceeds, even if they advise the provider/insurer of the beneficiaries details at claim stage, the trustees could still change their minds and pay someone else up to 125 years in the future.
• For a policy with an investment element, the trustee may be surrendering/redeeming the funds from the provider/insurer, to reinvest elsewhere, as opposed to distribution to any beneficiaries.
• Where dealing with the PR of an estate, the beneficial entitlement can be disclaimed or varied, making it impossible for the provider/insurer to know with certainty who the ultimate beneficiary is.
o SECTION 188 – IX – insert an example of beneficiary’s beneficial owner e.g. if the beneficiary is an entity, the natural person(s) who are the owner/controllers …cross ref to 4MLD….
o SECTION 189 - Simplified Due Diligence – it is not clear whether there is the requirement to determine if the customer or beneficiary is a PEP ( as in x under 188 EDD), if SDD applies?
• Chapters 8 and 9 – please add clarification that the cross reference to chapter 7 should include the same requirements for beneficial owners and beneficiaries.
CHAPTER 8 SECTORAL GUIDELINES FOR INVESTMENT MANAGERS
PAGE 73 – section 190 - The definition should also include management of assets under instruction from the customer according to a set mandate or execution only instructions.
o SECTION 193 - Further considerations would be:
If the product or service allows Straight Through Processing" where transactions are carried out directly by the client with no or limited intervention by the investment manager.
Where the product or service offered allows quick, often overnight, transactions such as treasury services using short term, cash like instruments allowing investment and redemption within a 24 hour period.
o SECTION 194 - Under "Customer's nature" – please add ‘the customer is a Nominee company with unknown underlying investors’.
o SECTION 194 AND/OR 196 - please add ‘where the client wishes to structure the relationship in such a way that multiple parties e.g. nominee subsidiaries are used in varying jurisdictions (particularly if they are higher risk jurisdictions with each party playing a different role, for example where funds or assets are received from subsidiary A but any proceeds are required to go to subsidiary B, both in different jurisdictions’.
o PAGE 75 – SECTION 198 – please give clarification here as it is implied that by requiring verification of underlying investors for unregulated investment vehicles that there is no requirement to verify underlying investors of a regulated vehicle.
o SECTION 199 - please give examples of such low risk situations in investment management, for which SDD could be applied.
CHAPTER 9 INVESTMENT FUNDS
PAGE 76 –
o SECTION 201 - Correction "Retail funds are often conducted" to "Retail fund investments are often conducted".
o SECTION 203 - suggest adding ‘where the product or service offered allows quick, often overnight, transactions such as treasury services using short term, cash like instruments allowing investment and redemption within a 24 hour period’.
o SECTION 204 - An indicator of lower risk for a fund would also be one where the trading in the fund a relatively illiquid e.g. the fund only deals on a weekly/monthly basis or the underlying assets in the fund prevent rapid removal of proceeds e.g. a restricted property fund where sale of the underlying property is needed for redemptions.
o PAGE 77 - SECTION205 - I) suggest adding "… without clear understandable rationale." at the end which also matches with the intention of point ii).
o PAGE 78 – SECTION 210 - Spelling error in fourth bullet "tequiring" should be "requiring". Further, the consultation suggests ”obtaining approval from senior management at the time of the transaction when a customer uses a product or service for the first time;". Although this may be a final stage of an EDD process, obtaining approval from a senior manager should not be considered as EDD itself, but in addition to. Providing this as an example may move firms to using this to avoid more intensive methods.
o PAGE 79 – SECTION 212 – suggest rewording to more clearly define the difference between an intermediary dealing as principle (for their own benefit) or dealing as agent (for their customers), e.g. reword as follows:
"Where a firm uses a financial intermediary to distribute fund shares, for example a regulated platform, a bank or a financial adviser, that intermediary may be regarded as the firm’s customer provided that the intermediary acts on its own account as the direct counterparty of the firm. However, where the intermediary receives from its customer a mandate to manage their assets or carry out one or more investment transactions, the firm should treat the intermediary’s customers as the fund’s beneficial owners."
PAGE 82 - 5.1 IMPACT ASSESSMENT
In answer to the impact questions, we prefer the following options:
Consistency with international standards - Option 2
Structure - Option 2
Addressees - Option 3
Level of prescription - Option 2"