Reviews should consider AML
Annual client reviews are being suggested as an ideal time to catch up on customer due diligence, required under the AML/CFT regime.
Tuesday, March 3rd 2015, 6:00AM 
1 Comment
by Susan Edmunds
The AML/CFT Act requires all new clients to have due diligence conducted on them before a business relationship can begin, where an adviser is a reporting entity.
This is not a requirement for advisers’ existing clients, although they are required to ensure appropriate due diligence is conducted on all clients and transactions, known as ongoing customer due diligence.
Meredith Cornelius, an adviser who now offers assistance with AML compliance, said that was a murky area. “This has created some confusion for advisers, particularly those who have larger pre-July 1 2013 client bases.”
She recommended they develop a systematic approach to identify gaps in their due diligence.
“It is likely that the FMA will consider annual review meetings standard or good practice. If you don’t already hold regularly annual review meetings, consider doing so over 2015. In addition to confirming client circumstances, this is an ideal time to update your AML/CFT responsibilities.”
Clients should be asked to bring along the necessary information, and take a photo of things such as updated IDs. “If five years ago you originally had IUD that proved who they were but a year or two later you find that’s expired, and you’re going to meet the client, why not pull out your phone and take a photo of their current ID? That’s in the spirit of ongoing due diligence.”
She said advisers were getting their heads around the legislation. The focus had been on getting the initial documentation in place but now it was turning to ongoing compliance. “Making sure you are dotting the Is and crossing the Ts.”
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It’s interesting that the AML/CFT Act 2009 did not clearly define AFA’s as reporting entities until the AML/CFT (Definitions) Regulations 2011. Section 16 (3) of this further regulation is relevant to AFA’s and financial adviser services. It ties them back to Section 5 (b) (i) of the main Act defining what a reporting entity is. Section 16 has a sunset clause which “very interestingly” expires itself on 27 July 2016 about the same time the terms of reference for the Financial Advisers Act review has taken its process through to July 1 next year, which is the statutory deadline for a report to the minister. Advisers and employers, compliance people, and commenters seem to have assumed that just because the FMA said AFA’s were reporting entities that they are. Everyone has been bogged down focused on compliance programmes, audits and reviews of such, not their businesses, whilst paying extra costs for that privilege.
Have a read of Section 16 (3) as it confirms what I have suspected, since completing an AML Audit, and Annual Return with the fiasco when some AFS’s quite rightly reported zero transactions handled to the FMA, and after experiencing perfectly compliant AFA CDD being declined as expired by a custodians legal department as they won’t rely on 3rd party CDD:
- that AFA’s are not reporting entities if their obligations are discharged through the processes of the actual reporting entity (fund manager or custodian)
- that the AFA (other person) is acting in the course of,the fund manager or custodians business, i.e handling their application and compliance paperwork on behalf of that business, so not responsible for the actual transaction to enter the financial markets, and the AFA is not relied on to do CDD, because they are a 3rd party.
Most AFA’s should not be reporting entities. They should be exempt from the programmes and associated compliance costs if they are not handling transactions, just collecting the required fund manager or custodian paperwork – doing administration. AFA’s should not participant in this game, and lobby the Government to clear this up in the review, so that an exemption applies for this type of AFA as those in Section 20 have done.