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DISCLAIMER: The information provided here does not, and is not intended to, constitute legal advice; instead, all information & content are for general informational purposes only.
As a Chief Financial Officer (CFO) of a fund, compliance with existing rules is paramount. This involves:
A) Understanding the rules.
B) Designing processes and systems for compliance.
Before delving into these steps, here are some general thoughts.
First of, non-compliance poses substantial reputational and legal risks, so this topic should be taken serious. This is not akin to correcting typos in a quarterly report; you need to ensure 100% compliance.
Another aspect is the scope. As a fund, you are involved in transactions at various levels. For example you probably have a management company that is acting like most other commercial companies, paying suppliers and receiving proceeds. But as a fund manager, you are also running funds, which basically means taking money from LPs and investing it in companies. Lastly, by virtue of being invested in companies you are part of any transaction that involves those companies, so the companies compliance also affects you. In concrete terms this means that you might need to diligence your co-investors or make sure your portfolio companies' have proper AML procedures in place.
We suggest you first work closely with your fund formation lawyers on this. These are the lawyers that have suggested a specific setup for your fund. Due to the complexity and variability of rules, it is probably better to seek a specific confirmation for your given setup rather than relying on general guidelines.
Your fund administrators might also know about what needs to be done, especially if your fund is following a common structure. We however suggest you definitely involve the lawyers to confirm your intended AML processes are solid, even if you think you already know.
We recommend conducting a country-by-country assessment of the pertinent rules. Start by focusing on the 'domicile' of your fund and gaining a comprehensive understanding of the regulations in that jurisdiction. Subsequently, ask if there are any applicable 'foreign' or global regulations, such as those outlined by the OECD. These considerations become particularly relevant if your fund has Limited Partners (LPs), investments, or banking relationships in other countries. While, in practice, most compliance requirements typically originate from the fund's domicile and banking jurisdictions, it is safer to double-check before onboarding LPs or making investments in a new country.
We recommend engaging external advisors to efficiently handle the essential tasks. While larger funds may opt for an in-house approach, achieving efficiency can be challenging for smaller teams. It is crucial to be well-versed in best practices and gain access to specific tools, which may be both challenging and costly.
The compliance process typically involves drafting written policies, conducting regular risk assessments, and screening counterparties and transactions. The specific requirements depend on the applicable rules.
Your fund administrator is likely the optimal starting point to identify the right supplier. Fund administrators already gather significant relevant data for bookkeeping and operational purposes, such as bank statements and LP lists. This data serves as the foundation for AML processes. Your administrator may even offer support for AML compliance through their in-house team, providing a streamlined solution. Alternatively, they may have established partnerships with preferred vendors.
Given the collaborative nature of the administrator and AML team's work, we recommend facilitating an early meeting between both parties. Addressing any potential friction between service providers, whether related to software or personnel, is crucial. The best "stand-alone"provider might not be ideal if they can't be seamlessly integrated into your existing setup.
Certain funds may be required to undergo an audit of their AML processes by an external auditor. For instance, Germany implemented comprehensive new AML rules in 2021, mandating an annual audit. Rather than immediately enlisting your regular auditor, typically responsible for financial statement audits, we recommend a detailed discussion about their approach to AML audits. It seems there are quite some differences in the methodologies employed by various auditing providers, affecting both the time and cost associated with completing the audit.
We have included several AML service providers below that can assist in compliance efforts. Consider reaching out to them.
Please let us know if you can recommend another one.
Explore their offerings to determine how they can aid in ensuring robust AML compliance.
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