The sector in brief
Asset managers, fund managers and portfolio managers invest on behalf of clients, either through separate mandates or through pooled funds. They are supervised by the Capital Markets Authority onshore, by the DFSA in the DIFC and by the FSRA in ADGM, depending on where they are licensed.
The AML duty starts with the investor. In a segregated mandate, the manager has a direct relationship with the client. In a pooled fund, investors may come through distributors, platforms, nominee companies or fund administrators, so the manager may never meet them. The rules expect the manager to be sure that someone has done the checks, and to be able to show who and how.
Fund structures can also be complicated. Master-feeder arrangements, side pockets and offshore vehicles all add layers. A manager that understands the structure, and can explain why it exists, is in a stronger position than one that simply accepts it.
Where the risk sits
Investors behind intermediaries
Where investors reach the fund through nominees or distributors, the manager may not see the real owners. The checks done by others need to be understood and tested.
Subscriptions and redemptions
Large subscriptions from unclear sources, and redemptions paid to third parties or other countries, are the main entry and exit points for illicit money.
Complex or offshore structures
Funds and investor vehicles in several jurisdictions can make ownership and control hard to establish.
Source of wealth of large investors
Institutional and high-net-worth investors may bring significant sums that need an explanation beyond the bank statement.
Politically exposed persons and sovereign links
Investors connected to public officials need enhanced attention, including senior approval.
Who supervises you
It depends on where the manager is licensed. The Capital Markets Authority supervises onshore asset and fund managers, the DFSA supervises authorised asset and fund managers in the DIFC, and the FSRA supervises those in Abu Dhabi Global Market. Funds and managers are often in different places, so look at the licence of each entity you are responsible for.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A Compliance Officer or MLRO with enough influence to challenge investment and commercial decisions.
- A risk assessment that covers each fund and mandate, the investor base, distribution channels and countries.
- Investor due diligence, including beneficial owners, at the level that suits the risk, and clear allocation of responsibility where distributors or administrators carry out checks.
- Source of funds and source of wealth enquiries for larger or higher-risk investors.
- Sanctions and politically exposed person screening of investors and, where relevant, underlying owners.
- Monitoring of subscriptions, redemptions and transfers, with particular attention to third-party payments and early redemptions.
- Reporting through goAML, training, record keeping and independent testing, including testing of delegated work.
Red flags to watch
- A subscription from an account in a name other than the investor's.
- A request to redeem shortly after investing, with proceeds to be paid elsewhere.
- An investor who is evasive about ownership or source of wealth.
- A structure that has more layers than the investment needs.
- Pressure to accept an investor ahead of the usual checks.
- Adverse media about an investor or the people who control it.
A worked example
A nominee investor in a pooled fund
A distributor brings a substantial subscription into a private fund on behalf of a nominee company, saying that the underlying investors have been checked. The manager asks to see the distributor's due diligence procedures and a sample of files, and finds that source of funds has not been recorded for several investors. The manager pauses the subscription, asks the distributor to supply the missing information and records the outcome. If the distributor cannot or will not, the manager declines the money and considers whether a report is appropriate.
How Adventant helps
Questions answered
If the administrator does investor checks, are we still responsible?
Yes. You can delegate tasks, but not responsibility. You need to be satisfied that the administrator is doing the work properly and be able to show how you checked.
What about investors who come through a platform?
Platforms and nominees can carry out checks on their clients, but you need to understand what they do and test it. The risk assessment should say when you rely on others and when you look through to the investor.
How much source of wealth work is enough?
Enough to make the origin of the wealth credible and documented, in proportion to the amount and the risk. For large or higher-risk investors, that is likely to mean evidence beyond a signed statement.
Should we monitor redemptions?
Yes. Redemptions, especially early ones or those paid to third parties or other countries, are a key exit point. Your controls should cover them.
Does a small manager need a full programme?
The programme can be proportionate, but it must cover the same areas: risk assessment, due diligence, screening, monitoring, reporting, training and testing.