The sector in brief
A custodian safeguards financial assets, such as securities and cash, for its clients and handles settlement and administration. The clients are often institutions such as funds, managers and other financial firms, but may also be wealthy individuals.
A custodian generally acts on instructions from the client or its manager, and often has less direct contact with the underlying owner than a broker or a bank. That distance is the main AML issue: assets can be held and moved at the direction of someone other than the person whose name is on the account.
Supervisors expect custodians to know who their clients are, to understand who may instruct them and to watch the movement of assets and cash for patterns that are out of line.
Where the risk sits
Distance from the beneficial owner
Accounts held for funds, nominees and other intermediaries may hide the real owner. The custodian needs to understand how far it can see and what it relies on.
Instructions from third parties
Managers, advisers and attorneys may instruct on the client's behalf. Authority, and the relationship between them, needs to be verified.
Free-of-payment transfers
Moving assets without payment, or between connected accounts, can shift value without showing a price.
Cross-border transfers of assets
Assets leaving the custodian to accounts in other countries need attention, particularly if the destination is high risk or the reason is unclear.
Sanctions
Assets held for sanctioned parties must be identified and frozen without delay. Screening needs to cover owners, controllers and authorised signatories.
Who supervises you
Custodians are supervised according to where they are licensed: by the Capital Markets Authority onshore, by the DFSA in the DIFC and by the FSRA in ADGM. Banks that provide custody services are also covered by the AML duties that apply to banks.
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 an understanding of custody operations and authority to stop a transfer.
- A business risk assessment covering clients, assets, markets and the way instructions are given.
- Client due diligence, including beneficial owners, authorised signatories and anyone with the power to instruct.
- Understanding of intermediary structures and a risk-based approach to what the custodian does and does not look through.
- Sanctions screening of clients, owners, signatories and counterparties, with an immediate response to a confirmed match.
- Monitoring of transfers, free-of-payment movements and changes in pattern.
- Reporting through goAML, training, record keeping and independent testing.
Red flags to watch
- A request to move assets to an account with no stated connection to the client.
- Instructions from someone whose authority is not documented.
- Free-of-payment movements between accounts with the same controller.
- A client who asks to close the account and transfer assets quickly without explanation.
- A sudden change in the signatories on an account.
- Reluctance to say who is behind the account.
A worked example
Assets moved out with no payment
A custody client asks for a large block of securities to be transferred free of payment to an account at another institution abroad, explaining that the move is for administrative reasons. The custodian cannot find a link between the client and the receiving account. It asks for an explanation and supporting documents, reviews whether the account's other activity is consistent with this request, and informs the compliance officer. If the answers fail to explain the move, it holds the instruction while a report is considered.
How Adventant helps
Questions answered
Does a custodian have to identify the owners behind a fund client?
The extent depends on the risk, the structure and the rules. Supervisors expect the custodian to understand who owns and controls the client, and to look through where the risk warrants it.
Who has authority to instruct the custodian?
Only those who have been properly authorised and verified. You should keep an up-to-date list of authorised persons and check instructions against it.
What is a free-of-payment transfer?
A transfer of assets without a matching payment. It can be legitimate, such as a move between accounts of the same owner, but it needs a clear reason because no price shows what value moved.
How should custodians deal with sanctions?
Screen at onboarding and continuously, and act at once on a confirmed match by freezing assets and reporting as the rules require. Slow reaction is a serious failing.
Do custodians report through goAML?
Yes, where there is suspicion. Custodians should register and have a clear process for escalating concerns.