The sector in brief
Investment advisers give advice on investments, and in some cases arrange transactions on behalf of clients. They may not hold client assets, but they learn a great deal about a client's wealth, objectives and plans. That puts them in a good position to notice when something does not fit.
Supervisors expect advisers to use that position. If a client wants to invest a large sum but cannot explain where it came from, or asks for a structure that appears designed to hide ownership, the adviser is often the first person to see the issue.
The Capital Markets Authority, the DFSA and the FSRA all supervise investment advisers in their own areas. Advisers in each system have the same basic duties and the details differ with the licence.
Where the risk sits
Clients with unexplained wealth
A client who wants advice on a large sum, but is unable to say how it was earned, creates a risk that the adviser's work helps place illicit money.
Advice that helps build opaque structures
Suggesting trusts, companies and cross-border vehicles without a clear commercial reason can end up hiding ownership.
Politically exposed clients
Wealthy clients can include public officials and their families. They need senior approval and more attention.
Introducers and referral networks
Advisers often receive clients from introducers who may not carry out checks to the same standard.
Dealing through others
Instructions given by someone other than the client, or on behalf of an unnamed principal, make it hard to know who benefits.
Who supervises you
Investment advisers 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. If your firm gives advice but also does other regulated activities, the regulator will usually be the one that issued your licence.
The supervisor decides the detailed rules for your licence category, so always read its current guidance alongside this page.
What supervisors expect
- A named compliance officer or MLRO, with the authority to refuse a client.
- A business risk assessment that reflects the type of clients, the services provided and the countries involved.
- Client due diligence before advice is given, including beneficial owners and a record of the client's source of wealth for higher-risk clients.
- Screening of clients and owners against sanctions lists, with documented review.
- Ongoing review of the client relationship, and attention to changes in the client's circumstances or instructions.
- Reporting of suspicion through goAML, with care not to alert the client.
- Training, record keeping and independent testing proportionate to the firm.
Red flags to watch
- A client who wants advice on investing a large sum quickly and cannot explain its origin.
- Requests for structures with no clear commercial purpose.
- Instructions that come from someone other than the client.
- A client who is reluctant to provide documents or discuss ownership.
- A client from a high-risk country with no clear reason for choosing the adviser.
- Interest in how to avoid reporting or disclosure.
A worked example
A request for an unusual structure
A client asks an adviser to help set up an arrangement under which several companies in different countries would hold a portfolio, and says he does not want his name to appear. When asked why, he says he values privacy. The adviser should not dismiss the request, but should explain that the firm must know the real owner, ask for a commercial reason for the structure and record the answers. If the client is unwilling to cooperate, the adviser should decline and speak to the compliance officer about a report.
How Adventant helps
Questions answered
We do not hold client money. Do the AML rules still apply?
Yes. They apply to the regulated activity, not to whether you hold the cash. Advisers must identify clients, understand their purpose and report suspicion.
How do we deal with referrals from introducers?
Treat the introducer's work as a starting point. Check the client yourself, or satisfy yourself that the introducer's checks meet your standards and keep a record.
What should we do if a client refuses to explain their wealth?
Do not proceed as normal. Record the refusal, tell the compliance officer and consider whether to decline the client and whether to report.
Can we advise on structures designed to protect privacy?
Privacy is legitimate, but secrecy from the firm is not. You must know the real owner and understand why the structure is needed.
How often should we review client files?
At a frequency set by risk and whenever something changes. Higher-risk clients should be reviewed more often. Your policy should state the cycle.