On 7 October 2016, the Department of Finance and the Department of Justice and Equality published the first National Risk Assessment for Ireland (NRA) on money-laundering and terrorist financing (AML/CTF).
The NRA is a detailed document and reflects a key objective of the inter-governmental Financial Action Task Group (FATF) to promote effective implementation of legal, regulatory and operational AML/CTF measures. The NRA also anticipates the Fourth anti-money laundering directive (EU 2015/849) (AMLD4) which is required to become law in EU member states in June 2017. AMLD4 introduces a requirement for member states to identify, assess, understand and mitigate AML/CTF risks, related data protection concerns and to keep their assessments up to date. It is thus envisaged that this NRA will be kept updated.
The NRA includes a review of the risks present in sub-sectors within the Irish financial services industry including investment funds. The various sub-sectors were given risk ratings based on "residual risk" i.e. "the residual risk after taking mitigants and other relevant factors into account". The report acknowledges that a higher risk rating does not necessarily indicate that there is low compliance within the particular sector, noting that "some sectors will by their very nature or scale remain higher risk even with robust AML/CTF compliance, whilst others may remain unproblematic, despite potential vulnerabilities".
Risk ratings were ascribed to 21 sub-sectors within the financial services industry including funds and fund administrators, which sector received a "medium-high" risk rating. Factors taken into account in the assessment were:
Although the fund industry is not cash-based it has a wide geographical reach in terms of the jurisdictions into which funds are marketed.
Customer ownership structures can be complex with ultimate ownership difficult to identify. Irish fund administrators not only provide services to EU based funds but also to funds that are domiciled in jurisdictions which have stringent based secrecy legislation and jurisdictions traditionally considered to be tax havens. This increases the difficulty in determining the beneficial ownership of the fund, as well as money laundering and terrorist financing risk.
There are high volumes of subscriptions associated with certain types of funds and funds are usually marketed through distributors and do not have a direct business relationship with the underlying investor.
There is also a high level of outsourcing and significant reliance on third parties to conduct customer due diligence.
The NRA is a very useful document and provides significant detail not just on Ireland's legislative, supervisory and enforcement architecture and environment in the area of AML/CTF, but also information, statistics and risk assessments of financial and non-financial businesses and professions in Ireland that are subject to AML/CTF obligations and which are at risk of AML/CTF vulnerabilities.
Contributed by Patricia Taylor of William Fry.