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Palana: Dirty Money - Coming Out in the Wash

Bastien Collette, a Partner in Palana, describes how Professionals verify that the investments performed by the Investment Funds are not linked to money laundering or terrorist financing. He reveals how technology is improving the process of due diligence and ways of ensuring cross-jurisdictional due diligence is enforcing anti-money laundering rules geographically.

How do you verify that assets are legitimate and not linked to money laundering or terrorist financing in funds?

Comprehensive due diligence on assets is key to fight money laundering and terrorist financing. Luxembourg’s AML/CTF legal and regulatory framework requires Professionals to apply a due diligence, on a risk-based approach, to the assets. For instance, They are expected to have adequate internal organizations in which they define their risk-based approach and risk appetite. This is achieved, amongst others, with an AML/CTF risk appetite statement, ML/TF own risk assessment, AML/CTF policy and procedures and AML/CTF training for employees. They have to provide an AML/CTF risk score to each investment and apply afterwards the adequate mitigation measures. Knowing your assets (KYA) includes to identify and verify the investments and their linked parties, on a risk-based approach. It is required to perform name screening on the assets and linked counterparties (i.e. sellers, borrowers, etc.). Where higher risks are identified, such as investing in high-risk countries or sectors, Enhanced Due Diligence must be employed to gather more extensive information, data and documents. Follow the money and therefore performing the transaction monitoring is also fundamental in the due diligence process to identify to whom payments will be made, from whom funds will be received as well as from which countries transactions emanate or terminate. Vigilance must be maintained with the reporting of any suspicious activities/transactions to the appropriate authorities. Professionals need to engage in ongoing monitoring of investments and continual reassessment of risk profiles. An appropriate hierarchical approval process must be applied, on a risk-based approach and depending of the AML/CTF risk scoring attributed, before investments are undertaken. Preventing ML/TF is a complex task, and no process can guarantee 100% effectiveness. However, robust due diligence procedures, staying informed about relevant regulations, and collaborating with authorities can significantly mitigate the risks of being involved in ML/TF activities.

“Applying a risk based approach, staying informed about relevant regulations, and collaborating with authorities can significantly mitigate the risks of being involved in ML/TF activities

How has technology improved the process of verifying assets to combat money laundering in funds?

Technology has significantly improved the process of verifying assets and combating money laundering in funds. Technology has helped by providing more efficient and effective means of analysis, data management, and risk assessment. But of course, professionals must ensure that they have good quality data in their systems to perform tasks like name screening of assets and identifying linked counterparties. For example, firms must perform due diligence on a name screening tool to ensure that it takes into account the latest sanction lists. The application of technology has contributed to enhancing AML efforts in asset due diligence including data, analysis, and automation. By analyzing multiple risk factors, such as investment type, geographic locations, etc., risk-based scoring and profiling models can help to provide the AML/CTF risk scoring of assets. This assists the professionals in prioritizing their resources and allowing them to focus on higher-risk areas for enhanced scrutiny. In future, technology such as Blockchain, and distributed ledger technology (DLT), will be applied to big data analytics. But while technology is revolutionizing the AML/CTF landscape, it is important to note that human expertise and judgment remain crucial in the asset verification process. Technology should be used as an enabler, supporting and augmenting the capabilities of AML professionals to combat money laundering effectively.

How do you ensure that due diligence checks on assets are consistent across different countries with varying regulations and enforcement practices?

Adherence to international standards, such as those set by the FATF, is one of many measures promoting cross-jurisdictional consistency and effectiveness of AML due diligence. A risk-based approach embraces many factors allowing for tailored measures based on the inherent risks associated with different countries. Risks to be considered include, amongst others, the regulatory environment, corruption levels, transparency of financial systems, and enforcement. Country risk ratings and scoring models must be developed to guide AML due diligence efforts consistently to help mitigate the challenges posed by varying regulations and enforcement practices. Based on this, Professionals can also implement, on a risk based approach, stricter identification and verification processes, additional checks on beneficial ownership, and more rigorous monitoring of transactions involving high-risk countries for instance. Training programs and awareness campaigns are important in educating AML professionals, compliance officers, and relevant stakeholders about the varying regulations and enforcement practices in different countries. Training helps them navigate requirements that are specific to individual countries. When investing in a target fund based in third countries, one key element for professionals is to ensure that they confirm they are performing name screening against UN and EU lists on the underlying assets. While achieving complete consistency across countries may be challenging, adopting these measures can significantly help bridge gaps and align AML due diligence checks. Collaborative efforts at the international level, standardized risk assessment frameworks, and continuous dialogue among stakeholders are essential for promoting consistent cross-border AML practices. We hope that in the future all countries will apply the same requirements as those seen in the Luxembourg AML/CTF framework to better fight the financial crime globally.

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