Money laundering laws to slug managers with unfair costs

Fundmanagers accepting deposits or funds from the public will be slugged with additional costs and increased compliance demands if new international due diligence guidelines are not amended, according to theInvestment and Financial Services Association(IFSA).

The guidelines come from the international body, the Financial Action Task Force (FATF), of which Australia is a member. The FATF spearheads efforts to counter criminal use of financial systems and has revised a number of recommendations for combating money laundering and terrorist financing.

Under the new recommendations, fund managers — in addition to banks and operators of cash management trusts (CMT) — will be required to verify the identity of customers and perform ongoing monitoring of the purpose of the business relationship.

For cross-border transactions, fund managers will have to gain information about offshore groups and assess their anti-money laundering and terrorist financing controls, and require the approval of senior management to establish new relationships.

IFSA chief executive Richard Gilbert says the current client identification system, which was developed for bank branch systems, will result in massive costs to the funds management industry if applied as is.

“The other [bank and CMT] system is not a technological system, and the question is: do branch banking structures meet everybody’s needs?

“We need a workable system that will not impose substantial additional costs on the industry — which could be in the order of tens of millions of dollars,” Gilbert says.

The ultimate loss, IFSA says, would be to the end client, who will suffer from increased management expense ratios (MER), and reduction in returns.

“There is no magic honey pot from which these expenses can be met — ultimately the MER is the headline outcome, and the industry is doing its best to reduce them. This could put pressure on MERs at the wrong time,” Gilbert says.

As they stand, the recommendations require due diligence to be performed on new and existing customers. Gilbert disagrees and says the requirements should only be applicable to new customers.

The revisions impact almost all Australian financial institutions, which FATF says “will need to adopt the new due diligence obligations recommended … to ensure they can operate in the global financial marketplace”.