When the new Guernsey AML/CFT Handbook was released by the Guernsey Financial Services Commission everyone started focussing on what they feared – changes requiring more work. However, what they failed to appreciate was that there were also areas that could reduce the work and documentation required to successfully identify and verify the identity of a customer and/or beneficial owner. Here we look at five of those points to make life easier.

1. Change of Address

In the past, many firms have re-verified the address of a natural person where they have moved from one residence to another. This can be time-consuming and also result in a temporary block being placed on the customer’s account.

Section 5.4 of the Handbook allows that where there is ongoing written correspondence at the new address this can be considered verification. As this must involve sending correspondence and receiving response to that correspondence consider sending the customer a letter with a tear-off slip to be signed and returned in a reply-paid envelope.

2. Declassifying PEPs

Less Politically Exposed Persons should mean less high-risk relationships and less work to do on an ongoing basis. Consider reviewing your PEP register, highlighting those former PEPs who have left office and determine what their time period is for declassification.

Even where some have not passed the time period you will be able to note when they can be declassified in the future. Once declassified perform a new relationship risk assessment, which may result in a reduction to their relationship risk rating. For further information see section 8.5.6 of the Handbook.

3. Governments, Supranational Organisations, State-Owned Enterprises & Sovereign Wealth Funds

Sections 7.11.2 and 7.11.3 of the Handbook looks at these structures. Historically many of these structures have been automatically classified as high-risk because one or more directors, trustees or equivalent have been PEPs. This would include structures such as:

• Government Pension Schemes
• Development Finance Institutions
• Sovereign Wealth Funds

Guidance given now indicates that where the PEP has no economic interest in the structure but is merely in the position due to their political role. Also, in many cases, payments will be received from the structure and paid back to the structure with no payments being made to individuals (including the PEPs) and therefore there is minimal risk in abuse of the structure. The Handbook clearly indicates that this should other than high risk, and furthermore many of these government-related structures will end up being low risk.

4. Simplified Customer Due Diligence

Chapter 9 of the Handbook contains the measures on Simplified Customer Due Diligence. These can be important tools in reducing the amount of due diligence required when the relationship risk assessment is low-risk and the customer meets certain other requirements. Important categories (some of which are particularly applicable for clearing banks) include:

• Bailiwick Residents
• Bailiwick Public Authorities
• Guernsey authorised or registered collective investment schemes
• Financial Services Businesses and Prescribed Businesses in low-risk (Appendix C) countries including natural persons authorised to act in respect of the Business

We would recommend specific document checklists for these categories of relationship.

5. Using Receipt of Funds as Verification of Identity

Here, a firm will still need to obtain identification information (e.g. on an application form), however verification of identity can be satisfactorily covered by ensuring:

• All initial and future funds are received from an Appendix C business
• All initial and future funds are come from an account in the name of the customer or beneficial owner
• Payments are only made to an account in the customer’s name or other limited recipients
• No product changes are made that result in receipts from or payments to third parties
• Cash withdrawals (if allowed) can only be made where the customer or beneficial owner is face-to-face, identifiable and the reason for cash withdrawal is verified

Whilst not particularly useful in banking relationships, this may prove adequate in cases such as collective investment schemes which typically only receive money from or pay to the named customer. For further information see section 9.7 of the Handbook.

Conclusion

Whilst not applicable in every business, there are sufficient “breaks” in the Handbook to make identifying and verifying the identity of certain customers and (where applicable) their beneficial owners far more streamlined. We would recommend looking carefully at the Handbook for these simplification measures and applying them where possible.

Many firms in the United Kingdom do business with Luxembourg on a cross-border basis. Luxembourg is one of the principal “low tax” jurisdictions within the European Union (EU) and consequently the continuation of financial services business between the two jurisdictions is of paramount importance.

To this end, Luxembourg has passed “Brexit Laws”, which make provision for temporary continuation of existing cross-border business from the UK. Under the current assumption that Brexit will happen on 31 October 2019, any notifications to the Commission de Surveillance du Secteur Financier (CSSF – the Luxembourg regulator) to utilise the transitional regime must be made by 15 September 2019. These notifications can be made utilising the CSSF’s eDesk portal.

The CSSF has set the transitional period at 12 months following a hard Brexit.

Included in the transitional regime

Firms providing cross-border services under the following directives may be allowed to participate in the transitional regime:

• Capital Requirements Directive (CRD)
• Markets in Financial Instruments Directive II (MiFID II)
• Payment Services Directive 2 (PSD2)
• Electronic Money Directive (EMD)

Additionally, funds (and their managers) sold cross-border under the following directives may be allowed to participate in the transitional regime:

• Undertakings for Collective Investments in Transferable Securities (UCITS)
• Alternative Investment Funds Managers Directive (AIFMD)

However, it should be noted that participation in the transitional regime is not automatic and will require assessment by the CSSF.

Transitional Regime – Services

Whether a UK firm is allowed to apply the transitional regime follows assessment by the CSSF, as stated above. Following its assessment, the CSSF will inform each UK firm as to whether they can benefit from the transitional regime.

To apply for participation in the transitional regime the UK firm must already be providing the services on a cross-border basis into Luxembourg. Furthermore, the transitional regime will only apply to contracts that have entered into force before Brexit (“existing contracts”) and contracts concluded after Brexit with close links to existing contracts (“closely-related contracts”).

A UK firm that intends to continue providing services into Luxembourg post-Brexit either (1) on an ongoing basis and/or (2) with the intention of forming new contracts should submit an application for authorisation to the CSSF as soon as soon as possible. It should be noted that authorisation can take up to 12 months following receipt of a complete application file.

UK firms not participating in the transitional regime and that have not been granted authorisation must cease all activities in Luxembourg from the date of a hard Brexit.

Transitional Regime – Funds and their Managers

Immediately following a hard Brexit UK funds and UK Managers will no longer have access to the passport regimes under either UCITS or AIFMD. UK funds (whether UCITS or Alternative Investment Fund (AIF)) will become non-EU AIFs and UK Managers will become non-EU Alternative Investment Fund Managers (AIFMs).

All UK funds and managers (UK entities) must notify the CSSF of their intention and the way that they intend to continue to provide services in Luxembourg by 15 September. This initial notification must be followed up with any application for authorisation, notification or other information by 31 October 2019.

The two options for a UK funds will be:

• To give notification that it will be sold to professional investors in Luxembourg under Article 42 of AIFMD (Article 100(2) of the Law of 17 December 2010)
• To apply for authorisation to be sold to retail investors as an individually registered fund under Article 43 of AIFMD (Article 100(1) of the Law of 17 December 2010)

It should be noted that at time of writing there is only one non-EU AIF registered for retail sale in Luxembourg and only four AIFs in total (EU and non-EU) are registered for such retail sale.

On the basis of the information and applications/notifications submitted the CSSF may, on a case-by-case basis, allow funds and/or their managers to continue their activities in Luxembourg on a temporary basis under the transitional regime. The CSSF will inform such funds and their managers within 10 business days of submission of the required information.

Entities that have already submitted an application for authorisation must still submit the Brexit notification.

Still to come

The CSSF is expected to communicate any transitional provisions that may apply to UK investment funds being included in investment portfolios that have restrictions on their non-EU investment holdings. This is expected to allow a regime where, for a temporary period, the UK investment fund holdings may continue to be counted under the “EU” portion of the investment portfolio.

In the event of a hard Brexit, or no agreement being reached on the cross-border selling of investment funds under the EU passport regimes, funds in the UK will have to become non-EU (third country) Alternative Investment Funds (AIFs) under the Alternative Investment Funds Managers Directive (AIFMD). Similarly, UCITS Managers and Alternative Investment Fund Managers (AIFMs) in the UK will become non-EU (third country) AIFMs under AIFMD.

This brief note sets out the key points of the non-EU (third country) retime under AIFMD.

It should be noted that any references to UK AIFMs or UK AIFs could also be applied to AIFMs and AIFs established in Gibraltar. It should be further noted that any reference to the EU can also be extended to Iceland, Liechtenstein and Norway, which whilst not in the EU are part of the European Economic Area and subject to AIFMD.

EU AIFMs selling UK AIFs to professional investors in the EU

This is covered under Article 36 of AIFMD and is one form of the National Private Placement Regime (NPPR).

Article 36 requires that the non-EU fund (AIF) is managed by an EU-based AIFM. There are two main requirements:

• The non-EU AIF cannot be established in a third country that is listed as a Non-Cooperative Country/Territory by the Financial Action Task Force (FATF)
• Appropriate cooperation arrangements must be in place between the EU country where the AIFM is established and the third country where the AIF is established – it is expected that the UK will sign such cooperation arrangements with most EU member states

It should be noted that unlike the AIFMD EU passport (under Article 32) the access to a host EU state for marketing under Article 32 of AIFMD is not automatic and is certainly not harmonised. Each EU member state can put in place their own requirements for registration or notification. There may also be a higher cost to Article 32 registrations than there would be to utilising the AIFMD passport in the same country.

UK AIFMs selling EU or non-EU AIFs to professional investors in the EU

This is covered under Article 42 of AIFMD and is the other form of NPPR.

Article 42 has three main requirements:

• The non-EU AIFM (and where appropriate the non-EU AIF) cannot be established in a third country that is listed as a Non-Cooperative Country/Territory by the Financial Action Task Force (FATF)
• Appropriate cooperation arrangements must be in place between the EU country where the AIFs are to be marketed and the third country where the AIFM (and where applicable the AIF) is established – it is expected that the UK will sign such cooperation arrangements with most EU member states
• The non-EU AIFM must comply with Articles 22 to 24 (and where appropriate Articles 26 to 30) of AIFMD

As noted under the previous section, NPPR is not automatic and not harmonised. Not only can each EU member state put in place their own requirements for registration or notification but some EU member states (such as Latvia, Greece and Italy) have not implemented Article 42 and therefore NPPR under Article 42 is not possible in these jurisdictions.

Sales to semi-professional investors in the EU

Again, sales to high net worth investors, sophisticated investors and other forms of semi-professional investors is not harmonised throughout the EU and each country will have its own method of dealing (or not dealing) with these investors.

Some EU countries (e.g. Netherlands, Denmark, France) allow funds registered for NPPR under Article 36 and Article 42 to be sold to semi-professional investors. Each jurisdiction will set a minimum investment level. In some EU member states there will be a requirement for a separate document or letter to be signed by the investor confirming their status. This is similar to the Financial Conduct Authority Regime for Non-Mainstream Pooled Investors (NMPIs).

Other EU countries (e.g. Austria, Germany, Sweden) may require a separate registration for semi-professional investors that is beyond the requirements for an Article 36 or Article 42 registration.

Some EU countries may not make provision for semi-professional investors. Each country in the EU should be looked at on a case-by-case basis.

Regardless of the method for enabling sale to these investors, it should be noted that a Key Investor Information Document (KIID) will normally be required under the Packaged Retail Investment & Insurance Products (PRIIPs) Directive.

Sales to retail investors in the EU

An area for least harmonisation, only certain EU countries allow for AIFs (whether EU or non-EU) to be sold to retail investors. Where this is permitted it will be subject to the highest level of restrictions and registration.

Article 43 of AIFMD allows for each EU jurisdiction to determine (1) whether they want to allow for AIFs to sell to retail investors in their country and (2) what authorisation/registration requirements are in place for such access.

In cases where retail registration is allowed it should be expected that the forms will be long and invasive and any fee will be dramatically more than similar UCITS registration.

Conclusion

Going forwards any access to the EU for UK fund managers and UK funds will require significantly more work that is currently required. Furthermore, easy access routes may not be found to all EU jurisdictions. The expectation that UK-based fund managers will be more selective in their EU marketing process.

Midshore Consulting specialise in the cross-border distribution of funds, and have extensive experience with non-EU funds. Please contact us for assistance.