Response to consultation on proposed RTS in the context of the EBA’s response to the European Commission’s Call for advice on new AMLA mandates
Question 1: Do you have any comments on the approach proposed by the EBA to assess and classify the risk profile of obliged entities?
INREV
INREV (the European Association for Investors in Non-Listed Real Estate Vehicles)[1] welcomes the opportunity to provide recommendations to reduce compliance burdens for real estate investment managers related to KYC, AML, anti-terrorist financing and sanctions enforcement requirements. In the past five years, those burdens have more than doubled, dramatically increasing the time, cost, complexity and challenge of meeting regulatory compliance obligations.
While we support efforts to ensure rules regarding know-your-client, anti-money laundering, anti-terrorist financing and sanctions enforcement and regulatory reporting across the whole spectrum of financial services are respected, the application of the rules in practice is often highly disproportionate and creates an immense challenge for our industry. This is an area ripe for improvement under the European Commission’s agenda to simplify EU policies and laws, and their implementation which is at the heart of the Commission’s focus on strengthening European competitiveness while upholding high standards and achieving economic, social, and environmental goals.
We therefore hope our recommendations make a constructive contribution to the important initiative to make EU regulations more rational, streamlined and proportionate from our perspective representing global capital investment into real estate investment through funds and other non-listed investment vehicles across Europe.
The sources of the problem
The compliance challenges arise from several different sources. These include: 1) the complexity of the EU rules themselves which makes them difficult to understand and implement; 2) gold-plating of these rules by EU member states; 3) seemingly ad hoc adoption of rules which results in a lack of coherence across the different rules; and 3) the resulting inconsistent requirements among the EU member state National Supervisory Authorities (NSAs).
In some instances, compliance burdens are also misplaced, for example when tax compliance requirements related to anti-tax avoidance reporting obligations, which require specialised tax expertise, are included in legal obligations of the entity’s general compliance officers. This example points to another source of disproportionate rules, as DAC 6 already requires advisors and intermediaries to report suspected cases of tax avoidance and compliance officers are then further obligated to self-certify that no tax avoidance motivations are reflected in fund structures.
Recommendations
- Adopt regulations rather than directives: Rather than adopt directives related to KYC, AML, anti-terrorist financing and sanctions enforcement compliance obligations, we recommend that, wherever possible, these obligations should be adopted though regulation. This makes the rules less susceptible to gold-plating and therefore more consistent across the EU.
Rules should reflect the real risk of activities in scope: We recommend that KYC, AML, anti-terrorist financing and sanctions enforcement rules should take account of, and therefore be tailored to, the real risk posed by the asset class and activities involved. For example, the possibility that a real estate investment fund would own a commercial building and use rental income cash flows to fund terrorism is highly implausible.
The ownership and leasing of commercial real estate by regulated real estate investment funds, whose investors are regulated pension funds, insurance companies or other institutional investors, is extremely low risk and yet they are subject to compliance obligations that are nowhere in line with proportionate to the real risk involved. The compliance obligations imposed on such assets and activities should be proportionate.
- Avoid redundant compliance obligations: In the example above, placing a KYC, AML, anti-terrorist financing and sanctions enforcement compliance burden on the investment managers is an unnecessary duplication of compliance efforts, which itself is per se disproportionate. These rents, as well as the funds transferred on purchase of the buildings, are always paid by bank transfer and the banks themselves have an independent obligation to ensure that the parties transferring the funds are not engaged in prohibited money laundering or terrorist financing activities and are not on sanctions lists. Therefore, placing a compliance burden on the investment managers as well is a classic example of ‘belts and suspenders’ regulatory duplication. We recommend that these overlapping and redundant compliance burdens be eliminated.
Adopt thresholds for anti-money laundering and sanctions compliance obligations: A major challenge for our industry concerns the immense burden that real estate investment funds shoulder as a result of the obligation to carry out anti-money laundering, anti-terrorist financing and sanctions checks on every single tenant in all their properties. For a residential fund, for example, this obligation can run into thousands of checks on tenants, even though many of them only pay a relatively very small amount of rent each month or quarter.
We recommend that reasonable thresholds be enacted that would limit the requirement to carry out real estate tenant KYC checks to tenants that pay a commercially significant amount of rent and charges, for example, more than one million euro per year.
Investment Management Group compliance plans: In anti-money laundering and sanctions compliance reporting, some member states require that every investment fund is obligated to submit its plan for ensuring appropriate compliance to the National Supervisory Authorities. This is true even though those funds may be part of an investment management group that has a group compliance policy and therefore all its funds must submit essentially identical compliance plans, which are then also subject to separate audit.
We recommend that guidance be issued confirming that investment management groups with established group compliance policies should be permitted to submit their group-wide compliance plans to National Supervisory Authorities on behalf of the funds and other investment vehicles they manage. This would ensure a more efficient and coherent approach to demonstrating compliance across entities operating under the same governance framework.
Making Europe a competitive environment for business
Europe is struggling with a loss of competitiveness with other major markets. The current regulatory environment acts as a distinct disincentive to invest here, and that issue needs to be addressed. The Commission’s conclusions regarding how to meet this challenge are correct: overly complex, costly and incoherent regulation must be eliminated. The Commission aims to streamline rules and reduce the administrative burdens for businesses by 25%, and by 35% for SMEs by the end of this mandate. The 25% reduction target will translate to €37.5 billion savings for businesses.
We hope our recommendations make a constructive contribution to the important initiative to make EU regulations more rational, streamlined and proportionate. We believe they would make a significant contribution to reducing costly, time consuming and redundant compliance burdens for real estate investment managers and urge their serious consideration.
We welcome further engagement on these matters and offer the expertise of our members and working groups to assist in achieving the Commission’s goals.
[1] INREV is the European Association for Investors in Non-Listed Real Estate Vehicles. We provide guidance, research and information related to the development and harmonisation of professional standards, reporting guidelines and corporate governance within the non-listed property funds industry across Europe.
INREV currently has more than 500 members. Our member base includes institutional investors from around the globe including pension funds, insurance companies and sovereign wealth funds that provide critical income security for more than 172 million people, as well as investment banks, fund managers, fund-of-funds managers and advisors representing all facets of investing in non-listed real estate vehicles in the UK and the rest of Europe. Our fund manager members manage more than 500 non-listed real estate investment funds, as well as joint ventures, club deals and separate accounts for institutional investors.
Question 2: Do you agree with the proposed relationship between inherent risk and residual risk, whereby residual risk can be lower, but never be higher, than inherent risk? Would you favour another approach instead, whereby the obliged entity’s residual risk score can be worse than its inherent risk score? If so, please set out your rationale and provide evidence of the impact the EBA’s proposal would have.
Please see our response to Question 1
3a: What will be the impact, in terms of cost, for credit and financial institutions to provide this new set of data in the short, medium and long term?
Please see our response to Question 1
Question 7: What are the specific sectors or financial products or services which, because they are associated with lower ML/TF risks, should benefit from specific sectoral simplified due diligence measures to be explicitly spelled out under Section 4 of the daft RTS? Please explain your rationale and provide evidence.
Please see our response to Question 1
Question 1: Do you any have comments or suggestions regarding the proposed list of indicators to classify the level of gravity of breaches sets out in Article 1 of the draft RTS? If so, please explain your reasoning.
Please see our response to Question 1