Response to consultation on Guidelines on risk factors and simplified and enhanced customer due diligence
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Nonetheless, we would like to highlight some concerns and give few suggestions:
• Title II – Assessing and managing risk – general part
o Risk Assessment: methodology and risk factors - Identifying ML/TF risk
Sources of information
(Paragraph 16) Among the “Other sources of information firms may consider” the ESAs list “information from media sources, such as newspaper reports”.
Although we understand that this list of sources is not mandatory and that firms are not required to consider media and newspapers as a primary source of information to identify the ML/TF risk, we believe that the reference to media sources and newspapers should be avoided. First of all because of the wide range of sources included in this definition and the potentially unlimited information that could derive from it. Secondly because of the potential lack of reliability of this information. Therefore, media sources, such as newspaper reports, should not be considered as a source that firms systematically use for their AML/CFT checks.
Risk factors - Countries and geographic area
(Paragraph 23) Although Directive (EU) 2015/849 does not recognize the “equivalence” of third Countries and European Member States’ list of equivalent jurisdictions is no longer being maintained, we wish to point out that the equivalence principle and the lists of equivalent jurisdiction constituted an important guide for firms applying AML/CFT measures in the past years. Therefore, we suggest ESAs to encourage the issuance of guidelines on this matter, preferably by national associations representing the different types of business involved, aiming to promote a uniform and consistent identification of lower risk jurisdiction.
o Risk management: simplified and enhanced customer due diligence
We note that “large transactions” and the breach of specific “threshold” are frequently labelled as factors indicating a higher risk. In this regard, we note that linking the application of EDD measures to unclear definitions as the scale of the transactions and more generally setting transaction thresholds to identify ML/TF risk could be inefficient.
• Chapter 5: sectoral guidelines for wealth management
o Risk factors – distribution channel risk factors
(Paragraph 145) We believe the use of financial institutions not being part of the same group of the firm to distribute products or services should not be regarded as a factor indicating a higher risk.
• Chapter 8: sectoral guidelines for investment managers
o Risk factors
(Paragraph 193) The reference to “unusually large transaction” as a factor of higher risk should be avoided or at least limited to circumstances when the scale of the transaction is unexpected or not coherent with the customer’s declarations.
(Paragraph 194) Among the factors indicating a higher risk in relation to the customer’s nature, we propose to delete the reference to “otherwise influential individual” since there is no definition and it could include an extremely wide range of relevant characteristics indicating a high-risk customer.
• Chapter 9 – sectoral guidelines for providers of investment funds
(Paragraph 200-202) The introduction to the sectoral guidelines for providers of investment funds, describes the parties involved in the provision of this kind of product and highlights the characteristics affecting the ML/TF risk associated to them. Nonetheless, we deem that some features typifying the investment funds are not being correctly pointed out.
First of all, it should be noted that investment funds are primarily distributed through financial intermediaries: the proposition stating “retail funds are often conducted on a non-face to face basis” is therefore misleading.
Secondly, the transfer of holdings is often subject to restrictions and in some Countries even forbidden (e.g. in Italy): the sentence “holdings of investment funds can easily be transferred between different parties” should be deleted.
Lastly, not all investment funds are designed to respond to medium/long term investment strategies: open-ended investment funds can be used as a short-term investment.
o Measures – Enhanced customer due diligence
(Paragraph 210) Among the measures firms should apply in a high-risk situation, no reference should be made to “anti-impersonation fraud checks”: this kind of measures fall within the competence of the IT department of a firm and it should not be classified as an AML/CFT safeguard.
Moreover, according to RBA approach, when the pension fund is the subscriber of an investment fund, the firms shouldn’t have to identify and verify the identity of the pension fund’s participants, even when the pension fund is established in third Countries.
o Measures - Intermediaries
(Paragraph 212) Whenever a firm uses a financial intermediary to distribute fund shares, and the conditions to apply the SDD are met, the firm should not be required to identify and verify the identity of the intermediary’s customer.
In the above-mentioned situation, SDD measures should be limited to identifying and verifying the identity of the intermediary, given that the firm has verified that the intermediary applies robust and risk-sensitive CDD to their customers and their customers’ beneficial owners.
Moreover, the supervisory activity should be focused on the application of the RBA and encourage an efficient allocation of resources to areas where the ML/TF risk is real and relevant.
a) Do you consider that these guidelines are conducive to firms adopting risk-based, proportionate and effective AML/CFT policies and procedures in line with the requirements set out in Directive (EU) 2015/849?
We share the ESA’s approach in designing these guidelines as a useful guidance for intermediaries and firms subject to AML/CFT requirements.Nonetheless, we would like to highlight some concerns and give few suggestions:
• Title II – Assessing and managing risk – general part
o Risk Assessment: methodology and risk factors - Identifying ML/TF risk
Sources of information
(Paragraph 16) Among the “Other sources of information firms may consider” the ESAs list “information from media sources, such as newspaper reports”.
Although we understand that this list of sources is not mandatory and that firms are not required to consider media and newspapers as a primary source of information to identify the ML/TF risk, we believe that the reference to media sources and newspapers should be avoided. First of all because of the wide range of sources included in this definition and the potentially unlimited information that could derive from it. Secondly because of the potential lack of reliability of this information. Therefore, media sources, such as newspaper reports, should not be considered as a source that firms systematically use for their AML/CFT checks.
Risk factors - Countries and geographic area
(Paragraph 23) Although Directive (EU) 2015/849 does not recognize the “equivalence” of third Countries and European Member States’ list of equivalent jurisdictions is no longer being maintained, we wish to point out that the equivalence principle and the lists of equivalent jurisdiction constituted an important guide for firms applying AML/CFT measures in the past years. Therefore, we suggest ESAs to encourage the issuance of guidelines on this matter, preferably by national associations representing the different types of business involved, aiming to promote a uniform and consistent identification of lower risk jurisdiction.
o Risk management: simplified and enhanced customer due diligence
We note that “large transactions” and the breach of specific “threshold” are frequently labelled as factors indicating a higher risk. In this regard, we note that linking the application of EDD measures to unclear definitions as the scale of the transactions and more generally setting transaction thresholds to identify ML/TF risk could be inefficient.
• Chapter 5: sectoral guidelines for wealth management
o Risk factors – distribution channel risk factors
(Paragraph 145) We believe the use of financial institutions not being part of the same group of the firm to distribute products or services should not be regarded as a factor indicating a higher risk.
• Chapter 8: sectoral guidelines for investment managers
o Risk factors
(Paragraph 193) The reference to “unusually large transaction” as a factor of higher risk should be avoided or at least limited to circumstances when the scale of the transaction is unexpected or not coherent with the customer’s declarations.
(Paragraph 194) Among the factors indicating a higher risk in relation to the customer’s nature, we propose to delete the reference to “otherwise influential individual” since there is no definition and it could include an extremely wide range of relevant characteristics indicating a high-risk customer.
• Chapter 9 – sectoral guidelines for providers of investment funds
(Paragraph 200-202) The introduction to the sectoral guidelines for providers of investment funds, describes the parties involved in the provision of this kind of product and highlights the characteristics affecting the ML/TF risk associated to them. Nonetheless, we deem that some features typifying the investment funds are not being correctly pointed out.
First of all, it should be noted that investment funds are primarily distributed through financial intermediaries: the proposition stating “retail funds are often conducted on a non-face to face basis” is therefore misleading.
Secondly, the transfer of holdings is often subject to restrictions and in some Countries even forbidden (e.g. in Italy): the sentence “holdings of investment funds can easily be transferred between different parties” should be deleted.
Lastly, not all investment funds are designed to respond to medium/long term investment strategies: open-ended investment funds can be used as a short-term investment.
o Measures – Enhanced customer due diligence
(Paragraph 210) Among the measures firms should apply in a high-risk situation, no reference should be made to “anti-impersonation fraud checks”: this kind of measures fall within the competence of the IT department of a firm and it should not be classified as an AML/CFT safeguard.
Moreover, according to RBA approach, when the pension fund is the subscriber of an investment fund, the firms shouldn’t have to identify and verify the identity of the pension fund’s participants, even when the pension fund is established in third Countries.
o Measures - Intermediaries
(Paragraph 212) Whenever a firm uses a financial intermediary to distribute fund shares, and the conditions to apply the SDD are met, the firm should not be required to identify and verify the identity of the intermediary’s customer.
In the above-mentioned situation, SDD measures should be limited to identifying and verifying the identity of the intermediary, given that the firm has verified that the intermediary applies robust and risk-sensitive CDD to their customers and their customers’ beneficial owners.
b) Do you consider that these guidelines are conducive to competent authorities effectively monitoring firms’ compliance with applicable AML/CFT requirements in relation to individual risk assessments and the application of both simplified and enhanced customer due diligence measures?
We fully agree with the setting-out of these draft guidelines, aiming to apply the RBA in a consistent way. Nonetheless, we deem there should be a strong commitment of the ESAs in promoting the adoption of a holistic approach to the risk factors when evaluating the AML/CFT measures put in place by intermediaries.Moreover, the supervisory activity should be focused on the application of the RBA and encourage an efficient allocation of resources to areas where the ML/TF risk is real and relevant.