Due Diligence of delegates – A Burden?
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Due diligence of delegates – when the burden of reporting turns into a valuable business tool.

In August 2018, Luxembourg’s financial regulator tightened the substance, reporting and compliance rules for funds domiciled in the grand duchy. While the new rules are a welcome clarification of the industry’s requirements, they make due diligence on providers of delegated functions a more time-consuming and complicated process.

CSSF circular 18/698 incorporates a great deal of detail on the enhanced requirements for the fund industry. For example, it sets out additional responsibilities of fund board members and management companies’ conducting officers to ensure that investors’ money is safe.

The circular also tightens measures designed to curb money laundering and the financing of terrorism, harmonising the rules for all UCITS and alternative investment funds and their registrars. They must ensure that investors and the intermediaries that market and distribute their funds are capable of demonstrating the legitimacy of assets. Each fund must file a comprehensive annual AML report, and structure its regular reporting to meet the many permutations of distributor and investor relationships that an investment vehicle can entail.

Complex task

For self-managed funds or management companies with limited resources or without the IT systems to comply cost-effectively, the reporting can be outsourced to a specialist, but not responsibility for its accuracy.

Conducting checks on a fund’s shareholders and service providers is a complex task already. Even if they have nothing to hide, persuading them to respond with full and accurate information can be a wearying struggle. E-mails are overlooked and questionnaires ignored, leading to significant gaps in the data. Even where data is provided, formats may not match, complicating the task for anyone filing a consolidated report or completing a spreadsheet.

What’s more, every AML check must be supported by documentary proof. In addition to compiling an initial, more robust reporting document, keeping it up to date and compliant means constant checking that documents are still valid.

The dangers of box-ticking

Not surprisingly, overworked compliance officers are liable to spend more time simply collating data, at the expense of analysing it for errors or anomalies that need action or flagging to the regulator. In other words, ticking boxes may take priority over monitoring for risks.

It should not be that way. While collecting information is a pure cost to the business, rigorous monitoring can add significant value. Many of the well-publicised money laundering cases affecting banks have highlighted monitoring failures, resulting in serious consequences for the institutions in question – including substantial financial penalties, severe reputational damage, and, in some cases, banks being shut down.

One of the factors driving Luxembourg’s success as a global domicile and servicing centre for investment funds is its flexibility in permitting vital functions to be contracted out to specialist providers that can offer the benefits of shared expertise and scale. Given the growing requirements now placed on fund managers with multiple investor and distributor bases, reporting systems – whether in-house or outsourced – must have the flexibility to focus effectively on assessing risk rather that just compiling reports.

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