Breaking Down Barriers – Digital Due Diligence for the Funds Industry
Anti-Money Laundering (AML) is the single biggest issue which delays fund closings. The way in which it is handled often creates a protracted administrative process for investors. This article outlines the benefits of a product designed to make the lives of both investors and fund managers far easier during the subscription process.
Global investors are asked for the same information when subscribing into new funds and then as part of the AML and FATCA processes for each of their investments. This is painful and inefficient for both investors and funds but recent changes in technology and regulation have provided a solution. Welcome to The ID Register.
1. KYC – a broken process for investors…
The law behind subscription documents and AML is open to interpretation so each fund and their administrators have made up their own paper forms. The same questions are asked in different ways which is confusing when small investment teams are investing across multiple funds. AML forms then request certified paper copies of documents by post so that sensitive information is entrusted to the mail followed by the record keeping system of their recipient. Contracting with a lawyer, investing in a trust or a private equity fund or even holding a bank account will often mean completing lengthy forms to prove that you are neither a terrorist (under CDD) nor a tax evader (under FATCA and CRS).
2. …and for the funds in which they invest
On receiving subscription and AML information, funds and their administrators must bear the cost of deciphering handwriting, asking for evidence and transposing data onto systems or, more commonly, a spreadsheet. Unsurprisingly, few wish to jeopardise their client relationships by repeatedly asking for the information to be updated. It is common practice for multiple certified copies of passports and utility bills to be stored in paper and PDF formats across different firms. This makes it difficult for funds in one jurisdiction to correctly identify the true ownership of their corporate clients who may be scattered worldwide and may result in regulatory sanction, fines or reputational damage.
3. The ID Register
The ID Register (www.theidregister.com) allows investors to create a single online profile, connect it to each of the funds into which they invest and keep it updated any time. Each investor owns their profile and controls to whom it is connected. Each investor’s connections are private. Update it once and each of its investments receives the update. Continuously screened against global sanctions and PEP lists, each client profile is also assessed against FATCA and CRS and fully supported by an expert team. Firms are then able to review the live CDD status of all their clients and investors and help fulfil their FATCA classification, registration and reporting obligations paper-free world wide and at any time. Already acting for some of the largest global fund management firms and with over 12,000 due diligence profiles, The ID Register applies technology that most of us use in our personal lives to the practical problems of CDD and CRS for financial firms.
4. Why has this never happened before?
The funds industry is still making, authenticating and reporting investments on dead trees just like we were doing in the 1980s because technology and regulation were insufficient. Regulation has been silent on using technology making it hard for funds to adopt a new solution. Only recently have we all got used to maintaining online profiles in our personal lives and without this modern version of an ‘exchange’ investors and funds have not been able to share information. No single fund manager, administrator or regulator has been able to garner widespread support to host and manage a solution, although many have implemented a similar approach for their own clients. Other financial sectors such as credit funds and clearing houses have supported central registries to make investor’s lives easier while we in the funds industry have been waiting for a credible, central industry solution to emerge.
5. Regulatory support for change
Regulators are recognising these practical problems. The UK Financial Conduct Authority has stated: “In order to enable effective competition and promote innovation, it is important that technologies that help firms better manage regulatory requirements and reduce compliance costs are supported.” The Guernsey and Jersey Financial Services Commissions have also updated their guidance to encourage firms to improve the cost effectiveness of CDD through the adoption of technology.
Technology has also come of age. We are used to sharing our personal profiles over social media, text and numerous mobile apps. Secure data encryption and block chain technology allow these profiles to be stored securely. We all have at least one mobile device and information is no longer confined to the office or to a filing cabinet. The Verify project from Gov.uk, for instance, aims to link UK consumer’s financial records across multiple major institutions in order to allow them to view and switch their investments more easily.
7. FATCA and CRS
Technology has also enabled funds to standardise the information they hold on investors. This is vital in order to comply with the reporting requirements of FATCA and the CRS, which require funds to report standard tax information on each investor to their domestic tax authority. This can’t be done from a spreadsheet. Regulation, technology and a requirement to standardise create the need and the opportunity for a better way of investing into funds.
8. A call to arms
So far, over 130 GPs and 12,000 investors have profiles on The ID Register, a figure that has grown by around 50% over the last six months. Wherever an investor invests and whatever its size, KYC is a time consuming and painful process whose costs ultimately reduce IRR. The ID Register is the new central industry utility that allows investors to create a single FATCA and KYC profile for free, connect it to each of their investments and be prompted to keep it up to date only when required. The ID Register is an industry solution to the problems of lengthy subscription documents, KYC and FATCA/CRS to the benefit of investors, funds and lawyers alike.