Investment firms are struggling with Anti-Money Laundering and Know-Your-Customer requirements, with one fund manager saying his AML/KYC team can’t grow fast enough. The push towards retailisation of private markets is only going to increase the stress.
That some 86,000 investor accounts in Luxembourg are frozen, as underlined by supervisor CSSF last week, also reflects the stress in the sector. Outsourcing and technology are being looked at to keep the workload manageable. Companies are aware of their difficulty in hiring and retaining the necessary staff, Wednesday’s debate at Alfi’s private assets conference made clear.
Derek Russell, a funds director at JTC, a Jersey-based fund administration provider, pointed out that even without the arrival of Eltif and measures to promote retail investment, he’s seeing more and more smaller ticket investors being closed into his firms’ funds. “I can understand it in a difficult fundraising environment, why that would be, why asset managers would chase those smaller tickets,” he said. “You can build up a fair commitment size through a number of ways.”
Russell pointed out that even with only slight increases in investor numbers, his AML/KYC team struggles, describing a situation where “80-100 private investors come into a fund all at once,” with a board meeting scheduled for the closing. “It’s a bit of a struggle for us. Obviously, my AML/KYC team can’t grow fast enough to keep up with demand.”
Bank account woes
Similar issues have gummed up the works at Luxembourg’s banks, with talk going around that it’s become difficult to open a bank account in Luxembourg. Camille Seilles, secretary general and member of the ABBL management board, conceded that the regulatory drivers of his members’ workload “have been a little bit more burdensome,” adding that this is “something the industry needs to take seriously.”
Seilles said that aspects of KYC requirements at the level of intermediary companies in holding chains involved “supervisory expectations were perhaps a bit more prescriptive than other jurisdictions.”
AI can be used under the EU framework, Seilles explained, for sanctions screening, “as a first pair of eyes.” At the same time, ABBL is engaging with the government on the timing of onsite visits for banks.
Freeing up resources
“I believe that these are all first steps which will hopefully free up resources currently absorbed by data and document chasing,” he said.
He pointed to Luxembourg’s “broad and deep ecosystem” in developing “mutualised solutions.” He pointed to the iHub due diligence process outsourcing service. He said this was providing member banks with their KYC repository, but could potentially be broadened to offer a fully-fledged diligence facility going beyond member banks. Possibly, it could also allow an investor to launch their fund with iHub or another platform.
Fintech to the rescue
During the period when banks were having problems with onboarding, fintech banks were on hand to fill the gap. Alan Dundon of L3A, the Luxembourg alternative administrators’ association and president of Alter Domus, explained that fintech banks can’t solve problems for regulated funds, but they can certainly do so for SPVs.
Dundon explained yet another element of the Luxembourg ecosystem, the Future Foundation mutualization initiative. “The purpose of that is to find better ways to exchange documents and information across the different players in the financial industry.”
The project’s steering committee includes L3A, Alfi, the ABBL and the CSSF as observers. It is expected to develop a secure platform for exchanging documents. The project is supposed to be finalised in 2024.
Bigger, fewer funds
The rising number of new investors will also continue the trend towards bigger funds, bigger fundraising and funds with more complexity, Dundon explained. This will lead to consolidation, a process which is already underway.
Yulia Martin, conducting officer and head of client and portfolio services with Ocorian Fund Management discussed the role of having a “harmonised tech stack.”
“We’re not a global organisation, you have to work with people across jurisdictions. And when you work off the same tech stack, it’s very easy to do that,” she said. This she explained, allows you to collaborate in a very efficient way. It also applies to digitalising onboarding.
Tech stacks
She explained that Ocorian is looking at where investors load their data onto a platform, where the system reviews the documents first. “Then there’s the people review that comes behind, and the investor gets a status update” on their documents.
Other solutions to the workload issue and getting the necessary staff will involve offshoring, which Dundon said Marco Zwick of the CSSF had discussed.
Leveraging technology will also be part of the solution. Whether it’s about process optimisation or even incorporating artificial intelligence.
“We’re going to need to do all this to be able to handle the sort of volumes” that Dundon had predicted.