European Hedge Fund Managers Must Incorporate New Guidelines on Risk Factors into Due Diligence Processes

The E.U. Directive to prevent money laundering and terrorist financing via the financial system (AML Directive) became effective on June 26, 2015.  It seeks to bring Europe into alignment with the 2012 International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation (Standards).  Following the Standards, the AML Directive puts the onus on Member States, competent authorities and in-scope firms – including hedge fund and other investment managers – to assess and manage anti-money laundering risks and implement appropriate counter-terrorist financing measures.  Consequently, European hedge fund managers will be required to determine the extent of their customer due diligence (CDD) measures on a risk-sensitive basis, applying simplified CDD for low-risk relationships but enhanced CDD for higher-risk relationships.  To help firms identify, assess and manage money laundering and terrorist financing risk – as well as help national competent authorities measure the adequacy of such firms’ actions – the European Supervisory Authorities jointly issued draft risk factor Guidelines for risk assessments, outlining how firms may adjust their CDD commensurate with identified risks.  This article summarizes those sections of the Guidelines applicable to hedge fund managers; outlines the impact of the Guidelines on hedge fund managers; and sets out the timeframe for implementation and compliance.  For more on anti-money laundering, see “Do Hedge Funds Really Pose a Money Laundering Threat? A Decade of Regulatory False Starts Raises Questions,” Hedge Fund Law Report, Vol. 5, No. 7 (Feb. 16, 2012); and “FinCEN Working on a Proposed Rule That Would Require Investment Advisers to Establish Anti-Money Laundering Programs and Report Suspicious Activity,” Hedge Fund Law Report, Vol. 5, No. 4 (Jan. 26, 2012).

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