What Is Anti-Money Laundering?

In simple terms, Anti-Money Laundering or AML is the range of regulations and procedures that have been designed to prevent money laundering, which begs the question What is Money Laundering

Money Laundering is the description given to any procedure used to convert cash, or any other assets, for that matter, that has been obtained as proceeds of any criminal activity, so that those assets are changed into what appears to be legitimate assets, which have been obtained in a legitimate fashion.

The sophistication of both Money Laundering and Anti-Money Laundering techniques have changed dramatically since Elliott Ness nailed Al Capone for tax evasion and the American crime syndicates established their trucking in olive oil businesses.

To a large extent, the increasing success of Anti-Money Laundering has been helped at the grass roots level by the growth in credit cards and the increasingly cashless society we now live in.

But it also has to be said that the regulations and the policing of those regulations are, today, very much more strictly enforced than was the case even five years ago.  This has been exacerbated by the quite understandable reaction in the US to 9/11, which resulted in the USA PATRIOT Act.  But it would be a mistake to assume that the regulatory pressure on Anti-Money Laundering compliance was triggered by 9/11, except perhaps in the United States itself.

The role and influence of the OECD and the Financial Action Task Force (FATF) should also be recognised in this area.  Although some feel, probably justifiably, that there hasnt been a level playing field and concentrated their guns on the relatively easy and vulnerable targets of the offshore financial centres without taking the same aggressive stance with regard to some of the larger industrialised countries.

Be that as it may, as all of us here know, the regulations are now quite draconian and carry serious criminal penal sanctions.

In the context of the investment industry and, specifically, for the purposes of todays meeting, the hedge fund industry, Anti-Money Laundering procedures that are followed, or should be followed, are, to a great extent, based on three core requirements.


-          Firstly, client verification procedures  what is known as Know Your Client or KYC; and

-          Secondly, identifying and knowing the source of the money that is being invested and confirming that it is bona fide; and

-          Thirdly, and, in my opinion, this is, perhaps, the most important procedure that needs to be followed, ensuring that the proceeds of any investment made into a hedge fund, are, when redeemed or liquidated, repaid into the original remitting bank account or, at least, into a bank account in the name of the investor, providing that account is held at a reputable bank, based in an approved and reputable jurisdiction.

In my own experience, Client Verification Procedures have been in place, certainly in the United Kingdom and Ireland, for many years now.  The requirements at that time were to have a file containing a certified or notarised copy of each clients passport or some other photo ID, together with some proof of residence  usually provided in the form of a certified or notarised copy of a utility bill.

Today, Client Verification or KYC information is very much more comprehensive than it used to be but, in essence, it is relatively simple.  The difficultly sometimes is getting that information and one of the things that the investment industry has to devote some time and effort to is, in my opinion, educating investors so that they realise they have to do this in order to invest in any respectable investment, wherever they may live or wherever that investment may be established or domiciled.

It should become second nature, like showing your passport at the airport, or passing through the scanning machine.

Other information that may be required of individual investors include, inter alia, details with regard to the bank account out of which their investment is being made, their nationality and, in some cases, confirmation of their employment status.

If the investor is a corporation, then it is necessary to find out the basic information about the company  you must get a Certificate of Incorporation and a Certificate of Good Standing; a copy of the Memorandum and Articles of Association; a Board Minute confirming they are allowed to make the investment; details of the Directors and shareholders, with more than 10% of the assets.  Furthermore, with regard to those individuals  the Directors and the substantive shareholders  the same personal information will be required, as Ive already described, for a direct individual investor.

If one of the shareholders is a corporation and that corporation owns more than 25% of the investor, then it will be necessary to drill down and obtain the same corporate and individual information about that company and its shareholders and Directors.

Similar information would be required with regard to the General Partner, or directors, or any authorised signatory for a partnership or any other unincorporated business.

With Trusts, we need information on the trustee, and would also need to see the Letter of Wishes and have details of the beneficiaries, as specified.  If the beneficiary is not specified, then that may be a good reason for not accepting the trust as an investor, because the redemption proceeds, once paid to the trust, could then be redistributed to anyone that that the trustee deems appropriate and that is, of course, open to abuse in the context of Anti-Money Laundering.

One the basic tenets of regulation and, particularly, Anti-Money Laundering, has been to avoid duplication of work, providing any steps taken to avoid that duplication do not weaken the process.  This leads to the concept of the Designated Body.  A Designated Body is, in simple terms and in the context of Anti-Money Laundering, a financial institution that is regulated by an appropriate regulator in an appropriate jurisdiction and meets certain regulatory standards regarding anti-money laundering procedures in accordance with your own local regulations.

It would be sufficient to accept a confirmation from such a Designated Body that they have carried out their own Anti-Money Laundering Due Diligence procedures and that they have all the information about a particular investor on file.  Under the Irish regulations, under which I operate, there is a further requirement that the Designated Body not only has to confirm they do this, by way of a Letter of Comfort, but they also have to confirm, in that letter, that those files will be made available to my company or to a court, under a court order, or to a competent regulator, if required.

I said earlier that I thought that the most important procedure with regard to the prevention of money laundering within the hedge fund industry, is the requirement that any proceeds of the redemption or liquidation of an investment should be repaid to the original remitting bank.  I say this because there is no way that the money can be laundered if it comes out of one bank and goes back into the same bank account.  This does, of course, assume that the bank is a Designated Body and is not only doing its own anti-money laundering due diligence effectively, but also ensures that any monies that it is holding for that investor are not subsequently paid out to the account of some unknown third party at The First Caribbean Detergent Bank.

In essence, fulfilling Anti-Money Laundering procedures and carrying out the Anti-Money Laundering Due Diligence checks are relatively simple  it is a matter of maintaining checklists and complying with procedures and having rigid controls, which is, essentially, a matter of staff education and discipline.