Monetary Authority of Singapore (“MAS”) publishes circular on enhancing Anti-Money Laundering (“AML”) and Countering the Financing of Terrorism (“CFT”) controls in the variable capital company (“VCC”) sector

21 November 2022|In Legal Updates

On 13 September 2022, MAS published a circular on enhancing AML and CFT controls in the VCC sector to ensure that VCCs are used for legitimate purposes.

What is a VCC?

A VCC is a corporate entity structure under which several collective investment schemes may be grouped under the umbrella of a single corporate entity and yet remain ring-fenced from each other. To learn more about VCCs, please read our VCC series here.

Under MAS Notice VCC-N01 (the “Notice”), VCCs are required to appoint an eligible financial institution (“EFI”) that is regulated and supervised by MAS to conduct the necessary AML/CFT checks and measures.

MAS’ key observations and supervisory expectations for effective AML/CFT frameworks and controls

Insufficient oversight by VCCs of appointed EFIs

MAS noted that some VCCs failed to indicate that they had appointed an EFI despite it being a Notice requirement. Further, some VCCs failed to put in place arrangements to oversee the ongoing implementation of AML/CFT controls by their EFIs, including (a) the lack of an agreed escalation process between the EFI and the VCC to ensure that pertinent issues were escalated in a timely manner; (b) the failure to specify sufficient details in its AML/CFT policies and procedures (“P&Ps”); and (c) the lack of the requirement for proper documentation of escalation of issues detected by EFIs.

MAS highlighted that VCCs remain ultimately responsible for fulfilling their AML/CFT obligations and need to exercise adequate oversight over their relationship with EFIs, which includes conducting adequate due diligence over EFIs and formally appointing them before the commencement of business operations and activities by VCCs. Additionally, VCCs should ensure that AML/CFT P&Ps implemented by EFIs are appropriate and subjected to the approval of the directors of the VCCs.

Inadequate customer ML/TF risk assessment frameworks and processes

VCCs need to conduct robust customer risk assessments to properly identify, understand and assess the ML/TF risks of their customers to apply the appropriate customer due diligence (“CDD”) and ongoing monitoring measures. However, MAS observed the following key control lapses:

  1. lack of a robust framework for assessing customers’ ML/TF risks where there was no guidance on ML/TF risk factors that should be considered in practice and how the ML/TF risk profile of customers would be determined. For example, the lack of a clear definition of complex ownership structures and guidance on how their risks should be assessed;
  2. failure to consider relevant risk factors in assessing country or geographic risks: failure to consider other country risk factors (beyond countries identified by the Financial Action Task Force to have weak measures to combat ML/TF risks) such as corruption, tax evasion, and terrorism financing; and
  3. inadequate documentation of customer risk assessments which reflected a lack of attention to record-keeping that a proper risk assessment had been conducted as the due basis and trigger of needful risk mitigation measures.

Failure to implement enhanced customer due diligence (“ECDD”) measures

VCCs should perform ECDD measures on all customers who are identified to pose higher ML/TF risks so as to mitigate and manage those risks. ECDD measures include conducting corroboration of their customers’ source of wealth and source of funds for higher-risk customers, including politically exposed persons. P&Ps for the conduct of ongoing monitoring and ECDD should be in place to ensure that appropriate and timely risk-mitigating measures are taken should any customer’s risk become elevated.

IMPORTANT NOTICE: This memorandum is only intended as a guide and does not purport to be an exhaustive or conclusive discussion of the matters set out herein and should not be relied on as a substitute for definitive legal advice. Reference should always be made to the applicable statutes, the relevant subsidiary legislations and other applicable guidelines. This memorandum is not to be transmitted to any other person nor is it to be relied upon by any other person or for any other purpose or quoted or referred to in any public document or filed with any governmental or other authorities without our consent in writing. This memorandum is limited to the laws of Singapore. In issuing this memorandum, we do not assume any obligation to notify or inform you of any developments subsequent to its date that might render its contents untrue or inaccurate in whole or in part at such later time. If you would like to discuss the implications of these legal developments on your business or obtain advice, please do not hesitate to approach your usual contact at Insights Law LLC or you may direct the inquiry to our key contacts stated above.