Navigating Key Risks and Regulations for Asset Managers and Offshore Funds

The panel began with a discussion on key areas that asset managers should focus on as AML/CFT evolves in Singapore.

Here are the key takeaways for asset managers:

• Staying abreast of emerging trends is crucial for fund managers as it allows them to identify new red flags and learn from each incident, allowing them to ensure that their AML/CFT frameworks are adapted accordingly.
• Senior management should engage the compliance team early on in implementation, such as during investor meetings, where they can help by asking relevant questions. They should also equip their compliance function with appropriate training and resources and develop a solid AML/CFT business culture.
  
• The front office plays a key role in identifying and assessing customer risk due to their position in the customer relationship. Through their interactions, they typically have more detailed customer information. It is important to maintain and share these records within the organization, including the compliance team, to ensure accurate AML/CFT risk assessments.
  
• Potential “red flags” that are often missed when assessing AML/KYC risk include:
  

  • Over-reliance on service providers, e.g. engaging large banks or major fund administrators as external providers
    
  • Highly complex structuring and investments in high-risk jurisdictions, often inappropriate use of Special Purpose Vehicles (SPVs) and trust structures
    
  • Investors cannot support or verify information such as the source of funding
    
  • Multiple citizenships
    

Given the popularity of the Cayman Islands as a domicile for offshore funds, Singapore fund managers should take steps to comply with the Cayman Islands AML regime, in addition to complying with Singapore AML/CFT requirements. The Panel highlighted several common areas that are often overlooked by Singapore asset managers:

• Cayman funds have their own AML/KYC regulatory framework that must be followed, in addition to the AML/KYC obligations of the asset manager in Singapore. For example, the ultimate beneficial ownership threshold is 25% in Singapore, while in the Cayman Islands it is 10%. Asset managers should not ignore the AML/KYC obligations of other jurisdictions. In addition to the sanctions checks conducted against the Singapore and US OFAC sanctions lists, compliance with the Cayman Islands would require conducting sanctions checks against the EU, UK, UN and Cayman Islands sanctions lists.
• In addition to conducting AML/CFT checks on investors, it is crucial to conduct an AML/CFT review of the counterparty when acquiring investments from third parties.
  
• Records must be retained for a minimum of five years; however, it is recommended that they be retained for a minimum of six years to comply with the Cayman Common Reporting Standard.

The panel then discussed other potential risk areas that require oversight and management in light of regulatory/enforcement priorities and trends that should be considered by CROs and compliance functions:

• Business conduct standards to ensure that client interests are at the forefront from product development to launch, and that sound investment processes are subject to appropriate oversight. This is important for asset and wealth management centers in Asia, such as Singapore, which are maturing as investment management and product manufacturing centers.
• Regulators around the world are acutely aware of the growth of private markets in private equity, venture capital and private credit, and the specific risks (e.g. valuation risks) associated with these asset classes.
• Emerging technologies and cybersecurity are high on the agenda of regulators as they seek to support and facilitate technological innovation in the financial sector while addressing associated risks and increasing resilience.
  

Key governance issues from a Cayman Islands perspective include:

• Corporate governance: The board agenda should cover various areas such as monitoring and overseeing delegated functions, ensuring sufficient ability to oversee fund operations, submitting annual conflict of interest declarations and ensuring compliance with Cayman Islands regulations.
  
• FATCA CRS: Avoid obtaining a GIIN for a fund’s SPV unless necessary (e.g. financial institution) to prevent attracting regulatory scrutiny. A FATCA CRS report should be completed annually for funds to avoid significant penalties.
  
• Report on ultimate beneficial owner: Applies to Cayman and BVI regimes. If a registrar requests a renewed passport, it must be provided immediately to avoid penalties.
  
• Data protection: In the event of a data breach, Singapore data protection laws should be taken into account and the Cayman Islands government may be notified.
  
• Economic essence: Every legal entity established or incorporated in the Cayman Islands must file an Economic Substance Notification (ESN) annually as to whether it has carried out any of the specified activities (Relevant Activities). Entities that are within scope (Relevant Entities) and have carried out any Relevant Activities must satisfy the Economic Substance Test (ES Test) in respect of such Relevant Activities.