Palana: “There Is A Real Market For Streamlining Third-Party Supervision Processes”

Benjamin and Bastien Collette, Partners at Palana (Photo © Silicon Luxembourg)

Faced with a talent gap and ever-increasing and complex regulations, Bastien and Benjamin Collette, Partners at Palana, believe that startups could support wealth and asset managers in their compliance with anti-money laundering rules. 

On November 12, 2018, the European Parliament published new rules to strengthen the fight against money laundering (AML) and terrorist financing (CFT), through the 6th EU Money Laundering Directive (6AMLD).

The package of texts comes with numerous legal and regulatory changes, both at international and national level. Specifically, it lists 22 specific underlying money laundering offenses that all EU member states must criminalize: such as environmental offenses, cybercrime and direct and indirect tax offenses. 

It also extends criminal liability to legal and natural persons (representatives, decision-makers or persons with authority to exercise control) who commit offences for the benefit of their organization.

EU member states and regulated businesses will also need to develop a thorough understanding of the underlying offenses, relevant risk factors and relevant typologies as a first step in implementing the new provisions.

These AML/CFT rules also apply to crypto-currencies: all crypto asset service providers will have to comply with EU rules to prevent the use of crypto-currencies for money laundering purposes.

The directive further allows remote customer identification methods (KYC) and online onboarding in a completely secure and legal manner. The aim is to save time and costs for businesses, while cutting red tape and improving the customer experience. 

Member States had to transpose the directive into national law by December 3, 2020. And the relevant regulations were to be implemented by member state businesses by June 3, 2021. 

The AMLA (AML Authority), the future European supervisory body, is expected to be operational by 2024. Founded in 2021, Palana specializes in consulting and services dedicated exclusively to fund managers and their service providers.

Its two founders Bastien and Benjamin Collette review the main challenges for asset managers and asset servicers, following all these legal and regulatory changes. They also explain how technology and start-ups can help these professionals comply with anti-money laundering rules.

“Luxembourg is ready and the players remain very aware of the fight against money laundering and terrorist financing.”

Benjamin Collette, Partner at Palana

In what context do these new European rules come into play?

They come in a context of numerous legal and regulatory changes, both at the international and national level: amendments to the FATF 40 recommendations, changes at the European level, in particular with the new European AML package soon to be voted, changes at the Luxembourg level: amendments to the AML law of November 11, 2004, to the CSSF regulation 12/02, new CSSF/AED circulars…

These AML changes also concern specific sectors: crypto-assets, real estate, AED guidance for FIARs (RAIF), etc.

The first action is to inform and clarify these upcoming changes, especially to the boards of directors/senior management of companies. They are the ones who set the direction for AML/CTF, who define the risk appetite and the risk-based approach, which their operational teams then put into practice. We also perform gap analysis on the future for our clients, checking the impact of these gaps on their corporate strategy and vision.

Are the Luxembourg players ready?

Luxembourg is ready and the players remain very aware of the fight against money laundering and terrorist financing. The international press has for a long time pointed the finger at the Luxembourg financial centre in this respect, often wrongly or for political reasons. And above all because the authorities regularly inform the supervised entities on these issues.

The market is also ready: we now need to see the exact content of future legal and regulatory changes in order to be able to adopt them quickly. But overall, we are clearly robust in this area, compared to the market practices we observe in Ireland, France or the UK, for example.

What challenges does the wealth and asset management industry face in becoming compliant?

The first challenge is the lack of qualified personnel. The industry is having a hard time recruiting. So we provide our clients with qualified people to help them.

The second problem is technological: market players use certain tools that were put in place a few years ago for transaction monitoring for example, but which no longer correspond to business reality. The types of clients, their business models, their risk profiles have changed and are constantly changing, which means that the scenarios used for monitoring must be continually adapted. 

This requires qualifications, but also a quasi-annual monitoring, to test the scenarios and see if they still correspond to the business model, to the specificities, or to the evolution of the types of operations and risk profiles of the clients.

These scenarios must also be analyzed, while also looking at the behavior of peers (more or less similar clients), and identifying any discrepancies, etc. In order to be compliant, a tailored and continuous control must be carried out, which is a real challenge for the market, especially in the current context of war in Ukraine and international sanctions deployed, unprecedented in size and complexity.

But the tools, for example name screening – a method of searching for information on existing or potential clients of organizations subject to the obligation to combat money laundering and the financing of terrorism – are not always sufficiently parameterized. This leads to numerous alerts (false positives, etc.), and a lot of work for companies to “clear” these alerts.

3rd challenge: the rapid evolution of regulations and regulator expectations. Because texts and market practices are changing, as well as the control of supervisory and regulatory authorities, which is continuously adapting to the practices and complexity of the supervised players.

4th challenge: crypto-assets. There is a lot of talk about them, many conferences address the subject, but today no one has a sufficient understanding to estimate how a KYC-AML approach on these crypto assets could be properly carried out at the legal, regulatory and operational level. 

Another challenge is the monitoring on delegates, mainly in investment funds. The manager must control all the actors involved in the management and distribution of the fund, such as portfolio investments, transfer agents, distributors, etc. This requires increasingly technical supervision, a mass of controls and therefore highly qualified personnel.

“Today, everyone does their own reporting: in Excel, in PowerPoint, via email. Nothing is standardized or efficient.”

Bastien Collette, Partner at Palana

What could be the solution to this talent and technology gap?

There is a market need for name screening in AML. The same is true for the identification and verification of the identity of clients/beneficiaries, for transaction monitoring, for due diligence on assets or delegates, etc. 

These are legally required activities, which protect the industry, and which offer a real competitive advantage when well understood and well done. However, they do not bring any commercial or real advantage on the product itself.

Most of these operations could be pooled, in particular via a supervised player in charge of centralizing all client data, doing data management, cleansing and even reporting around AML/CTF on behalf of the investment fund market. 

The question is whether the market is ready. Everyone will say yes. But are players – especially private banks – ready to share their customer data with their competitors? 

What answers can technologies like blockchain provide?

In terms of blockchain, initiatives exist, particularly in terms of document certification, such as identity cards. Or in terms of document bundles, where the certification concerns both the documents and the investor himself and his profile. But everything is not yet fully developed.

Technologies dedicated to name screening or transaction monitoring exist, but they are empty solutions. We are rather in IKEA mode in this field; the editors provide the tool and the assembly plan. It is up to their customers to set up the filtering rules themselves to identify suspicious cases, the types of transaction scenarios, etc. 

These solution providers could very well offer these applications with configured APIs, created by the market or certified by a control authority.

What role could startups play in supporting wealth and asset managers in their AML/CTF challenges?

Fintechs are active in third-party supervision. But there is a real place and a real market for streamlining the processes of this supervision. Today, everyone does their own reporting: in Excel, in PowerPoint, via email. Nothing is standardized or efficient. So there is a huge opportunity here.

However, nothing will be solved by a system solution alone. The best way to work is through managed services. It combines the technologies and expertise of startups – to find the right technological solution for standardized, approved and commonly accepted reporting – with human skills.

In other words, combining technological efficiency and human know-how, while generating efficient processes and economies of scale for market participants. In terms of AML/CTF, the tool helps the 1st line of defense (operational) and defers to the 2nd line of defense (compliance and therefore human), then to the board. 

But a tool will never replace the human being: it will help to apply the risk-based approach, but it is the human being who will remain in control of the decision and the associated responsibility.

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