Supervisory Overview: Managers of Investment Undertakings under the Wwft and Sw

Supervisory Overview: Managers of Investment Undertakings Regarding the Wwft and Sw Read more

2 Contents Summary 3 01 Introduction 4 02 General Overview 5 2.1 Assets in High-Risk Countries and Sectors with Increased Risk 5 2.2 Investors 6 03 Risk Assessment and Policy 7 04 Client Due Diligence 9 4.1 Client Risk 9 4.2 Outsourcing 9 05 Transaction Monitoring and Reporting Obligation 10 5.1 Reporting Unusual Transactions 10 5.2 Tools for Transaction Monitoring 10 06 Sanctions Legislation 11 07 Training 12 Appendix A - High-Risk Countries 13 Appendix B - Activity Categories with Increased Risk 15 Contents

Summary 3 The Dutch Authority for the Financial Markets (AFM) periodically sends a questionnaire to managers of investment undertakings (managers) to gain insight into the extent to which they comply with the Act on the Prevention of Money Laundering and Financing of Terrorism (Wwft) and the Sanctions Act 1977 (Sw). The AFM sent the Wwft and Sw questionnaire to managers for the fourth time in 2022. This questionnaire relates to 2021. This report is based on the results of this inquiry and is a follow-up to the report 'Gatekeepers Portrayed' from 2021. No questionnaire was sent to managers in 2021. Managers must ensure that the investment undertakings or collective investment undertakings in securities (UCITS) they manage comply with the provisions of the Wwft and Sw. For readability, this document uses the term 'manager' when referring to which party complies with certain provisions of the Wwft and Sw. Based on the Wwft and Sw questionnaires, the AFM concludes that compliance with the Wwft and Sw by managers has improved in recent years in important areas, such as risk assessment and policy, reporting of unusual transactions, and training. In 2022, 703 managers completed the inquiry. 1 The AFM considers investment undertakings to include both alternative investment fund managers (AIFMs) and undertakings for collective investment in transferable securities (UCITS). The periodic questionnaire is also sent to Dutch branches of managers of investment undertakings. 2 Due to the transition to a different data provider, no questionnaire was sent to managers in 2021. The inquiry yielded several specific insights for 2021. The most important of these are: • The total managed assets increased from €954 billion to €1.120 billion. • The number of managers with an AIFM registration has increased significantly. • The vast majority of managers take measures to identify and assess the money laundering risks for their investment undertaking(s) and have policies to counter risks of money laundering and terrorist financing. (+) • The number of reports of unusual transactions has increased. (+) Some parts of transaction monitoring still do not appear adequate. (-) • A large part of the employees of managers follow Wwft and Sw training. (+) For policy makers, less than half do this. (-) • A significant part of managers does not screen against all three relevant sanctions lists. (-) Only 11% of managers generate alerts with their transaction monitoring. However, both the number of alerts and reports of unusual transactions have increased significantly. Managers can apply various tools to further improve the monitoring of unusual transactions. A manager must screen its relationships against the National Terrorism Sanctions List, the EU Sanctions List, and the UN Sanctions List. Although the use of the latter two lists has increased among managers compared to last year, this is not the case for the use of the National Terrorism Sanctions List. 68% of managers state that they screen relationships against all three relevant sanctions lists. Given the attention in 2022 for sanctions against Russia, it is expected that the use of these lists increased further that year. Summary

4 The response rate to the 2022 inquiry was 95%. The AFM issued a warning to non-responsive managers and saw no need for further enforcement, such as imposing an administrative fine. Below is an analysis of the answers given to the Wwft and Sw inquiry. This feedback to the sector provides insight into where managers stand regarding their gatekeeper function and thereby provides direction for further improvement of the functioning of the financial markets. The Financial Supervision Act (Wft) provides two separate regimes for managers of investment undertakings (managers): a regime based on the AIFM Directive for managers of alternative investment funds and a regime based on the UCITS Directives for managers of undertakings for collective investment in transferable securities (UCITS). For both regimes, the Dutch Authority for the Financial Markets (AFM) is responsible for ongoing supervision. Licensed managers of investment undertakings must comply with the Wft, and additionally, both licensed and registered managers of investment undertakings fall under the Act on the Prevention of Money Laundering and Financing of Terrorism (Wwft) and the Sanctions Act 1977 (Sw). Managers must ensure that the investment undertakings or UCITS they manage comply with the provisions of the Wwft. For readability, this document uses the term 'manager' briefly when referring to which party complies with certain provisions of the Wwft and Sw. To gain insight into the extent to which managers comply with the Wwft and Sw, the fourth Wwft and Sw questionnaire was sent to managers in 2022. Responses to this (digital) questionnaire serve as the basis for the AFM's risk-based supervision, and based on the answers, sector-wide feedback is also provided. Because no questionnaire was sent to managers in 2021, comparisons with previous years in this report are based on statistics from the 2020 questionnaire. 3 As intended in Article 2:66a Wft. 4 Due to the transition to a different data provider, no questionnaire was sent to managers in 2021. 01 Introduction 01 Introduction

5 Assets are mainly concentrated among the relatively small group of AIFM license holders without UCITS licenses. Also, the number of direct investors lies relatively high for this group: there are approximately 126,967 direct investors listed for the AIFM license holder without UCITS license. At the level of individual investment undertakings, the picture regarding direct investors is as follows:

1. Managers with an AIFM license and without a UCITS license have an average of 1,376 direct investors per undertaking (2020: 1,967).
2. Managers of a UCITS with an AIFM license have an average of 2,409 direct investors per undertaking (2020: 2,054).
3. Managers with an AIFM registration have an average of 36 direct investors per undertaking (2020: 29).
4. Managers of a UCITS without an AIFM license have an average of 3,165 direct investors per undertaking (2020: 2,080). 2.1 Assets in High-Risk Countries and Sectors with Increased Risk Of the total assets invested by managers, 14% is invested in assets associated with an increased risk of money laundering and/or terrorist financing. Of all assets invested by managers in risky assets, 96% is invested in real estate (2020: 96%). 5 This is partly due to the fact that a manager must apply for a license if the total managed assets: i. are greater than €500 million, in the case of a manager managing funds that are closed-end for the first five years and do not use leverage; or ii. are greater than €100 million. 6 Direct investors are those who directly acquire participation rights in one or more investment undertakings without the intermediary of, for example, investment firms or banks. 02 General Overview The Wwft and Sw inquiry to managers was completed by 703 managers in 2022. Of these, 71 stated that they did not manage any investment undertaking (anymore) as of the reference date December 31, 2021. The group of managers can be divided based on licensing and registration requirements as follows:
5. Managers with an AIFM license and without a UCITS license (92 managers/13.1%).
6. Managers of a UCITS with an AIFM license (9 managers/1.3%).
7. Managers with an AIFM registration (587 managers/83.5%).
8. Managers of a UCITS without an AIFM license (15 managers/2.1%). The AFM sees that the number of managers with an AIFM registration has grown significantly (+22%), from 480 in 2020 to 587 in 2021. The total managed assets amount to approximately €1.12 trillion. This asset has grown compared to 2020, when the total managed assets were approximately €954 billion. The managed assets per type of manager are distributed as follows:
9. Managers with an AIFM license and without a UCITS license: €787.2 billion.
10. Managers of a UCITS with an AIFM license: €303.9 billion.
11. Managers with an AIFM registration: €22.4 billion.
12. Managers of a UCITS without an AIFM license: €6.4 billion. 02 General Overview

02 General Overview 6 2.2 Investors Investors in investment undertakings can be divided into direct and indirect investors. Direct investors are those who acquire participation rights in an investment undertaking without the intermediary of a third party (e.g., a bank or investment firm), and indirect investors are those who do use such (third) parties to acquire participation rights in an investment undertaking. There are 24,231 legal entities investing directly (2020: 18,047) and 162,747 natural persons (2020: 199,899). The invested assets by legal entities are €997 billion (2020: €776 billion) and the invested assets by natural persons are €13.4 billion (2020: €10.6 billion). The remaining 4% concerns investments in microfinance, virtual currencies, oil, gas, and minerals. A negligible percentage is invested in CO2 emission rights. Of the total assets invested by managers, 5% is invested in countries associated with an increased risk of money laundering and/or terrorist financing. 13% of managers state that they have positions in one or more countries that the AFM designates as high-risk based on public country lists (2020: 15%). The value of investments in high-risk countries by managers with a license is approximately €67.7 billion. This is 6% of their total managed assets (2020: €61 billion and 7%). For managers with a registration, the amount invested in high-risk countries is approximately €552 million, which is about 2% of the total assets managed by them (2020: €600 million and 4%). China, the Cayman Islands, and Russia are in the top 3 high-risk countries where the most is invested by managers. On March 1, 2022, all managers with a possible link to Russia received a letter from the AFM drawing their attention to the additional requirements of sanctions legislation. It was then communicated that if the sanctions of the European Union (EU) apply, the relevant funds and/or economic resources must be frozen and no financial services may be provided anymore. Business relationships in high-risk countries can entail an increased risk of money laundering and/or terrorist financing. In case of a high risk of money laundering and/or terrorist financing, enhanced client due diligence must be performed. 7 Based on data with reference date December 31, 2021. 8 See for all EU sanctions the website www.sanctionsmap.eu, which gives a complete overview of EU sanctions.

03 Risk Assessment and Policy 7 Figure 1. The integrity risks taken into account in the risk analysis by managers. 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% n 2022 n 2020 Other Corruption 65% 68% Money Laundering 98% 96% External Fraud by Client Relations 52% 56% Evasion and Avoidance of Fiscal Regulations 62% 63% Market Manipulation 39% 36% Terrorist Financing 92% 91% 12% 19% Conflict of Interest 63% 66% Evading Sanctions Legislation 70% 70% Proliferation Financing 21% Not Asked Internal Fraud by Employees 56% 60% Based on Article 2b Wwft, institutions must have a risk assessment regarding money laundering and terrorist financing, whereby the measures must be proportional to the nature and size of the investment undertaking. Sector-wide, 98% of managers have currently taken measures to identify and assess the risks for their investment undertaking(s) for money laundering (2020: 96%). Of the managers who stated they have a risk assessment, 92% have also documented this in writing (2020: 91%). It is legally required to document the results of the risk assessment, keep them up to date, and provide them to the AFM upon request. Often, the risk analysis under the Wwft is part of the systematic integrity risk analysis (SIRA) that must already be made under Article 17 of the Decision on Conduct Supervision Financial Undertakings Wft (BGfo). The integrity risks taken into account in the risk analysis by managers can be seen in Figure 1. Based on Article 2c Wwft, managers must have codes of conduct, procedures, and measures to limit and effectively control the risks of money laundering and financing of terrorism, appropriate to the nature and size of the investment undertaking. These risks are made visible by the own risk analysis, but the supranational risk assessment (SNRA) and national risk assessment (NRA) must also be taken into account in the policy. The general picture based on the questionnaire is that license holders adhere to the obligations of Article 2c Wwft more often than managers with a registration. 9 Based on Article 2b, third paragraph, Wwft. 03 Risk Assessment and Policy

03 Risk Assessment and Policy 8 Sector-wide, 85% (2020: 87%) of managers have established policy to specifically comply with the Wwft. The results of the own risk analysis have been incorporated into this policy, procedures, and/or measures in 94% of cases (2020: 92%). Furthermore, it appears that 81% of managers (2020: 84%) have policy for compliance with sanctions legislation. Managers must establish such policy based on Article 2 of the Regulation on Supervision Sanctions Act 1977. The Wwft and sanctions policy is well elaborated. The topics client acceptance, client risk classification, client review, and termination of the client relationship are included in almost 100% of cases in the policy of managers. The topic 'reporting of unusual transactions' is included in 95% of cases in the policy (2020: 91%). The topics 'screening in the context of sanctions legislation' and 'transaction monitoring' are included in 95% (2020: 91%) and respectively 93% (2020: 90%) of cases in the policy of the manager.

04 Client Due Diligence 9 based on data provided by a third party, but remains responsible for the risk assessment of the client and remains responsible for monitoring transactions. Of the managers, 29% state that they outsource client due diligence to a third party in all cases (2020: 24%). 10% of managers partially outsource client due diligence to a third party (2020: 11%). If the outsourcing has a structural character, a manager is obligated to document this in writing. Of the managers who (partially) outsource their client due diligence, 86% state that there is a written documentation of the outsourcing (2020: 85%). However, in 7% of those cases, the obligations regarding compliance with the Wwft are not fixed in an outsourcing agreement (2020: 4%). Managers who outsource client due diligence check in 65% of cases at least once a year whether the outsourcing is in accordance with the Wwft (2020: 67%). 28% checks this less often than once a year (2020: 24%) and 6% states that they never check this (2020: 9%). Risks are associated with outsourcing work that must be adequately controlled. In case of outsourcing, the manager remains responsible for the control of the risks associated with the implemented policy and for the compliance by the outsourcing partner with the rules set under or by virtue of the Wft and the Wwft. It is therefore important to exercise due care when selecting the outsourcing partner. Also after entering into the outsourcing relationship, it is important to closely monitor the execution of work by the outsourcing partner. 10 Article 10, second paragraph, Wwft 4.1 Client Risk In the context of Wwft client due diligence, 88% (2020: 87%) of managers always perform a risk assessment of their investors. In 7% of cases, managers never do this (2020: 7%) and in 5% of cases, they do this sometimes (2020: 6%). The preparation of a risk assessment of other business relationships, not being investors, happens less often: in 52% of cases it is always done (2020: 54%); in 35% of cases it is sometimes done (2020: 34%) and in 13% of cases it is never done (2020: 13%). The proportions in the established risk classifications of clients (low, medium, and high) have remained largely the same compared to 2020. The only notable difference is that natural persons not residing in the Netherlands are more often classified as medium-risk instead of low-risk compared to 2020. 4.2 Outsourcing A manager can have part of the client due diligence performed by a third party, including for example the identification and verification of the identity of the (UBOs of the) client. Managers must ensure that the third party to whom work is outsourced has adequate Wwft procedures and measures and that these are complied with. The manager outsourcing client due diligence remains responsible for the ongoing control of her clients and compliance with the law. Because the ongoing monitoring of clients (Article 3, second paragraph, item d, Wwft) is not included in Article 10, first paragraph, Wwft (outsourcing), a manager may not outsource the ongoing monitoring of clients to a third party. That is to say, a manager may do the monitoring based on data provided by a third party, but remains responsible for the risk assessment of the client and remains responsible for monitoring transactions. 04 Client Due Diligence

05 Transaction Monitoring and Reporting Obligation 10 Furthermore, it appears that about half of the managers have registered with FIU-NL. A registration with FIU-NL is only mandatory when a report of an unusual transaction must be made. The AFM recommends, however, to have an FIU registration before making a report, so that an unusual transaction can be reported to FIU-NL without delay. 5.2 Tools for Transaction Monitoring In 2020, one of the findings from the thematic investigation into transaction monitoring was that managers generally prepared few transaction profiles for clients. Currently, in 56% of cases, such an expected transaction profile is prepared for the client by the managers (2020: 55%). Preparing an expected transaction profile can be a tool for monitoring transactions. Another tool for monitoring transactions can be working with reference groups and detecting outliers from them. Regularly performing a feedback loop on the transaction monitoring system can help sharpen the used business rules by looking at how many false positives come from the generated alerts. 11 Transaction monitoring by investment undertakings and firms must be better | April | AFM and Most investment undertakings take measures against criminal money, transaction monitoring deserves extra attention | October | AFM Professionals The percentage of managers who have set up their transaction monitoring exclusively manually is about 50% (2020: 58%). For a large part of this group, it appears that exclusive manual transaction monitoring is appropriate, taking a number of indicators into account. About 2% has a system that checks exclusively automatically and 35% uses a combination of manual and automated checking (2020: 33%). In total, 87% of managers have a system to monitor transactions (2020: 91%). In reality, this percentage is likely higher. Research by the AFM shows that managers of closed-end funds do perform (client) due diligence when clients invest the investment funds, the possible interim distributions, and the payout of the invested funds at the end of the investment period, but sometimes do not define this as transaction monitoring in the inquiry. For transactions initiated by the client, the manager checks these transactions in 78% of cases prior to the moment they are executed (2020: 81%). In 22% of cases, the manager checks the transactions after they have been executed. 5.1 Reporting Unusual Transactions In the 2020 analysis, one of the findings was that the process of transaction monitoring and reporting should take place more effectively by managers. Although the number of alerts and reports of unusual transactions has increased significantly, only 11% of managers still generate alerts. These managers generated 51,861 alerts in the period from January 1, 2021, to December 31, 2021, of which 226 were reported as unusual transactions to FIU-NL. 05 Transaction Monitoring and Reporting Obligation

06 Sanctions Legislation 11 An investment undertaking must screen its relationships against the National Terrorism Sanctions List, the EU Sanctions List, and the UN Sanctions List. The use of the National Terrorism Sanctions List by managers has decreased slightly: 78% of managers screen relationships against this list, compared to 79% in 2020. The use of the EU and UN sanctions lists has increased: to 79% (2020: 75%) and respectively 70% (2020: 65%) of all managers. Based on the questionnaire, it also appears here that the general picture is that license holders check the relevant sanctions lists more often than managers with a registration. On the National Terrorism Sanctions List, persons and organizations involved in terrorist activities are listed. On the EU Sanctions List, institutions can see which persons and entities must have their funds frozen based on financial sanctions legislation applicable in the Netherlands. Any prohibitions or restrictions on providing financial services directed against certain countries and territories are also included in the relevant lists. 06 Sanctions Legislation

07 Training 12 Managers must ensure that their employees receive adequate training regarding the Wwft and Sw. The AFM finds that a large part of the employees of managers follow Wwft and Sw training. However, for policy makers, less than half do this. This is a point of attention for managers. 07 Training

Appendix A - High-Risk Countries 13 The AFM uses public country lists to designate high-risk countries. The following countries are designated as high-risk: • Countries subject to EU sanctions. • Countries subject to UN sanctions. • Countries identified by the Financial Action Task Force (FATF) as having strategic deficiencies in their anti-money laundering and counter-terrorist financing regimes. • Countries identified by the European Commission as having strategic deficiencies in their anti-money laundering and counter-terrorist financing regimes. Appendix A - High-Risk Countries

Appendix B - Activity Categories with Increased Risk 15 The following activity categories are considered to have an increased risk of money laundering and/or terrorist financing: • Real estate transactions. • Financial services for non-residents. • Cash-intensive businesses. • Trust and company service providers. • Dealers in precious metals and stones. • Virtual currencies. Appendix B - Activity Categories with Increased Risk