European funds could avoid routinely identifying every investor behind intermediary accounts under draft EU anti-money laundering rules. The proposal favors oversight of intermediaries’ controls, broadly backing Luxembourg’s existing approach.
For years, the European fund industry has faced a fundamental AML question: who is the relevant AML customer where fund interests are distributed through nominees, omnibus accounts, platforms or other intermediaries?
Is it the intermediary appearing in the fund’s shareholder register, or the underlying investor behind that intermediary?
The distinction matters because it determines whether a fund may focus its customer due diligence (“CDD”) on the intermediary and its AML framework, or whether it must ultimately identify and verify the underlying investors throughout the distribution chain.
The final draft Regulatory Technical Standards (“RTS”) under Article 28(1) of the Anti-Money Laundering Regulation (“AMLR”) suggest that the European Anti-Money Laundering Authority (“AMLA”) has now made an important policy choice. Rather than requiring systematic look-through, AMLA appears to favour a supervised-intermediary model that is much closer to existing Luxembourg practice.
Two competing models
Broadly, two approaches have emerged in Europe.
The first is the look-through model. Under this approach, the underlying investor remains the ultimate focus of the fund’s AML analysis. The fund may rely operationally on an intermediary to perform CDD, but must remain capable of obtaining sufficient information to identify and verify the final investor.
The second is an intermediary reliance model. Here, the intermediary becomes the principal AML relationship of the fund. The fund performs CDD on the intermediary and assesses its regulatory status, AML framework and controls over its own customers. It does not systematically obtain information on every underlying investor.
Luxembourg practice has generally operated much closer to the second model. The starting point is to analyze the substance of the relationship rather than the terminology used in the relevant agreement or the platform through which the investment is made. Relevant questions include whether the entity invests on its own account or on behalf of underlying investors, with whom the fund has established the customer relationship and who is registered as the investor.
Where a regulated intermediary is the registered holder of an omnibus position and acts for underlying clients, the relationship will typically be analyzed as a financial intermediary or nominee relationship. The resulting approach is twofold: CDD on the intermediary itself and a risk-based assessment of its AML/KYC framework and controls over underlying customers.
Draft pointed towards look-through
The original draft RTS appeared to leave considerably more room for a look-through interpretation.
Former Article 17 provided that a fund could satisfy its obligations where an intermediary acted in its own name but on behalf of final investors, provided that the fund was satisfied that the intermediary would provide the information necessary to identify and verify any final investor “without undue delay and upon request.”
Although this did not necessarily require the fund to hold all underlying investor information systematically, it created an important practical requirement: the fund had to be able to obtain that information when required.
For distribution chains involving several regulated intermediaries, this risked duplicating AML controls already performed by regulated institutions further down the chain.
AMLA changed course
The final draft RTS takes a different approach.
Article 15 no longer requires the intermediary to provide information necessary to identify and verify the identity of the final investor. Instead, a fund may rely on an intermediary where four conditions are satisfied:
- the intermediary is subject to sufficiently robust AML/CFT obligations;
- it is effectively supervised;
- the relationship is not high risk; and
- the fund is satisfied that the intermediary applies robust and risk-sensitive AML/CFT controls, including CDD on its customers and their beneficial owners.
Most importantly, AMLA explains why it removed the former requirement. In response to industry concerns, AMLA states that the deletion was intended “to prevent an interpretation” that funds must systematically obtain information on underlying investors, namely a look-through approach.
This is more than a drafting change. AMLA expressly considered the possibility of systematic look-through and removed the provision that could have supported such an interpretation.
The rationale is also understandable from a practical perspective. Modern fund distribution is commonly organized through regulated distributors, nominees, platforms and other intermediaries that already perform CDD on the investors with whom they establish business relationships. Requiring every entity further up the distribution chain to recreate those controls risks duplicating due diligence rather than improving it.
Implicitly, the final Article 15 recognizes that investor-level AML controls will often be most effective when performed by the entity that actually establishes and maintains the investor relationship.
From investor identification to intermediary oversight
The final Article 15 therefore shifts the emphasis from systematic identification of underlying investors to oversight of the intermediary.
The relevant question becomes: why is the fund comfortable relying on this intermediary?
That requires more than confirming that the intermediary is regulated. The fund must assess the intermediary’s regulatory status, jurisdiction and risk profile, as well as the robustness of its AML/CFT framework and the controls applied to its own customers.
This closely mirrors the approach already used in Luxembourg. For financial intermediary relationships, the practical framework is to conduct due diligence on the intermediary itself and then assess, on a risk-sensitive basis, its AML/KYC framework, controls and oversight of underlying customers. The extent of the second level of review should reflect factors such as the intermediary’s regulatory status and jurisdiction, customer base and distribution chain.
The burden has therefore not disappeared. It has moved from systematic access to underlying investor information to demonstrable confidence in the intermediary’s AML controls.
What does this mean for distribution chains?
The practical implications extend beyond traditional nominee structures. Modern fund distribution frequently involves omnibus accounts, custody networks and fund supermarkets.
The presence of a platform does not, in itself, determine the AML classification. The distribution chain must first be mapped to establish which entity is registered, which entity has the customer relationship, whether the registered entity acts for underlying customers and which entity performs the relevant AML/KYC functions.
Under a strict look-through approach, these structures could have required significant operational changes and potentially duplicated CDD performed by regulated intermediaries.
Under the proposed Article 15, the focus is instead on whether the relevant intermediary is appropriately regulated and supervised and whether the fund has adequately assessed its AML/CFT controls.
For Luxembourg funds using regulated nominee, omnibus and platform-based distribution chains, this is therefore broadly consistent with the existing market approach.
Will the Commission reverse course?
The RTS will still need to go through the European Commission’s adoption process. A change therefore remains possible.
A fundamental return to a systematic look-through model nevertheless appears unlikely.
AMLA did not merely delete the former wording. It expressly explained that the deletion was intended to avoid precisely that interpretation.
Moreover, the final report repeatedly emphasizes proportionality, simplification and avoidance of unnecessary regulatory burden. Reintroducing the original wording at the adoption stage would be difficult to reconcile with the policy rationale AMLA itself used to justify the change.
This does not mean that underlying investors will never need to be identified. Higher-risk relationships or particular distribution structures may still require additional information. The point is that such look-through should not become an automatic consequence of distributing fund interests through an intermediary.
In short
The final draft RTS may contain a relatively technical amendment, but its policy significance is greater.
The consultation draft left room for a look-through interpretation under which a fund would need to remain capable of obtaining information on final investors. The final draft removes that requirement and places greater emphasis on the regulated and supervised intermediary and the robustness of its AML/CFT controls.
AMLA appears not merely to have amended a drafting point, but to have chosen between two competing supervisory models.
AMLA has therefore not abolished look-through in every circumstance. It has, however, expressly rejected systematic look-through as the default consequence of Article 20(1)(h) AMLR.
If the RTS are adopted substantially in their current form, Luxembourg funds should therefore be able to continue relying primarily on a substance-based and risk-sensitive intermediary model, rather than having to redesign established distribution chains around systematic identification of every underlying investor.
Sebastiaan Hooghiemstra is a senior associate in the investment management practice group of Loyens & Loeff Luxembourg. The law firm is a member of Investment Officer’s panel of experts.
