In our previous article, we covered DPAs – what they are, why they are being introduced, the draft legislation and the implications for Jersey. The legislation- The Criminal Justice (Deferred …
Jersey Private Fund Thematic Review
The JFSC issued the results of its thematic review of designated service providers (“DSP’s”) in ensuring a Jersey Private Fund’s (JPF’s) compliance with the JPF Guide and the DSPs responsibilities and confirmations regarding compliance with all necessary Jersey AML/CFT requirements. This JFSC report, issued on 29 March 2021, highlighted some concerning findings.
The JPF guide was established in 2017. JPF’s are relevant persons for AML purposes. A JPF is a private investment vehicle (company, partnership or unit trust) involving the pooling of capital raised and operates on the principle of risk spreading.
Confusingly, a JPF does not have to be established in Jersey. Also a JPF is not a fund as defined under the Collective Investment Funds (Jersey) Law, 1988 because there is no ‘offer to the public’ per Article 3. A JPF must not make offers to, or have more than 50 investors, each investor being a person:
1. who is a ‘professional investor’ (within the meaning of paragraph 1. of Annex A of the Guide, (e.g. has a net worth exceeding US$1m);
2. who makes a minimum initial investment in or commitment to the JPF of not less than two hundred and fifty thousand pounds sterling (or the equivalent) either through an initial offering of units or by subsequent acquisition;
3. to whom paragraph 3. of Annex A of the Guide applies (non-participating, founder or management type interests in the JPF); or
4. to whom paragraph 5. of Annex A of the Guide applies (a discretionary manager acquiring an interest in a JPF on behalf of others)
Only professional investors or eligible investors (as per 2. – 4. above) who have acknowledged in writing receipt and acceptance of an investment warning and disclosure statement in substantially the same form as the investment warning set out under part E. of the Guide may invest in a JPF. (Essentially confirming they meet the definition of professional or eligible investor and acknowledging the risks as the JPF is not regulated and they may lose the entirety of their investment).
Personal questionnaires are not required for any director, beneficial owner/controller, money-laundering reporting officer, money-laundering compliance officer or service provider to the JPF other than the Designated Service Provider (DSP) through the DSP’s FSJL requirements.
The promoter (a person who, in the mind of the investor, is regarded as the “brainchild” behind the scheme) of a JPF does not need the prior approval of the JFSC.
A JPF is not required to have a private placement memorandum or an offer document, but may do so, provided such document contains all of the material information which investors would reasonably require for the purpose of making an informed judgement about: a. the merits of purchasing units; and b. the nature and levels of the risks.
One key feature is the requirement to have a Jersey based Designated Service Provider (DSP). The DSP must be an existing Jersey full substance entity. If the JPF has less than 15 offers/investors (a very private JPF) the DSP may be regulated under the FSJL as an FSB or TCB or IB. If the JPF has more than 15 offers/investors the DSP must be a FSB holding class V (Administrator), class U (Manager), class X (Investment Manager) or class ZG (Trustee).
Specifically, the DSP must assume responsibility for the following duties in relation to the JPF:
- making all reasonable enquiry, to ensure that the JPF meets all of the eligibility criteria referred to under part D. of the Guide both on its establishment and, on a continuing basis;
- ensuring that all necessary due diligence on the JPF and its promoter is carried out and ensuring that the promoter of the JPF has put in place appropriate measures to ensure that all service providers to the JPF are fit and proper and can fulfil the tasks in a responsible, professional and suitable manner;
- ensuring that all documents relating to its due diligence enquiries will be readily retrievable in Jersey and, if kept otherwise than in legible form, will be maintained by it so as to be readable at a computer terminal in Jersey so that they may be produced in legible form without delay;
- ensuring compliance with all necessary Jersey AML/CFT requirements applicable to the JPF;
- completing and submitting a JPF application form (JPF Form) to the JFSC for authorisation of the JPF declaring in its capacity as DSP to the JPF and having made all reasonable enquiry, that the information provided in the JPF Form “is complete, true and accurate” to the best of the DSP’s knowledge and belief;
- completing and submitting a JPF notice of change or event (JPF Notice of Change or Event) to notify the JFSC as soon as reasonably practicable, and for the avoidance of doubt within 28 calendar days’, in the event of any:
- material change in relation to the JPF which would impact the accuracy of the information provided to the JFSC in the JPF Form (including the termination of the JPF (under any circumstances) or any change to the JPF’s Jersey service provider(s) other than the DSP (on the basis that there shall be no change in the DSP without the prior approval of an officer of the JFSC));
- non-compliance with the JPF’s Jersey AML/CFT obligations (noting that the requirement for reporting/notice to be given in such circumstances may be a statutory requirement pursuant to other laws and regulations);
- material/unresolved complaint(s) made in relation to the JPF; or JFSC Official Jersey private fund guide Page 8 of 13 Effective from: 18 April 2017 Updated: 31 August 2018
- qualified audit of the JPF’s annual accounts and financial statements (where the JPF has appointed an auditor).
- completing and submitting a JPF annual compliance return (JPF Return) with the JFSC in each relevant year.
The DSP is required to comply with all relevant provisions of the MLO and FSJL and, the JFSC may consider and take account of such conduct when assessing the ‘fit and proper’ status of the DSP for the purposes of its FSJL licence.
Thematic Review Findings
At the time of the review there were 42 DSPs acting for 334 JPFs, of these, 22 were selected (responsible for 225 JPFs) and completed a survey. From these 22 DSPs, 6 (responsible for 148 JPFs) were subject to detailed review (including 18 of the JPFs including some underlying investors).
The JFSC referred to the findings as ‘concerning’ and highlighted:
- Deficiencies in services provided by DSP to ensure JPF was compliant with the Money Laundering Order (MLO) and JPF Guide.
- JPF Boards not holding DSP accountable for inadequate services (majority of Boards comprise directors from DSP or related entities)
- JPF Returns filed incorrectly stating JPF in compliance with AML/CFT requirements
- DSP failing to appreciate the JPF is a relevant person under the MLO.
- Lack of understanding (training) of the requirements of the JPF Guide and Section 14 of the AML Handbook (Funds and Fund Operators) by JPF Boards, DSPs and staff
Internal Systems and Controls
- Board of DSP unaware of responsibilities under JPF Guide or JPFs were relevant persons
- Lack of training by DSP of directors and employees providing DSP services
- DSPs and JPFs lacking appropriate policies and procedures
- Delays in tabling DSP BRA to the DSP Board incorporating JPF products
- No written agreement between JPF and DSP
- Key documents undated
- CDD deficiencies flagged but not followed up
JPF Annual Compliance Return
- Confirming compliant with AML regime when:
- No testing or reviews undertaken
- No formal appointment of MLRO and MLCO
- appropriate policies /procedures not adopted
- Inadequate checks when performing Promoter due diligence
- Submitting inaccurate investor data
- JPF directors did not understand or demonstrate practical application of AML/CFT requirements
- BRAs for JPF too generic, failed to address risk of investors from higher risk jurisdictions or with PEP connections
- Lack of CMPs for JPF
- Failure to resolve issues highlighted by CMP
- Lack of, or infrequent compliance reporting to Board of JPF
- Failure to obtain written warning acknowledgements from investors
Customer Due Diligence
- CRA by DSP in relation to the JPF failed to properly reflect risk of investor base or Promoter(s)
- Failing to recognise UBO could exert significant control regardless of effective ownership percentage
- Shortcomings in information and records regarding source of funds of higher risk investors
- A DSP failed to provide quarterly compliance reporting as per administration agreement
- Board of JPF unable to explain failure of DSP to provide contracted services
- Failure to identify conflicts at JPF Board where DSP group corporate director appointed
- Conflicts arising from individuals representing corporate director to JPF also being directors of DSP.
Recommended Best Practice
The JFSC cites the following examples;
- An annual compliance checklist tabled to the JPF Board regarding compliance with the JPF Guide and AML/CFT requirements in advance of the DSP filing the JPF Return
- DSP considers JPF’s CMP and any compliance issues reported prior to completing JPF Return
- BRA of DSP should refer to role of DSP and duties imposed by JPF Guide
- DSP should perform a full review of policies and procedures to ensure all JPF Guide and AML/CFT requirements are considered
- Administration agreement between DSP and JPF should clearly detail services including DSP responsibilities set out in JPF Guide
- JPF Board minutes should:
- Include compliance reports as a standard agenda item
- Record appointment of MLRO and MLCO
- Consider whether the services the DSP is contracted to provide cover requirements in JPF Guide
- Consider whether DSP is adequately delivering contracted services
- Records should be maintained demonstrating all individuals connected with JPFs (e.g. Board members and DSP directors and staff) have received training regarding JPF Guide and Section 14 AML/CFT Handbook