What is Managed Account in Anti-Money Laundering?

Definition

In the context of Anti-Money Laundering (AML), a Managed Account refers to a financial account or investment portfolio that is overseen and controlled by a designated financial professional or fiduciary on behalf of a client or beneficial owner. This fiduciary has discretionary authority to make investment decisions, including buying, selling, and trading financial assets within the account, guided by the client’s investment goals and regulatory compliance requirements. Crucially, from an AML perspective, such accounts must be monitored to ensure that the funds involved do not facilitate money laundering, terrorist financing, or other illicit activities. The account’s ownership and transactional activities are subjected to customer due diligence and ongoing AML controls to prevent misuse.

Purpose and Regulatory Basis

Role in AML

Managed accounts play a significant role in AML frameworks because they represent a channel through which large volumes of financial transactions occur under discretionary control, often involving significant capital. Due to the fiduciary’s autonomy in maneuvering funds, these accounts can be exploited by criminals seeking to disguise illicit origins of funds via layering or integration phases of money laundering.

To mitigate these risks, financial institutions and managers must implement AML controls, including rigorous customer due diligence (CDD), ongoing transaction monitoring, and reporting suspicious activities. Managed accounts are thus critical points where AML efforts focus to detect and prevent financial crimes.

Key Global and National Regulations

1. Financial Action Task Force (FATF) Recommendations: As a global standard-setting body, FATF emphasizes enhanced due diligence for accounts with fiduciary control, such as managed accounts, especially if involving politically exposed persons (PEPs), high-risk countries, or complex ownership structures.
2. USA PATRIOT Act (2001): Requires banks and financial institutions to implement stringent CDD and AML monitoring for accounts, including managed accounts, to combat money laundering and terrorist financing risks.
3. European Union Anti-Money Laundering Directives (AMLD): These mandates require EU member states to regulate financial intermediaries, including those managing accounts on behalf of clients, to ensure transparency of beneficial ownership and implement robust AML programs.
4. National Regulations: Many countries have specific AML laws that impose obligations on fiduciaries and asset managers to maintain records, conduct ongoing client risk assessments, and report suspicious transactions through Suspicious Activity Reports (SARs).

Thus, regulated entities managing such accounts must comply with comprehensive AML standards to prevent the misuse of managed accounts in financial crime.

When and How it Applies

Real-World Use Cases

• Investment Portfolio Management: Wealthy individuals or institutions hire fiduciaries who manage their investment portfolios, including stocks, bonds, mutual funds, and other securities. The managed account allows the manager to execute trades and manage assets according to agreed mandates.
• Trust and Estate Management: Trustees managing funds on behalf of beneficiaries hold managed accounts. AML scrutiny is vital here to verify the legitimacy of the funds and monitor ongoing transactions.
• Corporate Asset Management: Corporations may have managed accounts for treasury functions or employee pension plans controlled by financial managers.

Triggers for AML Scrutiny

• New account openings requiring enhanced due diligence to verify the client’s identity and source of funds.
• Transactions involving high-risk jurisdictions or PEPs.
• Large or unusual transaction patterns inconsistent with the stated purpose.
• Changes in beneficial ownership or account control.

Examples

• A managed account opened for a foreign political figure would trigger enhanced AML reviews due to higher corruption risk.
• An investment manager suddenly redirecting large sums into obscure offshore funds would require further AML investigation.

Types or Variants

Managed accounts may vary based on:

• Discretionary Managed Accounts: The manager has full authority to make investment decisions without prior client approval for each transaction.
• Non-Discretionary Managed Accounts: The manager advises but requires client authorization before executing trades.
• Separately Managed Accounts (SMA): Individual portfolios managed independently from pooled funds, allowing personalized investment strategies.
• Mutual Fund Accounts: Pooled funds managed collectively but differ from managed accounts because ownership is shared rather than held in a single account.

From an AML standpoint, the level of control and discretion impacts the risk profile and compliance requirements due to the differing potential for misuse.

Procedures and Implementation

Compliance Steps for Institutions

1. Customer Due Diligence (CDD): Verify identity, source of funds, and beneficial ownership before opening or accepting a managed account.
2. Risk Assessment: Classify the customer’s risk based on jurisdiction, industry, control over the account, and transaction behavior.
3. Ongoing Monitoring: Use automated transaction monitoring systems to detect suspicious patterns or unusual activities.
4. Enhanced Due Diligence (EDD): For high-risk customers or accounts, perform deeper investigations including background checks and activity reviews.
5. Record-Keeping: Maintain detailed documentation of account activities, client communications, and due diligence actions.
6. Reporting: File Suspicious Activity Reports (SARs) when unusual transactions are identified that may indicate money laundering.

Systems and Controls

• Integration of AML compliance software for real-time transaction monitoring.
• Designated AML compliance officers overseeing managed account activities.
• Training programs for staff handling these accounts to recognize and escalate AML red flags.
• Policies aligned with FATF and local regulations governing managed accounts.

Impact on Customers/Clients

Rights

Clients retain the right to privacy and control over their investments within the regulated framework. They can expect fiduciaries to manage accounts prudently and in accordance with agreed mandates.

Restrictions

Clients must provide full disclosure of personal and financial information and comply with AML-related inquiries. In some cases, accounts may be frozen or transactions delayed pending AML investigations.

Interactions

Clients may receive requests for additional documentation or explanations regarding certain transactions. Transparency and cooperation with AML processes protect client interests and prevent regulatory sanctions.

Duration, Review, and Resolution

Timeframes

Managed accounts are subject to ongoing AML reviews throughout their lifespan. Initial KYC checks occur at account opening, followed by periodic reviews, typically annually or upon significant changes.

Review Processes

• Risk reassessment triggered by new information or transaction anomalies.
• Periodic reviews of beneficial ownership and control.
• Verification updates for customers on sanctions or PEP lists.

Ongoing Obligations

Institutions must ensure continuous compliance and update frameworks in response to regulatory changes, ensuring sustained AML vigilance until accounts are closed or resolved.

Reporting and Compliance Duties

Institutional Responsibilities

• Implement AML programs tailored to managed accounts.
• Monitor transactions continuously.
• Keep comprehensive records for audit and regulatory review.
• Report suspicious activities promptly via SARs.

Documentation

Maintain evidence of all due diligence, reviews, risk assessments, and customer communications relating to managed accounts.

Penalties

Non-compliance with AML obligations can lead to heavy fines, reputational damage, and legal action against institutions and individuals involved.

Related AML Terms

• Customer Due Diligence (CDD): Core AML process applied to managed accounts.
• Enhanced Due Diligence (EDD): For higher-risk managed accounts.
• Politically Exposed Persons (PEP): Often subject to stricter checks in managed accounts.
• Suspicious Activity Reports (SARs): Reports filed based on managed account activities.
• Beneficial Ownership: Identification crucial in managed account setups.
• Layering and Integration: Money laundering stages that managed accounts may be misused for.

Challenges and Best Practices

Common Issues

• Complexity in tracing beneficial owners.
• Managing high volumes of transactions.
• Balancing client privacy with regulatory demands.
• Detecting complex layering schemes through discretionary authority.

Best Practices

• Use advanced AML compliance technology for monitoring.
• Frequent training and awareness programs.
• Maintain clear policies and escalation protocols.
• Foster a culture of compliance from management to front-line staff.

Recent Developments

• Increasing use of AI and machine learning in transaction monitoring for managed accounts.
• Regulatory tightening around transparency and disclosure in trusts and managed structures.
• Greater emphasis on beneficial ownership registries globally.
• Integration of blockchain analytics for AML in digital asset managed accounts.

Managed accounts represent a critical focus area in AML due to their discretionary nature and the volume of assets involved. Effective management, monitoring, and compliance with regulatory frameworks are essential to prevent their misuse for money laundering and other financial crimes.