Defining and capturing information on the beneficial ownership of investment funds

Overview

Investment funds play an important role in financing the global economy and adding liquidity to financial markets. An investment fund generally refers to a type of collective scheme that pools together money from different investors, both individuals and institutions, to invest in different types of assets, including real or financial assets. Broadly, they are classified as retail versus private investment funds. Retail investment funds are those which are available to the general public, such as listed mutual funds. Private investment funds, also referred to as alternative investment funds, are only available to specific categories of investors who often have access to large amounts of capital.

The investment funds market is vast and growing. As of 2022, approximately USD 61 trillion worth of assets were under management of investment funds globally, an amount roughly equivalent to the combined gross domestic product of China, the European Union (EU), and the United States (US). [1] Civil society organisations have raised concerns over the lack of beneficial ownership transparency (BOT) in the investment industry as being a factor that makes investment funds attractive for potential misuse. Although the full extent to which investment funds are used for the purposes of money laundering and other financial crimes is unclear, there is a growing number of documented cases. The misuse of private investment funds, as opposed to retail funds, is of particular concern.

BOT is an area of policy reform that refers to governments putting in place requirements for corporate vehicles, such as companies, trusts, and other forms of legal entities and arrangements, to collect and disclose information about their beneficial owners in a register. Governments collate this information and make it available to a range of actors, including law enforcement, tax authorities, the private sector, as well as civil society. There are significant practical challenges to applying beneficial ownership (BO) disclosure requirements to investment funds. The high speed of trading in securities globally means that aggregate ownership of any one individual in an investment fund may change in intervals of seconds, and ownership interests are typically held through layers of intermediaries. The challenges are similar when applying BOT to publicly listed companies (PLCs), and they are addressed in a separate Open Ownership briefing. [2]

Given the size and complexity of the investment industry, BOT is only one of many policy measures that can improve its transparency and accountability. Others, such as stronger anti-money laundering (AML) requirements on both registered and unregistered investment advisors and full disclosure of interests in financial assets, are also highly significant but fall largely outside the scope of this briefing. [3] The Financial Action Task Force (FATF) has classified the securities sector as high-risk for money laundering. [4] In many jurisdictions, investment funds are subject to AML regulations, but they are often imperfectly applied.

Where BOT is being implemented, some jurisdictions have explicitly exempted some or all investment funds from disclosing beneficial ownership information (BOI) to a government register and have no minimum BO reporting requirements. Civil society groups have pointed out that there is a risk that the introduction of BO registers could lead to a shift of illicit finance from anonymous companies to the less-transparent investment industry if similar standards are not applied. [5]

Due to limited research on the BOT of investment funds, many questions remain underexplored: for instance, whether BO disclosure is an appropriate instrument to generate useful information for their oversight; and how BOT regimes can effectively include investment funds, for example, by placing specific requirements on fund managers or institutional investors to disclose certain information.

This policy briefing aims to contribute to filling this gap by analysing the existing policy and regulatory framework on the BOT of investment funds at the international level. It provides considerations to help policymakers and those implementing or supporting BOT reforms to think through various issues and approaches toward ensuring effective transparency and oversight of investment funds. It also outlines recommendations for the operationalisation of BOT measures by identifying emerging practices in legal and policy reforms.

International AML standards are a key policy driver for BOT reforms, and most documented cases of the misuse of investment funds involve money laundering and related financial crimes. AML is therefore the main focus of this briefing. However, given their involvement in such a significant share of the global economy, not knowing who ultimately owns, controls, or benefits from investment funds risks undermining a range of policy objectives that countries typically pursue through BOT.

Broadly, the research concludes that including investment funds within the scope of a jurisdiction’s BOT regime can be a good approach to effectively regulating and preventing their misuse. Key considerations for implementers include:

• considering whether the existing legal definitions of the beneficial ownership of legal entities and arrangements are fit for the purpose of applying BOT to investment funds, which can be organised in a variety of legal forms and include the use of multiple layers of intermediaries;
• to adequately capture BOI on investment funds, it may be necessary to include the concept of deriving benefit from a corporate vehicle in the definition and to adjust reporting thresholds downward to capture information on all relevant parties enjoying ownership, benefit, and control;
• making all investment funds – regardless of their legal form – subject to BO disclosure requirements, unless reasonably exempt;
• when granting an exemption from the BOT regime, creating clear criteria for the basis of exemption, whilst ensuring that equally adequate, accurate, and up-to-date information on the beneficial ownership of investment funds is available in a timely manner, when required, through an alternative mechanism;
• considering the relative levels of risk of misuse among different types of investment funds, for purposes such as money laundering, in setting out disclosure requirements that are at once adequate and proportionate: namely, whether they are retail or private funds.

Next page: Introduction to investment funds