Should the GP be responsible for screening investors to prevent money laundering or other illegal practices?
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Should the GP be responsible for screening investors to prevent money laundering or other illegal practices?

Should the GP be responsible for screening investors to prevent money laundering or other illegal practices?

Explanation

The definition of what constitutes money laundering and the application of anti-money laundering (AML) legislation can vary from jurisdiction to jurisdiction. However, there are general requirements and common principles relating to AML legislation, which are set out in the Financial Action Task Force (FATF), and these include not only vetting the investing entity, but also identifying who the "beneficial owner" of the investing entity is in order to prevent money laundering through fund investments.

Recommendation

The GP is responsible for ensuring compliance with applicable anti-money laundering regulations. Regardless of compliance considerations, a GP should be careful to include only reputable, long-term partners in the fund.

GPs should ensure that fund documents require LPs to provide all necessary identifying information that the GP needs to comply with its policies and relevant regulatory and legal requirements, including providing documentation to authorities during the life of the fund. Failure or refusal to comply with this requirement should entitle the GP to require the LP to withdraw from the fund.

Legal advice on this matter should be sought as early as possible to ensure that all relevant money laundering checks are carried out and properly documented. In all cases, these checks must comply with the relevant local regulations of the country in which the fund is domiciled and the country from which it is managed. In addition, steps should be taken in the fundraising process to ensure that capital commitments are not made to facilitate money laundering.

Investments should not be accepted if the source of the investment raises concerns (e.g., if the investment originates in a FATF blacklisted country) or the identity of the LP (or its beneficial owners) either cannot be verified or is reasonably believed to be an internationally sanctioned person or entity, or until further extended due diligence is completed and confirms that these factors are not a concern.

Subscription documents should contain specific information and confirmations from the fund's LPs regarding the source of the invested monies, confirmed by appropriate documentation and supported by appropriate guarantees, where applicable. The fund documents should enable the GP to require LPs to update or amplify this information, documentation and guarantees as appropriate, and provide the GP with the right to manage the situation if their failure to provide this information, documentation and/or guarantees compromises the ability of the GP and the other LPs to conduct the business of the Fund.



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