The role of the compliance officer and the money laundering reporting officer in the prevention and detection of fraud in collective investment schemes

Abstract

Over the past years, the investment funds industry experienced rapid growth, both in Malta and overseas, which resulted in increased opportunities and advantages for investors. However, the global financial crisis of 2007/2009 uncovered several governance problems in this sector, and numerous cases exposed the opportunities investment advisers have to exploit investors. As a consequence, it is becoming ever more important to have the proper safeguards in place which protect investors’ interests. In this context, through the powers and duties imposed by the relevant legislation and regulations, the MLRO and the compliance officer could contribute towards increasing good governance as well as limiting as much as possible instances where investment schemes are utilised for fraudulent purposes. In Malta, appointment of these two officers is mandatory for all collective investment schemes (CISs), irrespective of size, complexity of operations or investors targeted. This could at times place a financial and administrative burden, especially for the smaller schemes. However, there is a caveat in the case of the MLRO, where duties may be delegated to the administrator. Considering that in most cases the CIS delegates its operations to regulated entities such as the management company, administrator and custodian, which would have their own compliance officer and MLRO, and in line with the developments in the EU 4th AML Directive, one may question the validity of imposing these two officers at all times. In addition, it is important to ensure that the regulator’s expectations with respect to the duties and obligations of these two officers are aligned with the actual and existing laws, rules and regulations. This avoids room for misinterpretation and increases the strength of the compliance officer and MLRO in combating fraud within CISs.