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Financial crime compliance principles in the securities custody business
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Abstract
This paper aims to introduce the reader to the purpose and content of the International Securities Services Association (ISSA) Financial Crime Compliance Principles (FCCP), the Principles. The FCCP aim to become the standard in financial crime prevention across the securities industry. The Principles particularly address the risks resulting from the many layers of intermediation between the issuer and final beneficial owners, taking into account the cross-border nature of the industry. The FCCP provide guidance to custodians on how to implement adequate controls on assets holdings, and not only on the execution of transactions. Recognising that different account structures are used for holding securities interests, the FCCP propose that the due diligence performed at the account level is proportionate to the risk of the account structure used and make the distinction between proprietary accounts, segregated third party accounts and omnibus accounts. A significant aspect of the FCCP is that they foresee that custodians communicate their due diligence standards to its clients (account holders in ISSA terminology) and has to obtain contractual commitment that they will be complied with. The Principles go even further and require the custodian to compel the account holders to apply the FCCP to their clients, thereby creating a virtuous circle and increasing transparency along the custody chain.
Keywords: securities industry, due diligence, financial crime; guidance, custody