Anti-Money Laundering Compliance Structure for VCC, Singapore

 The Variable Capital Company of Singapore (“VCC”) is an on-shore Singapore domiciled investment fund product set up under the eponymous Act. A VCC is required to comply with Anti-Money Laundering and Combating Financing of Terrorism (AML&CFT) regime of Singapore. The relevant regulatory provisions including the outsourcing structure to comply with AML&CFT requirements are provided in Monetary Authority of Singapore (the “MAS”) Notice VCC-01 dated 14 January 2021 (the “Notice”), the Guidelines to MAS Notice VCC-01 dated 4 December 2020 (the “Guidelines”) and Response to the Feedback Received for Proposed AML/CFT requirements for Variable Capital Companies dated 15 January 2020 issued by MAS (the “Feedback”) (all together the “VCC AML Regime”).

This post has been made specifically to bring out the differences between the regulatory provisions w.r.t AML&CFT for Cayman Islands domiciled funds vis-à-vis the VCCs. Since VCC is relatively new fund product, its outsourcing requirements are also generally thought to be the same as for Cayman Islands domiciled funds. However, the requirements to comply with the outsourcing of AML&CFT functions as per VCC AML Regime are unique and different from the similar obligations on Cayman Islands domiciled funds. Appreciation of such nuanced differences between Cayman Islands domiciled funds and Singapore domiciled VCC fund structure cannot be overemphasised to remain compliant with VCC AML Regime.

As per the Notice, though a VCC is allowed to outsource its AML&CFT function but it can do so only to an eligible financial institution (“EFI”). The list of EFIs is provided in Appendix 2 to the Notice and comprises institutions which are licensed or supervised by MAS. Generally, for a VCC the suitable EFI will be its fund manager which will be a holder of a capital markets services licence under the relevant regulatory provision of Singapore. It is pertinent to note that a VCC is not allowed to directly outsource its AML&CFT function to its fund administrator as part of the fund administration agreement which is the general practice for Cayman Islands domiciled funds.  

Further, it is mandatory for a VCC to execute a contract with its EFI to formalize the outsourcing arrangement for AML&CFT function. In addition, it is necessary that this contract must provide details of the AML&CFT policies and procedures that the EFI is expected to perform on the VCC’s behalf.  This contract can be a composite contract covering both fund management function and the AML&CFT function.  

This means that a VCC must have its own AML&CFT policy. A VCC cannot rely on the AML&CFT policy either of its fund manager or its fund administrator. It has been clarified by MAS in the Feedback that both the VCC and its fund manager must have separate and distinct AML&CFT policy though there can be similarities between the two. In case, a fund manager operates multiple VCCs, even then, each VCC must have its own separate AML&CFT policy.

The difference between the concept of ‘outsourcing’ and ‘reliance’ also distinguishes the VCC’s AML&CFT obligations from those of Cayman Islands domiciled funds. In case of reliance, an entity on whom reliance is placed would apply its own procedures to perform the function in question (and this is generally followed for Cayman Islands domiciled funds when a fund relies on the AML&CFT procedures of its fund administrator). In contrast, in case of outsourcing, the outsourced service provider would perform the function in accordance with the VCC’s AML&CFT policy as clearly highlighted in the Guidelines and the Feedback. However, there is no restriction for an EFI to further outsource a VCC’s AML&CFT function to the fund administrator by entering in a separate contract.

Due to the ubiquitous nature of Cayman Islands domiciled funds, the fund managers and their service providers are inclined to treat Cayman Islands’ AML&CFT process practices as global standard. But such an approach can have serious pitfalls specially when new on-shore investment fund products are on offer both in Singapore and Hong Kong. It is necessary to distinguish the regulatory provisions of each private fund product and accordingly define the business processes and contract requirements.

My experience in dealing with clients brought this into my sharp focus that both the fund managers and their advisors were not ready to accept the fact that VCC is mandated to outsource its AML&CFT function only to EFI and is required to comply with other provisions as highlighted above. Initially as part of our services and to ensure that our clients’ VCC remain compliant, we had to provide explanations and evidence to convince the fund managers and their advisors on the necessity to follow the approach as detailed above. Our efforts have started showing results and now fewer such questions get asked.