Financial Crime World

ALL OTHER LOSSES: CUSTODIANS’ LIABILITY AND DUTIES

A recent directive has shed light on the responsibilities of custodians in managing financial instruments and assets. In a move to increase transparency and accountability, the European Parliament and Council have outlined the duties and liabilities of custodians when it comes to all other losses.

Liability for Neglect or Intentional Failure

Custodians are liable for their negligent or intentional failure to fulfill their obligations. This includes any losses resulting from a lack of monitoring, oversight, or safe-keeping of assets under their care.

Duties of Custodians

A custodian’s duties can be summarized into three main areas: cash monitoring, oversight, and safe-keeping.

Cash Monitoring

Custodians are required to monitor the cash inflows and outflows of Alternative Investment Funds (AIFs) under their care. This includes:

  • Ensuring that payments made by investors have been received
  • Verifying that all cash belonging to the AIF is booked correctly on accounts opened in its name

Oversight

The custodian’s duty of oversight involves ensuring that the sale, issue, redemption, and cancellation of AIF units or shares are carried out in accordance with relevant laws and regulations. This also includes:

  • Verifying that any instructions issued by the Alternative Investment Fund Manager (AIFM) are carried out
  • Remitting any consideration due to the AIF within usual time limits

Safe-Keeping

The safe-keeping function of a custodian applies differently depending on the type of assets held. For financial instruments, these must be:

  • Registered in a financial instrument account opened in the custodian’s books
  • For other assets, such as commodities or real estate, the custodian must:
    • Verify ownership
    • Maintain a record of those assets

Delegation of Safe-Keeping Function

The safe-keeping function can be delegated to a third party, but only if:

  • Objectively justified
  • Meeting certain criteria, including the exercise of due skill, care, and diligence in appointing the delegate

Transparency Requirements

AIFMs must comply with transparency requirements for each AIF under management and those marketed in the EU. This includes providing an annual report describing the financial position of the AIFs and information to investors and regulatory authorities.

In light of these new directives, it is clear that custodians have a significant role to play in managing financial instruments and assets. Their liability for neglect or intentional failure highlights the importance of adhering to their duties and responsibilities. As the financial landscape continues to evolve, it is essential that custodians prioritize transparency and accountability to ensure the stability and security of the markets.