final fund accounting study manual

7/25/2019 Final Fund Accounting Study Manual

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ABCD

FUND ACCOUNTING MODULE

Study Manual

2012

DCU

Dublin City University


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Cntents

Chapter 1 Introduction....................................................................................................................6

1.1 The Irish Investment Funds Industry 6

1.2 History of the IFSC and the Irish Funds Industry 8

1.3. hat is a fund! 1"

1.# hy investment funds are created! 1#

1.$ %enefits of a Fund 1$

1.6 &is'(&e)ard 16

Chapter 2 Type of Fund Structures...............................................................................................1*

2.1 Types of Funds 1*

2.2 Specia+ist(Hy,rid Funds1-

2.3 m,re++a Funds1-

2.# Fund of Funds 2"

2.$ /aster(Feeder Funds 2"

2.6 Hed0e Funds 21

Chapter 3 CITS and onCITS ehic+es.................................................................................2#

3.1 CITS funds 2#

3.2 onCITS Funds 2-

Chapter # 4ifferent approaches to investment decision ma'in0....................................................33

#.1 5ctive v assive /ana0ement 33

#.2 Top4o)n v %ottomp ortfo+io Construction 3#

#.3 7ro)th v a+ue Stoc' Se+ection 3#

#.# Fundamenta+ v Technica+ 5na+ysis 3$

#.$ Stoc' /ar'et Timin0 3$

#.6 5sset 5++ocation 36

#.* 7roup &otation 36#.8 /omentum Investin0 36

Chapter $ vervie) of various service providers.........................................................................3*

$.1 vervie) of the arious arties 3*

$.2 5dministrator 38

$.3 Transfer 50ent #1

$.# Custodian(Trustee #2

$.$ Investment /ana0er #*

$.6 4irectors to a Fund #*$.* 5uditors #8

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$.8 /ana0er(/ana0er Company #8

Chapter 6 Introduction to 5ccountin0...........................................................................................$"

6.1 The 5ccountin0 9:uation $"

6.2 The ;ed0er System $26.3 4ou,+e 9ntry %oo''eepin0 $2

Chapter * Fund Income.................................................................................................................$6

*.1 4ividends $6

*.2 4ividend Stoc' ptions $8

*.3 Fi


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11.# The Crimina+ Dustice 5ct 1--# 1"8

11.$ The /oney ;aunderin0 7uidance otes 111

Chapter 12 4ata rotection 113

12.1 Introduction 11312.2 4ata rotection 5cts 113

Chapter 13 Fund a+uation.........................................................................................................11*

13.1 Introduction to a+uations 11*

13.2 a+uation 118

13.3 ricin0 Investment Instruments 12"

Chapter 1# 5ccountin0 for Share Capita+...................................................................................12#

1#.1 5ccountin0 for Share Capita+ 12#

1#.2 4istri,utors 126

1#.3 4ividend &einvestment 12*

1#.# &edemptions(;i:uidations 128

Chapter 1$ The Custodian...........................................................................................................12-

1$.1 hat is Custody! 12-

1$.2 4omestic E 7+o,a+ Custody 13"

1$.3 rime %ro'ers BHed0e Funds 133

1$.# Se+ectin0 a Custodian 133

1$.$ The Cost of Custody 138

1$.6 Centra+ Securities 4epositories BCS4s 13-

1$.* 4rivin0 Forces Impactin0 on the Custody 1#2

Chapter 16 Custody Services......................................................................................................1#8

16.1 Sett+ement 1#8

16.2 re Sett+ement Functions 1#-

Chapter 1* Fund 4ocumentation................................................................................................16#

1*.1 F und 4ocumentation 16#

Chapter 18 Traditiona+ Tradin0 Strate0ies E 5+ternative Investment Specific &e0u+ation for Irish

4omici+ed Funds...........................................................................................................................1*"18.1 Common+y avai+a,+e Fund roducts andAsset C+asses 1*"

18.2 5+ternative Investment Strate0ies 1*$

18.3 5+ternative Investment Strate0ies G &e0u+ation in Ire+and 1*8

Chapter 1- Fund &estructure ;i:uidations ( Terminations..........................................................188

1-.1 Fund &estructures 188

1-.2 o+untary indin0 up of Irish CITS and nonCITS Schemes IFI5 7uidance ote

1-#

1-.3 Investment Company ;i:uidation rocess 1-8

1-.# 5dministrative Issues on Comp+etion of indp 2""

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1-.$ Chan0e of Custodian(Trustee 2"1

Chapter 2" Industry %odies.........................................................................................................2"3

2".1 IFI5 2"3

2".2 4ata 2"32".3 5;FI 2"#

2".# C9S& 2"$

2".$ 9F5/5 2"*

2".6 ICS5 2"8

2".* 5+/5 2"-

Chapter 21 &e0u+atory pdates..................................................................................................21"

21.1 CITS I 21"

21.2. roposed 4irective on 5+ternative 213

21.3 C9S&s 5dvice on &is' /ana0ement 21#

21.# 9


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26.# Credit 4efau+t S)aps 283

26.$ Tota+ &eturn S)aps 28$

26.6 9:uity S)aps 286

26.* Contract for 4ifference 28626.8 S)aptions 286

Chapter 2* Ta


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C!a"ter 1 # Intrdu$tin

1%1 T!e Iris! Invest&ent Funds Industry

The &epu,+ic of Ire+and has ,ecome one of the most attractive +ocations for the investment

funds ,usiness in recent years. In 1-86 the Irish 7overnment announced its intention to

esta,+ish an Internationa+ Financia+ Services Centre in 4u,+in )ith the approva+ of the

9uropean Community and introduced su,stantia+ ta< incentives )ith a vie) to the successfu+

deve+opment of the IFSC as a +ocation for internationa+ financia+ services.

These incentives )ere fo++o)ed in 1-8- ,y a further pac'a0e of incentives re+atin0 to

investment funds in the IFSC. These inc+uded CITS and other investment funds +ocated or

mana0ed ,y companies operatin0 )ithin the IFSC )ith the intention of ma'in0 the IFSC themost competitive +ocation in 9urope for fund mana0ement. The Finance 5ct 2""" e


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their Irish su,sidiary. They may then repatriate this money to the S )ithout

incurrin0 any further ta< pena+ties.

b' Gvern&ent )a$*in+

5s the funds industry is seen as a )ay of creatin0 ne) o,s= the various Irish

re0u+atory ,odies are sensitive to the needs of internationa+ fund mana0ers and have a

positive approach to issue )hich arise in the course of esta,+ishin0 funds in Ire+and.

$' St$* E($!an+e Listin+s

The Irish Stoc' 9


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1%2 .istry - t!e IFSC and t!e Iris! Funds Industry

cto,er 1-86 5 report out+inin0 the feasi,i+ity of Ire+and as an internationa+ treasury centre

is presented to the Industria+ 4eve+opment 5uthority BI45 ,y consu+tant Han Muurdee0.

ovem,er 1-86 The Custom House 4oc's 4eve+opment 5uthority is esta,+ished.

5pri+ 1-8* Taoiseach Char+es Hau0hey esta,+ishes and IFSC committee.

Du+y 1-8* The 1-8* Finance 5ct is passed= +e0is+atin0 for a specia+ 1" rate of Corporation

Ta< for IFSC companies= and a " ta< rate for IFSC funds.

Septem,er 1-8* The first t)o companies 7andon and an0 app+y for IFSC +icenses.

cto,er 1-8* The )innin0 desi0n for the Custom House 4oc's ,ui+din0 is chosen.

ovem,er 1-8* The internationa+ stoc' mar'et crash 'no)n as %+ac' /onday occurs= and

initia++y threatens the IFSC proect. 7andon is a)arded the first IFSC +icense.

4ecem,er 1-8* The Industria+ 4eve+opment 5uthority BI45 0ives the approva+ for 18

IFSC proects to 0o for)ard to the 4epartment of FinanceAs Certification Committee for

+icensin0.

Danuary 1-88 or' on the first IFSC ,ui+din0 ,e0ins.

ovem,er 1-88 the Centra+ %an' of Ire+and ,e0ins pu,+ishin0 draft +e0is+ation to esta,+ish

a financia+ services re0u+atory frame)or'.

Dune 1-8- The CITS directive comes into effect in Ire+and. The 1-8- Finance 5ct is

passed= )hich e


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Dune 1--2 5fter intense ne0otiations= the 7overnment 0ets permission from the 9uropean

nion to e


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Dune 2""* 5 f+urry of conso+idation )ithin the industry has ,een )itnessed= )ith %an' of

e) @or' purchasin0 /e++on Trust and ,uyin0 out 5I%As $" share of their oint operation.

State Street ac:uires Investors %an' and Trust= )hi+e Citi0roup ac:uires %IS@S Hed0e and

Fund Services.

Du+y 2""* ver *=""" funds are no) administered in Ire+and= )ith over N1.$ tri++ion )orth

of funds under administration.

ov 2""* The /ar'ets in Financia+ Instruments 4irective B/iFI4 is transposed into Irish

;a) on 1stovem,er.

Fe, 2""8 The 9uropean Commission has pu,+ished a report on the investment po+icies of

CITS and their use of derivatives under CITS III.

Du+y 2""8 The CITS I directive has ,een approved ,y the 9uropean ar+iament to ,e

imp+emented in 2"11.

Dune 2""- The 7overnment announces that the Irish Financia+ Services &e0u+atory

5uthority is to ,e scrapped and rep+aced ,y the Centra+ %an' of Ire+and Commission= to ,e

chaired ,y the Centra+ %an' 0overnor. The Commission )i++ supervise ,oth the sta,i+ity of

the financia+ system and individua+ firms in that system.

cto,er 2"1" The Centra+ %an' &eform 5ct= 2"1"= created a ne) sin0+e unitary ,ody the

Centra+ %an' of Ire+and responsi,+e for ,oth centra+ ,an'in0 and financia+ re0u+ation. The

ne) structure rep+aced the previous re+ated entities= the Centra+ %an' and the Financia+

Services 5uthority of Ire+and and the Financia+ &e0u+ator.

1%/% !at is a -und

5 fund is an investment vehic+e o)ned ,y the investors )hich ena,+es them to invest on a

poo+ed or co++ective ,asis. Funds are a+so referred to as co++ective investment underta'in0s=

co++ective investment schemes or poo+ed investment vehic+es.

The most common method of formin0 a fund is for a promoter= such as a professiona+

investment mana0er= to set up a vehic+e such as a company or trust and to issue shares in the

Company or units in the trust to peop+e )ho )ant to avai+ of the promoter(investment

mana0ers s'i++s= perhaps ,ecause they do not have the time or the e


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The fund is usua++y traded at a va+ue e:ua+ to the et 5sset a+ue BK5L per share(unit=

)ithout a premium or discount= )hich is ca+cu+ated ,ased on the current mar'et va+ue of the

assets and +ia,i+ities of the fund. 5 fund may not ,e avai+a,+e for dai+y tradin0 and as a resu+t

the ca+cu+ation of 5 may ,e performed +ess fre:uent+y than dai+y Be.0.= ee'+y= month+y=

annua++y.

The money raised from the sa+es of the shares or units is then invested on ,eha+f of the fund

,y the investment mana0er. Funds can invest in a hu0e variety of investments= dependin0 on

ho) they are set up and )hat they set out to do. For e


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Investment mana0ers are norma++y su,ect to restrictions on their po)ers of investment and

choice of strate0ies= derivin0 from the fo++o)in0 sourcesG

3i' Invest&ent Ob4e$tive

%efore a fund is +aunched= the promoter of the fund )i++ consider carefu++y )hat the

nature of the fund is to ,e= attemptin0 to stri'e a ,a+ance ,et)een )hat )i++ ma'e the

fund attractive to potentia+ investors and )hat can rea+istica++y ,e attained. The

investment proposition put for)ard ,y the promoter )i++ ,e set out in the fundAs

prospectus in the form of an investment o,ective and po+icies.

The fundAs investment o,ective represents the fundamenta+ aim of the fund= the mission

statement as it )ere= and 0ives the overa++ f+avor of the investment strate0ies that )i++ ,e

pursued ,y the investment mana0er. For ee:uity

securitiesA inc+udes converti,+e ,onds= ho) much of the fundAs cash the investment

mana0er e


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3iii' Invest&ent 5estri$tins

5s )e++ as specific investment po+icies= the prospectus )i++ a+so contain various

restrictions on the fundAs po)ers of investment and )ith )hich the investment mana0er

)i++ have to comp+y. Typica+ restrictions inc+ude +imits on the amount of the fund that

may ,e invested in any one issuerAs securities and +imits on the amount of +evera0e the

fund may emp+oy and their purpose is to +imit the amount of ris' the fund may ,e

e


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assets of the fund are in the possession of a custodian= 0enera++y a ,an' or other

financia+ institution )hich is su,stantia+ in siJe and strict+y re0u+ated.

3v' )en$!&ar*in+

The performance of the investment mana0er and his success in dea+in0 )ith investments

in the fund is c+ear+y a 'ey component in the a,i+ity of the fund to attract ne) investors

and to retain e


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Investment funds are desi0ned to meet various investor needs= for e


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1%8 5is*5e9ard

The easiest )ay to distin0uish ,et)een various cate0ories of investment is throu0h their ris'

and the associated potentia+ re)ard.

Thus simp+e deposits shou+d= ,arrin0 unfortunate situations +i'e %CCI and %arin0s ,e the

+east ris'y. 5s a resu+t= the re)ard is not spectacu+ar in that capita+ 0ro)th may ,e Jero

Bne0ative after inf+ation is ta'en into account and the income is suscepti,+e to chan0es in

interest rates.

Converse+y= e:uities may haveG

Mero capita+ 0ro)th= Jero income

Su,stantia+ capita+ 0ro)th )ith continuin0 income and income 0ro)th

The maor cate0ories of investment may ,e sp+it intoG

Fi


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C!a"ter 2 # Ty"e - Fund Stru$tures

2%1 Ty"es - Funds

.i+! 5is* v L9:5is* Funds

Certain types of investor can ta'e different +eve+s of ris'. The more sophisticated type of

investor )i++ fre:uent+y )ant to invest in a fund that is not so concerned )ith diversification

of ris'. In many cases= the hi0her the ris' profi+e of the fund= the 0reater the potentia+ returns

for the investor. n the other hand the sma++er investor )i++ not ,e prepared to put his

retirement savin0s at ris' and )i++ ,e happier )ith a +on0 term investment in a +o) ris' fund.

O"en:ended v Clsed Ended Funds

Funds can ,e c+assified accordin0 to the manner in )hich the investor can Kcash inL his

investment. penended funds are funds )hich a++o) investors to rea+ise their investment

durin0 the +ifetime of the fund ,y redeemin0 their shares= receivin0 ,ac' from the fund the

current va+ue of their shares in cash. C+osedended funds are funds )hich )i++ not redeem

shares and the on+y )ay for investors to cash in their investment is to se++ the shares to

someone e+se or= if the fund has a +imited +ifespan= to )ait unti+ the fund is terminated.

The ,enefit of a c+osedended vehic+e is that the monies invested ,y shareho+ders are +oc'ed

in for definite period and therefore the investment mana0er can ma'e investment

mana0ement decisions )ithout havin0 to )orry a,out ma'in0 si0nificant payments to

redeem shares at the re:uest of shareho+ders.

Invest&ent C&"any v Unit Trust

Fund can ,e esta,+ished usin0 a variety of +e0a+ structures= dependin0 on the country in

)hich the fund is esta,+ished. In addition= in many countries= there are a+ternative vehic+es)hich can ,e used to achieve the same resu+t= a+thou0h not strict+y spea'in0 c+assed as fund.

T)o of the most common forms of fund used in 9urope= ,oth of )hich are avai+a,+e in

Ire+and= are the unit trust and the investment company )ith varia,+e capita+ Ban investment

company )ith varia,+e capita+ is referred to as an openended investment company or

>9ICA in the .?. and as a sociPtP dAinvestissement Q capita+ varia,+e or >SIC5A on the

Continent.

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C&"arisn - unit trusts and invest&ent $&"anies

Unit Trusts Invest&ent C&"any

5 unit trust does not have a separate +e0a+

identity ,ut is represented ,y the trustee as

+e0a+ o)ner of the assets= on ,eha+f of the

unitho+ders )ho are the ,eneficiaries of

the trust.

5 company has a separate +e0a+ e


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2%2 S"e$ialist.ybrid Funds

The Financia+ &e0u+ator BIFS&5 )i++ permit specia+ist funds to ,e set up as nonCITS

funds= and has issued specific notices settin0 out investment restrictions tai+ored to such

funds= such asG

/oney mar'et funds Binvestin0 in cash deposits and short term de,tR

Funds of funds Binvestin0 in other fundsR

Feeder funds Binvestin0 on+y in one other specific fundR

roperty fundsR

5nd futures and options funds

The Financia+ &e0u+ator a+so a++o)s funds that com,ine features of different types ofspecia+ist funds= app+yin0 the respective notices to that portion of the assets of each such

Khy,ridL fund invested in each specia+ist cate0ory of investments.

2%/ U&brella Funds

In Ire+and= as in most countries= ,oth CITS and nonCITS funds can ,e esta,+ished as one

structure ,ut )ith a num,er of separate compartments= 'no)n as su,funds or c+asses= each

of )hich represents a separate 0roup of investors and assets. This is 'no)n as an um,re++a

structure. In the case of a unit trust= each su,fund is a separate trust )hi+e in the case of a

company= the company )i++ issue different c+asses of shares each of )hich re+ates to different

poo+s of assets.

The advanta0e of usin0 an um,re++a fund structure is that a num,er of funds can ,e

esta,+ished )ith different investment po+icies or fee structures ,ut )hich have simi+ar

dea+in0 arran0ements and other characteristics.

9ach um,re++a of funds is 0overned ,y one main constitutive document Bthe prospectus.

nce an um,re++a fund has ,een set up= for each ne) fund it )i++ usua++y on+y ,e necessary

to produce a short supp+ementa+ prospectus out+inin0 those features of the ne) fund )hich

distin0uish it from the other su,funds a+ready esta,+ished under the um,re++a. This

considera,+y speeds up the esta,+ishment process as there are fe)er and shorter documents

for the parties invo+ved to consider= particu+ar+y the re0u+atory authorities= and it a+so reduces

costs.

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2%6 Fund - Funds

5 fund of funds is a scheme )hich has as its principa+ o,ective ma'in0 investments in other

funds.

Investors

Fund

Fund Fund

Fund of Funds

Investors in a fund of funds scheme need to ,e a)are that there is the possi,i+ity of investors

sufferin0 costs at ,oth the fund of funds +eve+ and the under+yin0 fund +eve+. The Financia+

&e0u+atorAs re:uirements are desi0ned to prevent such dou,+e char0in0 on su,scriptions and

to ensure that investors are to+d of any dou,+e char0in0 of mana0ement or other fees.

2%7 MasterFeeder Funds

5 feeder fund has as its principa+ o,ective investment in another sin0+e fund Bthe master

fund. The feeder fund and master fund may ,e domici+ed in different urisdictions and may

a+so ,e set up as different types of structures. For e


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/aster(Feeder Fund Structure

Investors

Feeder Fund Feeder Fund

/aster Fund

5ssets

Investors

2%8 .ed+e Funds

4espite the name= a hed0e fund has nothin0 to do )ith hed0in0 techni:ues ,ut instead is a

term used to +oose+y descri,e a cate0ory of fund )hich is typica++y esta,+ished in unre0u+ated

urisdictions and )hich emp+oys a+ternative investment strate0ies to those emp+oyed ,y more

traditiona+ funds. There are hed0e funds of a++ shapes and siJes= specia+isin0 in many

different forms of investment= so that they do not fa++ easi+y into any particu+ar cate0ory or

description.

The :uestion of ho) to define a hed0e fund can provo'e a +en0thy discussion amon0

investment professiona+s= ,ut )hi+e it is difficu+t to define= it is usua++y easy to reco0nise a

hed0e fund= as they 0enera++y have a num,er of common characteristics. For e


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service. To the e


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Hed0e funds escaped their S ori0ins )hen first S,ased mana0ers= and then mana0ers

,ased e+se)here= ,e0an to set up hed0e funds in urisdictions= such as the Cayman Is+ands=

)hich offer a simi+ar unre0u+ated environment to that avai+a,+e in the S= ,ut )ithout the

comp+ications created ,y the S ta< system for nonS investors.

Hed0e funds have ,een in e


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C!a"ter / : UCITS and Nn:UCITS ;e!i$les

In this chapter )e )i++ +oo' at the conduct of ,usiness ru+es app+ica,+e to CITS mana0ers and

other co++ective investment schemes BnonCITS mana0ers.

/%1 UCITS -unds

The Financia+ &e0u+ator has issued a series of UCITS Notices)hich app+y to CITS )hich

are either esta,+ished in the State or esta,+ished in another 9 mem,er state ,ut authorised

to ,e mar'eted in the State. These otices comp+ement the re+evant CITS re0u+ations.

The CITS mana0er is re:uired to comp+y )ith a num,er of conduct of ,usiness type ru+es=

in the promotion and sa+e of units to Irish resident investorsG

(i) Prospectus

9ach CITS must have a simp+ified and a fu++ prospectus= ,oth of )hich must ,e dated and

'ept up to date.

The simp+ified prospectus must ,e offered to potentia+ investors free of char0e= ,efore

investin0 in the CITS. The fu++ prospectus must ,e supp+ied to investors in CITS= on

re:uest and free of char0e.

The prospectus must contain sufficient information for investors to ma'e an informed

ud0ment of the CITS investment and the ris's associated )ith that investment.

here the va+ue of a CITS is +i'e+y to ,e hi0h+y vo+ati+e due to its portfo+io composition or

the portfo+io mana0ement techni:ues that may ,e used= a prominent statement dra)in0

attention to this fact must ,e inc+uded in ,oth the fu++ and simp+ified prospectuses.

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The simplified prospectus

The simp+ified prospectus must contain the fo++o)in0 informationG

3A' )rie- "resentatin - t!e UCITS

Bi Form in +a)

Bii 4ate of authorisation and date of incorporation )here re+evant

Biii 4etai+s of su,funds in the case of um,re++a CITS

Biv ame and address of the mana0ement company= if app+ica,+e

Bv The e


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Bii ame of the Financia+ &e0u+ator

Biii 4etai+s of a contract point )here additiona+ information may ,e o,tained if

needed

Biv 4ate of pu,+ication of the fu++ prospectus

The full prospectus

The fu++ prospectus must contain more detai+ed information than the simp+ified prospectus

inc+udin0 such information asG

%rief indications re+evant to unitho+ders of the ta< system app+ica,+e to the CITS.

4etai+s of )hether deductions are made at source from the income and capita+ 0ains paid

,y the CITS to unitho+ders. 4etai+s of the type and main characteristics of the units

rocedures and conditions for repurchase of redemption of units= inc+udin0 the period

)ithin )hich redemption proceeds )i++ norma++y ,e paid or dischar0ed to investors.

Circumstances in )hich repurchase or redemption may ,e temporari+y suspended.

4escription of the CITS investment o,ectives Be.0. capita+ 0ro)th or income and

investment po+icy Be.0. specia+isation in 0eo0raphica+ or industria+ sectors. The

description must ,e comprehensive and accurate= readi+y comprehensi,+e to investors and

sufficient to ena,+e investors ma'e an informed ud0ment on the investment proposed to

them. The description must inc+ude any +imitations on that investment po+icy= and

,orro)in0 po)ers )hich may ,e used in the mana0ement of the CITS.

5 statement that the CITS )i++= on re:uest= provide supp+ementary information to

unitho+ders re+atin0 to the ris' mana0ement methods emp+oyed= inc+udin0 the :uantitative

+imits that are app+ied and any recent deve+opments in the ris' and yie+d characteristics of

the main cate0ories of investments.

&u+es for the va+uation of assets.

In the case of um,re++a CITS the char0es= if any= app+ica,+e to s)itchin0 of investments

from one su,fund to another.

The prospectus must state that the authorisation of the CITS is not an endorsement or

0uarantee of the scheme ,y the Financia+ &e0u+ator nor is the Financia+ &e0u+ator

responsi,+e for the contents of the prospectus and must incorporate the fo++o)in0

statementG

The authorisation of this scheme by the Financial Regulator shall not constitute a

warranty as to the erformance of the scheme an! the Financial Regulator shall not be

26

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liable for the erformance of !efault of the scheme"#

The prospectus must identify= and descri,e in a comprehensive manner= the ris's

app+ica,+e to investin0 in that particu+ar CITS. In particu+ar the prospectus shou+d ma'e

reference toG

the fact that prices of units may fa++ as )e++ as riseR

the desira,i+ity of consu+tin0 a stoc',ro'er or financia+ adviser a,out the contents of the

prospectusR and

)here re+evant= the fact that the difference at any one time ,et)een the sa+e and

repurchase price of units in the CITS means that the investment shou+d ,e vie)ed as

medium to +on0 term.

CITS )ith investment o,ectives )hich invo+ve a hi0her than avera0e de0ree of ris'

Be.0. CITS investin0 in emer0in0 mar'ets or )arrant schemes must recommend that an

investment in the CITS shou+d not constitute a su,stantia+ proportion of an investment

portfo+io and may not ,e appropriate for a++ investors. This )arnin0 must ,e inserted and

hi0h+i0hted at the ,e0innin0 of the prospectus and the prospectus must contain a fu++

description of the ris's invo+ved.

(ii) Reports

5 CITS must pu,+ish aG

a year+y report= coverin0 a fu++ financia+ year= and

a ha+f year+y report= coverin0 the first ha+f of the financia+ year.

The annua+ report must ,e prepared )ithin # months of the end of the financia+ period to

)hich they re+ateG the time +imit for the ha+f year+y report is 2 months from the end of the

period. The annua+ and ha+f year+y reports must ,e avai+a,+e to the pu,+ic at p+aces specified

in the prospectus.

The +atest annua+ report and any su,se:uent ha+f year+y report must ,e offered to investors=

a+on0 )ith the simp+ified prospectus= free of char0e ,efore investin0 in the CITS.

The annua+ and ha+f year+y reports must ,e supp+ied free of char0e to e


29/295

a++o) the prices to ,e pu,+ished month+y= instead= on condition that this does not preudice

the interests of the investors.

(iv) Change in investment policy

5 chan0e to the investment o,ectives= or a materia+ chan0e to the investment CITS=

as disc+osed in the prospectus= may not ,e effected )ithout approva+ on the ,asis of a

maority of votes cast at 0enera+ meetin0.

K$aterialL is ta'en to mean= a+thou0h not e


30/295

e


31/295

referred to a,ove= e.0. re:uirement to have a prospectus= pu,+ication of year+y and ha+f year+y

reports= advertisin0 re:uirements= etc.

(i) Professional Investor unds (PIs)

%oth CITS and nonCITS funds are su,ect to certain investment and ,orro)in0

restrictions in the operation of their investment funds.

Ho)ever )here a fund is mar'eted on+y to >rofessional in(estorsA these investment and

,orro)in0 restrictions can ,e disapp+ied= provided the minimum investment is 12$=""".

The prospectus for such a professiona+ investor fund must indicate= in a prominent position=

that it has ,een authorised ,y the Financia+ &e0u+ator to mar'et so+e+y to professiona+

investors. It must specify its minimum su,scription re:uirements and add the fo++o)in0G

KAccor!ingly% the re&uirements of the Financial Regulator which are !eeme! necessary for

the rotection of retail in(estors% in articular the con!itions set !own by the Financial

Regulator in relation to in(estment an! le(erage% !o not aly to the schemeL.

rofessiona+ Investor Funds are not re:uired to ma'e pu,+ic the issue and redemption prices

of their unitsR ho)ever= these must ,e made avai+a,+e to unitho+ders on re:uest.

The criteria for ,ein0 considered a professiona+ investor are set out in 5nne< II to 4irective

2""#(3-(9 on mar'ets in financia+ instruments= as fo++o)sG

9ntities )hich are re:uired to ,e authorised or re0u+ated to operate in the financia+

mar'ets such asG

Ba Credit institutionsB, Investment firmsBc ther authorised or re0u+ated financia+ institutionsBd Insurance companiesBe Co++ective investment schemes and mana0ement companies of such schemesBf ension funds and mana0ement companies of such fundsB0 Commodity and commodity derivatives dea+ersBh ;oca+sBi ther institutiona+ investors

;ar0e underta'in0s meetin0 t)o of the fo++o)in0 siJe re:uirements on a company ,asisG

%a+ance sheet tota+G 2"m

3"

ABCD


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et turnoverG #"m

)n funds 2m

ationa+ and re0iona+ 0overnments= pu,+ic ,odies that mana0e pu,+ic de,t= Centra+

%an's= internationa+ and supranationa+ institutions such as the or+d %an'= the I/F= the

9C%= the 9I% and other simi+ar internationa+ or0anisations.

ther institutiona+ investors )hose main activity is to invest in financia+ instruments=

inc+udin0 entities dedicated to the securitisation of assets or other financin0 transactions.

The a,ove investors are automatica++y deemed to ,e professiona+ investors.

Certain individua+ private investors can opt to ,e treated as professiona+ investors= provide

they can meet at +east t)o of the fo++o)in0 criteriaG

the individua+ has carried out transactions= in si0nificant= in si0nificant siJe= on the

re+evant

the siJe of the individua+As financia+ instrument portfo+io= defined as inc+udin0 cash

deposits and financia+ instruments e


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fact that inherent in such investments is the potentia+ to +ose the entire sum invested.

The prospectus for a ua+ifyin0 Investor Fund must indicate= in a prominent position= that a

fund has ,een authorised ,y the Financia+ &e0u+ator for mar'etin0 so+e+y to :ua+ifyin0

investors. It must specify its minimum su,scription re:uirements and add the fo++o)in0G

Accor!ingly% while this scheme is authorise! by the Financial Regulator% the Financial

Regulator has not set any limits or other restrictions on the in(estment ob)ecti(es% the

in(estment olicies or on the !egree of le(erage which may be emloye! by the scheme#"

ua+ifyin0 Investor Funds are not re:uired to ma'e pu,+ic the issue and redemption prices of

their unitsR ho)ever= these must ,e made avai+a,+e to unitho+ders on re:uest.

32

ABCD


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C!a"ter 6 : Di--erent a""ra$!es t invest&ent de$isin &a*in+

Fe) issues 0enerate more heated discussion in the investment mana0ement circ+es than do

approaches to investment decision ma'in0. arious investment mana0ers considerin0 the

same rea+ity )i++ come to diametrica++y opposite conc+usions. ne says you shou+d start the

ana+yses of emer0in0 mar'ets )ith the 0overnment econometric reports= another says to

i0nore these reports. ne says to pic' common stoc's ,y understandin0 the fundamenta+s of

the companies themse+ves= another says to +oo' at the patterns in the prices of the companyAs

stoc'. The +ist 0oes on and on.

%e+o) are hi0h+i0hts of a fe) of the maor= common+y encountered approaches= to i++ustrate

the ran0e of possi,i+itiesG

6%1 A$tive v ,assive Mana+e&ent

Can any individua+ or 0roup of individua+s= even professiona+ portfo+io mana0ers=

consistent+y pic' securities that are )inners! That is the cru< of the :uestion that divides the

proponents of active mana0ement from those of passive mana0ement. The passive

mana0ement schoo+As ar0ument= made most visi,+y in %urton /a+'ie+As 5 &andom a+'

4o)n a++ Street= contents that financia+ mar'ets are so efficient that they ma'e it

impossi,+e for active man0ers to consistent+y outperform mar'et avera0es. assive

mana0ers therefore do not attempt to se+ect individua+ securities= ,ut rather match the

composition of a se0ment of the mar'et. Typica++y= they attempt to match a maor

,enchmar' inde< such as the SE $"" or the ;ehman Intermediate Term 7overnment %ond

Inde


35/295

research= ho)ever= tends to support the passive mana0ement ar0ument. 5ctive+y mana0ed

funds typica++y have hi0her e


36/295

a+ue investin0 attempts to identify outoffavour companies= )hose stoc' has a 0ood

potentia+ to increase in price. a+ue mana0ers usua++y have a +o)er turnover of securities in

their portfo+ios and assume +ess ris' than 0ro)thorientated mana0ers. They tend to ho+d

+ar0e cash positions at mar'et pea's= )hen ,ar0ains are presuma,+y rarer. In 0enera+= va+ue

mana0ers do ,est )hen the economy is comin0 out of a s+ump and underva+ued companies

,e0in to recover.

6%6 Funda&ental v Te$!ni$al Analysis

Fundamenta+ ana+ysis invo+ves study of the issuin0 company itse+f its financia+ statements

and other :uantitative data= p+us :ua+itative assessments of factors such as the companyAs

mana0ement= physica+ p+ant= and mar'et presence. %ased on the ana+ysis of these

fundamenta+s Band different mana0ers have many different )ays of 0oin0 a,out these

ana+yses= the mana0er estimates a va+ue for the companyAs stoc' that can ,e compared to the

current mar'et price. If the mana0er finds that the current mar'et price is +o)er than the

computed va+ue= then the stoc' is considered underpriced and a candidate for ,uyin0.

Technica+ ana+ysis= sometimes ca++ed KchartistsL= focus on the detai+s of :uantitative+y

measura,+e data on chan0es in the price of particu+ar stoc's or of short interest in the

mar'et= for e


37/295

6%8 Asset All$atin

5sset a++ocators focus on the anticipated ris's and returns of the various assets c+asses

stoc's= ,onds and cash 0iven certain assumptions a,out economic 0ro)th= interest rates=

mar'et va+uations and other fundamenta+ indicators. They continua++y adust their portfo+io

composition amon0 the c+asses and individua+ security se+ection is accorded secondary

importance. The C(Funds= for e


38/295

C!a"ter 7 : Overvie9 - varius servi$e "rviders

7%1 Overvie9 - t!e ;arius ,arties

This i++ustration out+ines the re+ationship ,et)een the various parties to fund.

B2 B3

B1 B1" B- B8 B* B# B$

B6

T!e trustee vie9s t!e entire "r$ess t ensure it is in $&"lian$e 9it! -und and

re+ulatry restri$tins%

1 Investor decides to dea+ in Fund and contacts the Transfer 50ent.

2 Transfer 50ent informs Investment /ana0er of Funds 5vai+a,+e.

3 Investment /ana0er stri'es dea+ on the mar'et ,ased on information received from

Transfer 50ent.

# Investment /ana0er advises Custodian of dea+s p+aced.

$ Custodian sett+es trades on the mar'et.

6E* Investment /ana0er and Custodian advise Fund 5ccountant of dea+s p+aced.

8 Fund 5ccountant a0rees va+uation )ith Investment /ana0er.

- et asset va+ue communicated to Transfer 50ent.

1" Shareho+der notified of va+ue of investment.

3*

Trustee

Transfer 50ent

Investor

Investment

/ana0er

5dministrator

Counterparty

7+o,a+

Custodian

ABCD


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7%2 Ad&inistratr

Some of the mana0ement companyAs responsi,i+ities may ,e de+e0ated to the Fund

5dministrator )ho is responsi,+e for carryin0 out periodica+ va+uations of the fund. This can

,e dai+y= )ee'+y or month+y. The main responsi,i+ities of the fund administrator inc+ude the

fo++o)in0G

a+uin0 the assets= ca+cu+atin0 and recordin0 the income and e


40/295

re:uirements= the promoter is free to choose to have dea+in0 days as fre:uent+y or

as se+dom as is thou0ht to ,e appropriate. 4ependin0 on the type of fund= dea+in0

may ta'e p+ace dai+y= once a )ee' or once a month for e


41/295

,e audited and the administrator )i++ ,e responsi,+e for arran0in0 this )ith the

fundAs auditorsR

3i(' Cr"rate and Se$retarial

5ctin0 as secretary of the fund Bfor funds esta,+ished as companies= arran0in0

,oard meetin0s= 'eepin0 the minutes of these meetin0s and +oo'in0 after any

notices or returns that need to ,e fi+ed in the Companies &e0istration fficeR

5rran0in0 meetin0s of unitho+ders or shareho+ders Bremem,er that companies must

have at +east one shareho+dersA meetin0 or annual general meetingeach year to

discuss and vote on any proposa+s that may ,e made from time to time to ma'e

chan0es to the fundAs constitutive documentation and any other important issues

affectin0 the fund or the ri0hts of the investors in the fundR

3(' C&"lian$e

9nsurin0 the fund comp+ies )ith its o,+i0ations to the appropriate re0u+atory

,odies= such as the Financia+ &e0u+ator and if +isted= the Stoc' 9


42/295

ther daytoday operations= such as payment for investments ac:uired for the fund=

co++ection of income and dividends paid on the fundAs investments and de+ivery of share

certificates and documents of tit+e )hen investments are so+d are the responsi,i+ity of the

custodian or trustee.

7%/ Trans-er A+ent

The responsi,i+ities of a transfer a0ent inc+udeG

Subs$ri"tins and 5ede&"tins> The transfer a0ent 0enera++y assists in the shareho+der

servicin0 re:uirements of a co++ective investment underta'in0= i.e.= co++ectin0 the

su,scription proceeds and payin0 out the redemption proceeds. The transfer a0ent must act

in accordance )ith the provisions of the /emorandum and 5rtic+es of 5ssociation(Trust

4eed(rospectus and may ,e re:uired to issue a unit(share certificate to the re+evant

unitho+der(shareho+der. ery often= the units(shares )i++ ,e he+d in re0istered form and share

certificates are not issued.

S!are 5e+ister> The transfer a0ent )i++ 0enera++y maintain the &e0ister in respect of the

co++ective investment underta'in0. The &e0ister ref+ects shares su,scri,ed for= shares

redeemed and share ,a+ances. The transfer a0ent periodica++y prepares and transmits to

shareho+ders account statements sho)in0 the tota+ num,er of units(shares o)ned ,y the

shareho+der as of the statement c+osin0 date= su,scriptions and redemptions of units(shares

,y the shareho+der durin0 the period covered ,y the statement and dividends and other

distri,utions paid to the shareho+der durin0 the statement period.

The transfer a0ent transmits to unitho+ders(shareho+ders pro


43/295

The maintenance of a++ ri+inal d$u&entatinreceived from the shareho+ders.

7%6 CustdianTrustee

The Custodian is responsi,+e for the safe'eepin0 of the assets of the Company. They may

a+so appoint a su,custodian of the assets ,ut their +ia,i+ity is not affected.

The Trustee of an Irish domici+ed investment fund may not ,e rep+aced ,y another trustee

)ithout the approva+ of the Financia+ &e0u+ator. The trustee must satisfy the Financia+

&e0u+ator that it has ade:uate and appropriate e


44/295

To ensure that the income of the fund is app+ied in accordance )ith the /emorandum and

5rtic+es of 5ssociation.

To carry out the instructions of the mana0ement company un+ess they conf+ict )ith the

re+evant +e0is+ation.

To act as a )atchdo0 for the shareho+ders of the fund. The Financia+ &e0u+ator imposes a

duty on the trustee to in:uire into the conduct of the mana0ement company in its

mana0ement of the fund and to report its findin0s to the shareho+ders in each financia+

year.

The trustee is +ia,+e to the mana0ement company= the investment company and the

shareho+ders for any +oss suffered ,y them as a resu+t of its unustifia,+e fai+ure to perform its

o,+i0ations as a trustee or improper performance of them. This +ia,i+ity to shareho+ders may

,e invo'ed either direct+y ,y the shareho+ders or indirect+y throu0h the mana0ement

company.

The custodia+ responsi,i+ities inc+udeG

To ensure that there is +e0a+ se0re0ation of non cash assets he+d under custody and that

these assets are he+d on a fiduciary ,asis. In urisdictions )here fiduciary duties are not

reco0nised= the trustee must ensure that the fund is assured +e0a+ entit+ement to the assets.

To maintain appropriate interna+ contro+ systems to ensure that records c+ear+y identify the

nature and amount of a++ assets under custody= the o)nership of each asset and the

+ocation of the documents of tit+e to each asset.

here a custodian de+e0ates some of its custodia+ duties ,y appointin0 a custodian(su,

custodian= it must maintain an appropriate +eve+ of supervision and ma'e en:uiries from

time to time to confirm that standards are maintained ,y the custodian. This re+ationship

is set out in a forma+ contract ,et)een ,oth parties.

5 more detai+ed description of the trustee(custodian o,+i0ations are as fo++o)sG

Sa-e*ee"in+ - t!e -und@s assets%

The fundAs assets must ,e p+aced )ith a trustee for safe'eepin0. The trustee is

responsi,+e for the physica+ safe'eepin0 of the assets and the everyday administration of

these assets. The trustee ho+ds the assets on ,eha+f of the fund and not for its o)n ,enefit.

The term assets are defined ,road+y to inc+ude dividends and interest as )e++ as the

securities of the fund Be:uities= ,onds. The trustee must ,e satisfied that contro+s are in

#3

ABCD


45/295

p+ace in the custodian Bor that the su,custodian= )here one is appointed= has appropriate

contro+s in p+ace to ensure that assets of the fund are in safe'eepin0. This is one of the

main o,+i0ations of the trustee and the duty that most peop+e are fami+iar )ith.

T!e trustee &ust ensure t!at t!e sale issue re"ur$!ase and $an$ellatin - units in

t!e -und is $arried ut in a$$rdan$e 9it! t!e re+ulatins and t!e -und

d$u&entatin%

The trustee must ensure that the sa+e= issue= repurchase= redemption and cance++ation of

units are carried out in accordance )ith the re0u+ations and the fund documentation.

The records of units issued and redeemed )i++ ,e maintained ,y the transfer a0ent )ho

has ,een contracted to carry out this function on ,eha+f of the fund. This cou+d ,e the

mana0ement company or a third party transfer a0ent. The use of the )ord KensureL in the

Financia+ &e0u+ator notices shou+d not ,e interpreted as a 0uarantee 0iven ,y the trustee

that every share activity is carried out correct+y. &ather it shou+d ,e interpreted that the

trustee is responsi,+e for ensurin0 that ade:uate contro+s are in p+ace )ith the re+evant

transfer a0ent. The trustee is eensureA is

interpreted to mean that the trustee shou+d revie) the administratorAs contro+s and

procedures to ensure that it is in a position to correct+y comp+ete the function )hich it has

,een contracted to carry out. The )ord ensure does not mean that the trustee )i++automatica++y ,e responsi,+e if there is an error in a 5 ca+cu+ation ,ut that the trustee

)i++ ,e re:uired to investi0ate the administratorAs procedures and contro+s for producin0

the 5 on a periodic ,asis.

T!e trustee &ust $arry ut t!e instru$tins - t!e &ana+e&ent $&"any unless t!ey

$n-li$t 9it! t!e re+ulatins r t!e -und d$u&entatin%

##

ABCD


46/295

The mana0ement companyAs instructions may ,e received ,y fa


47/295

procedures in the transfer a0entAs office are ade:uate to dischar0e this function. It may

periodica++y revie) their procedures to ensure that the transfer a0ent contro+s are ,ein0

adhered to and operatin0 effective+y.

T!e trustee &ust en?uire int t!e $ndu$t - t!e &ana+e&ent $&"any in ea$!

a$$untin+ "erid and re"rt t!eren t t!e unit!lders%

The trustee )i++ provide an annua+ report for inc+usion in the fundsA annua+ report. This is

the accumu+ation of the trusteeAs )or' over the year. It is important in that it is possi,+y

the on+y direct contact the trustee )i++ have )ith the actua+ unitho+ders of the fund. /ost

of the unitho+dersA contact )i++ ,e )ith the mana0ement company or other de+e0ated third

party providers.

The trustee report states )hether or not= in the trusteeAs opinion the fund has ,een

mana0ed in accordance )ith the +imitations imposed on the investment and ,orro)in0

po)ers of the fund as provided in the fund documentation and re+evant re0u+ationR and

other)ise in accordance )ith the fund documentation and the re0u+ation.

If the mana0ement company or investment company does not comp+y )ith Bi or Bii

a,ove= the trustee must state )hy this is the case and out+ine the steps )hich the trustee

has ta'en to rectify the situation.

T!e trustee &ust ensure t!at t!e ter&s and $nditins - any a+ree&ent entered int

by a -und -r t!e "ur"ses - e--i$ient "rt-li &ana+e&ent are bserved%

It is important to note that this o,+i0ation on+y app+ies to nonCITS funds. The )ord

>ensureA means that the trustee must satisfy itse+f that the mana0ement company has

sufficient contro+s and procedures to ena,+e it to ensure that the terms and conditions of

efficient portfo+io mana0ement a0reements are o,served.

T!e Standard - Care 5e?uired - t!e Trustee

There are different ru+es for the standard of care re:uired of trustees for CITS and non

CITS funds= as a resu+t of differin0 approaches to the imp+ementation of the CITS

directive. In the case of a CITS fund= the Financia+ &e0u+ator re:uires the trustee to

underta'e to ,e +ia,+e to the mana0ement company= investment company and unitho+ders for

any +oss suffered as a resu+t of the trusteeAs unustifia,+e fai+ure to perform its o,+i0ations or

its improper performance of them. For a nonCITS fund= the trustee )i++ ,e +ia,+e for

fraud= ne0+i0ence= )i++fu+ defau+t= ,ad faith or rec'+ess disre0ard of its o,+i0ations.

#6

ABCD


48/295

The re+evant statements must appear in the trust deed of a unit trust or in the custodian

a0reement for an investment company or an investment +imited partnership. The unit ho+ders

may enforce this +ia,i+ity either direct+y Bi.e. Sue the trustee themse+ves or indirect+y thou0h

the mana0ement company. This )i++ depend on the +e0a+ nature of the re+ationship ,et)een

the trustee= /ana0ement Company and the unitho+der )ho suffered the +oss.

The +ia,i+ity of a trustee )i++ not ,e affected ,y the fact that it has entrusted to a third party

some or a++ of the assets in its safe'eepin0. C+ear+y this o,+i0ation )i++ ,e hi0h+y re+evant as

it )i++ ,e usua+ for the trustee to appoint su,custodians in the different urisdictions )here

the fundAs assets are +ocated. These su,custodians act as a0ents of the custodian and ho+d

the assets of the fund on its ,eha+f.

In order to dischar0e the trusteeAs responsi,i+ity= the trustee must e


49/295

The ,oard of directors of an investment company= /ana0ement Company or administration

company must not have directors in common )ith the directors of the trustee of the

investment fund. The trustee has independent functions and duties.

The Financia+ &e0u+ator re:uires that at +east t)o of the directors of any of these companies

must ,e Irish &esidents.

7%< Auditrs

The auditor of must ,e :ua+ified in accordance )ith the provisions of the Irish Companies

5cts and in addition to the norma+ auditin0 duties= has specific duties imposed on him under

the CITS re0u+ations concernin0 the auditin0 of the accounts of a CITS. He a+so has a

direct o,+i0ation to report to the Financia+ &e0u+ator in certain circumstances.

7%= Mana+erMana+er C&"any

5 unit trust scheme is a nonoperationa+ vehic+e and its day to day operations are conducted

,y the mana0ement company and the trustee. 5 varia,+e capita+ company may a+so de+e0ate

its mana0ement functions to a mana0ement company for an annua+ fee.

The mana0ement company provides the effective contro+ and mana0ement to a co++ective

investment underta'in0. ot)ithstandin0 the overa++ responsi,i+ity of the custodian ( trustee=

the mana0ement company 0enera++y has the fo++o)in0 duties )hich may ,e de+e0atedG

Issues the prospectus )hich is approved ,y the Financia+ &e0u+ator.

5ppoints a distri,utor to raise funds and vests those funds in the trustee.

5ppoints an investment adviser.

5dministers the su,scription and redemption of units(shares. a+ues the assets= ca+cu+ates the net asset va+ue per unit(share and 'eeps ,oo's of account.

repares the annua+ report and accounts.

?eeps the prospectus up to date.

/ar'ets the units.

/a'es necessary fi+in0s and ensures comp+iance ,y the co++ective investment underta'in0

)ith app+ica,+e re0u+atory and +e0a+ re:uirements.

#8

ABCD


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5 mana0ement company )i++ usua++y in turn de+e0ate certain of its functions to third parties

and any app+ication for authorisation as a co++ective investment underta'in0 must inc+ude

information concernin0 the name of any entity )hich has ,een contracted ,y the

mana0ement company to carry out its )or' to0ether )ith copies of any re+evant a0reements.

Sufficient information concernin0 any such third party must ,e supp+ied to ena,+e the

Financia+ &e0u+ator to ,e satisfied as to its e


51/295

C!a"ter 8 : Intrdu$tin t A$$untin+

5ccountin0 is often said to ,e the +an0ua0e of ,usiness. It is used in the ,usiness )or+d to

descri,e the transactions entered into ,y a++ types of or0anisations. 5ccountin0 terms and

ideas are therefore used ,y peop+e associated )ith ,usiness= )hether they are mana0ers=

o)ners= investors= ,an'ers= +a)yers or accountants.

The actua+ recordma'in0 phase of accountin0 is usua++y ca++ed ,oo''eepin0. Ho)ever=

accountin0 e


52/295

In the startup situation )hen the o)ner is the on+y one )ho has supp+ied the assets then the

fo++o)in0 e:uation )ou+d ho+d trueG

Assets B Ca"ital

Ho)ever sometimes= some of the assets )i++ have ,een provided ,y someone other than the

o)ner. It is norma+ for ,usinesses to source funds e


53/295

E(a&"le

/r V is settin0 up a ne) ,usiness and invests 9ur#=6"" cash into it on 1 Danuary 2""$. The

amount invested referred to as capita+ is the amount o)ed ,y the ,usiness to /r V. 5t 1

Danuary 2""$ the accountin0 e:uation )ou+d ,eG

5ssets U Capita+ p+us ;ia,i+ities

9ur#=6"" BCash 9ur#=6"" W 9ur"

8%2 T!e Led+er Syste&

;ed0ers are another name for some of the ,oo's of account of a ,usiness. The sa+es +ed0er

contains +ists of amounts due from customersR there )i++ a+so ,e a correspondin0 purchases

+ed0er. These are 0enera++y termed persona+ +ed0ers= ,ecause they dea+ )ith de,ts to and

from persons(entities. There are a+so nomina+ +ed0ers that dea+ )ith accounts that are neither

rea+ nor persona+= for edou,+e entryA system of

,oo''eepin0= so ca++ed ,ecause every transaction is recorded t)ice in the accounts. This is

sometimes referred to as the concept of dua+ity.

The ,asic ru+e )hich must a+)ays ,e o,served is that every financia+ transaction 0ives rise to

t)o accountin0 entries= one a de,it and the other a credit. 5 de,it entry means the ,usiness

Ko)nsL and a credit entry means the ,usiness Ko)esL. The tota+ va+ue of de,t entries in the

0enera+ +ed0er is therefore a+)ays e:ua+ at any time to the tota+ va+ue of credit entries.

$2

ABCD


54/295

hich account receives the credit entry and )hich receives the de,it depends on the nature

of the transaction.

Ba 5n increase in an e


55/295

Bii Cash is paid Bcredit entry to the cash account

4r Securities at Cost 9ur2="""

Cr Cash 9ur2="""

, The t)o sides of the transaction areG

Bi 5udit e


56/295

Bii The amount o)ed to creditors increases ,y 9ur*"" Ba credit entry to the

creditors account

4r Scanner 9ur*""

Cr Creditors 9ur*""

, The t)o sides of the transaction areG

Bi The amount o)ed ,y de,tors increases Bde,it entry to the de,tors account

Bii The sa+es account increases ,y O#$" Bcredit entry to the sa+es account

4r 4e,tors 9ur#$"

Cr Sa+es 9ur#$"

hen these transactions are sett+ed Bi.e. )hen the cash is physica++y paid for the scanner or

received for the 0oods so+d the fo++o)in0 transactions occur.

a ayment of 9ur*"" for the scannerG

Bi The amount o)in0 to creditors is reduced Bde,it entry in the creditors account

Bii Cash is paid Ba credit entry to the cash account

4r Creditors 9ur*""

Cr Cash 9ur*""

, &eceipt of sa+es proceeds of 9ur#$" from customerG

Bi Cash is received Bde,it entry to the cash account

Bii The amount due from de,tor is reduced Bcredit entry to the de,tors account

4r Cash 9ur#$"

Cr 4e,tors 9ur#$"

$$

ABCD


57/295

C!a"ter < : Fund In$&e

Ho) do funds provide for income and e


58/295

Ho)ever companies 0enera++y +i'e to maintain the same +eve+ of dividend and any si0nificant

variances in the tota+ va+ue of dividends dec+ared on a particu+ar stoc' )ou+d merit

investi0ation ,y the fund administrator.

reference shareho+ders are entit+ed to a fi


59/295

5ssumin0 the shares are denominated in ster+in0 and the fund has a ho+din0 of 2""="""

shares the dividend entit+ement )i++ ,e as fo++o)sG

7ross 4ividend 2""=""" < # U O8="""

ithho+din0 Ta< O8=""" < 2" U O1=6""

et 4ividend O6=#""

5 portion of the ta< in an offshore fund mi0ht ,e rec+aima,+e. In that case a further provision

a0ainst income )ou+d ,e made to rec+aim the amount of ta< outstandin0.

The receiva,+e )ou+d ,e recorded as e


60/295

5 discount security is an instrument Bi.e. a short term de,t instrument )hich is ,ou0ht at a

price +o)er than the face va+ue and has no coupon associated )ith it. 9


61/295

4iscounted securities are he+d on the va+uation usin0 the accreted va+ue method. 5n

accountin0 convention in the S for money mar'et securities ca++ed the K6" day ru+eL states

that it is accepta,+e to va+ue discounted money mar'et securities )ith a maturity of 6" days

or +ess at accreted cost if the %oard of 4irectors of the fund determines in 0ood faith that

amortised cost appro


62/295

sin0 the accreted cost method comp+ies )ith the accrua+ concept. The a+ternative to

accretion )ou+d ,e to mar' the security to mar'et on a dai+y ,asis. The effect on the 5 of

the fund )ou+d ,e su,stantia++y the same in times of interest rate sta,i+ity as the accreted cost

usua++y ref+ects the mar'et va+ue of the security. Ho)ever prior to maturity the income effect

)ou+d ,e reco0nised as an unrea+ised capita+ 0ain and at maturity as a rea+ised capita+ 0ain.

This treatment= thou0h not materia+ to the 5= is 0enera++y re0arded as incorrect as it

understates the income of a fund.

$oney $ar%et and Accretion

The 5ccretion po+icy is of particu+ar importance in /oney /ar'et Funds. It is the aim of

/oney /ar'et funds to offer the investor an a+ternative to p+acin0 their cash on deposit )ith

financia+ institutions. Instead the /oney /ar'et fund invests in a portfo+io of short term

securities hopin0 to 0ive the shareho+der the 0uarantee of capita+ preservation coup+ed )ith a

hi0her return than )ou+d ,e 0enera++y avai+a,+e from overni0ht or +on0er deposit rates.

orma++y money mar'et funds :uote a do++ar BO or 9ur 5 )ith a specific yie+d. The

maintenance of the do++ar 5 is possi,+e ,ecause the ,oard of directors of the fund have

determined that a++ short term securities in the fund )i++ ,e maintained at accreted or

amortised cost. 5mortisation is the a++ocation of premium a0ainst income over the +ife of a

security. 5mortisation ensures that there is no capita+ 0ain on maturity. In effect it is the

opposite of 5ccretion.

Interest rates are un+i'e+y to remain sta,+e in the +on0 run and there may come a time )hen

accreted(amortised cost does not proper+y appro


63/295

interest rate for securities in the same ris' c+ass there )i++ ,e a difference ,et)een the face

va+ue and mar'et va+ue )hich )i++ ,e treated either as a discount or as a premium. 5++

interest ,earin0 securities Be.0. treasury ,onds= treasury notes= corporate ,onds etc. are

accounted for in a simi+ar manner.

If the interest rate specified on the security is +ess than the mar'et interest rate then security

)i++ se++ at a discount Bi.e. mar'et va+ue )i++ ,e +ess than the face va+ue. If the security is a

,ond or a note it )i++ then ,e referred to as a discount ,ond or a discount note. BThis shou+d

not ,e confused )ith the discount securities descri,ed a,ove.

The security )i++ se++ at a premium if the interest rate specified is more than the mar'et

interest rate Bi.e. mar'et va+ue )i++ ,e more than the face va+ue.

5 typica+ ,ond is a promise of fi


64/295

3"(36" 5ssumes t)e+ve months of thirty days each e.0. 5 3"(36"

,ond )i++ accrue 3" days interest in Fe,ruary B28 actua+

days and 3" days interest in /arch B31 actua+ days.

5(36" This accrua+ convention is common for short term securitiesBi.e. )ith maturity of +ess than 1 year. 5ssumes a

denominator of 36" days to ca+cu+ate the annua+ income and

uses the actua+ num,er of days in the period as numerator.

5(36$ ? and Irish 7i+ts BTreasury %onds as descri,ed in Ire+and

and 9n0+and use this methodo+o0y.

5(5 This convention app+ies to S T%onds. It assumes that the

year is divided uneven+y into t)o parts either 181 W 18#

days or 182 W 183 days. The amount of the dai+y accrua+

chan0es from one period to the ne


65/295

The accrua+ period is e:ua+ to the tota+ num,er of days ,et)een the +ast coupon date and the

date of the accrua+. In order to determine the num,er of 3"(36" days there are in the accrua+

period )e need to underta'e the fo++o)in0 ca+cu+ation.

;ast coupon date 22("*(2""$ to Current 5ccrua+ 4ate 3"("-(2""$

22("*("$ 3"("*("$ U - days inc+usive

3"("*("$ 3"("8("$ U 3" days

3"("8("$ 3"("-("$ U 3" days

Tota+ 3"(36" days U 6- days

5pp+yin0 the formu+a to our e


66/295

3"("6("$ 31("*("$ U 31 days

31("*("$ 31("8("$ U 31 days

31("8("$ 3"("-("$ U 3" days

3"("-("$ "#(1"("$ U # days

Tota+ actua+ days U 126 days

5pp+yin0 the formu+a to our e


67/295

The effect of this formu+a is i++ustrated in the dia0ram.

A$tA$t A$$rual -r US Treasury


68/295

This situation is avoided ,y a ca+cu+ation )hich a++ocates the tota+ 3"(36" coupon over the

actua+ num,er of days in the coupon period. There is a smooth f+o) of income for each

dayAs va+uation )hich ensures a +eve+ yie+d for dai+y priced va+uations.

E(a&"le

5 corporate ,ond pays interest semiannua++y as fo++o)sG

Interest payment datesG 3" Dune= 31 4ecem,er

Interest day countG 3"(36"

Interest rateG 1"

Fund 5%C ho+ds SN1="""=""" nomina+ of this ,ond throu0hout 2""$. The dai+y interest

accrua+s throu0hout 2""$ are ca+cu+ated as fo++o)sG

1 "1("1("$ 3"("6("$

Tota+ interest accrua+ "1("1("$6 3"("6("$

Bi.e. ha+f the annua+ interest amount

SN$"="""

Tota+ num,er of days "1("1("$ 3"("6("$ 182 days

4ai+y interest accrua+ SN2*#.*3

2 "1("*("$ 31(12("$

Tota+ interest accrua+ "1("*("$ 31(12("$

Bi.e. ha+f the annua+ interest amount

SN$"="""

Tota+ num,er of days "1("1("$ 3"("6("$ 18# days

4ai+y interest accrua+ SN2*1.*#

ote that if there is a sa+e or purchase on the ,ond durin0 the period that there )i++ ,e a

mismatch ,et)een )hat has ,een posted to the income account and )hat )i++ ,e rea+ised in

cash. 5s a resu+t an adustin0 entry )ou+d have to ,e made.

6*

ABCD


69/295


70/295

C!a"ter = : Fund E("enses

The a++o)a,+e e


71/295

The three main cate0ories of e


72/295

E(a&"le - a $ntra$tual -ee s$!edule>

The investment advisory fee schedu+e is 0iven as fo++o)sG

.#6 of the first 1" mi++ion of net assets.

.#1 of net assets over 1" mi++ion ,ut +ess than 2" mi++ion.

.12 of net assets over 2" mi++ion ,ut +ess than 3" mi++ion.

."8 of net assets e


73/295

The e


74/295

n 1st 5pri+ the dai+y accrua+ )i++ ,eG

4r. 5udit e


75/295

=%7 ,er-r&an$e Fees and E?ualisatin

The e


76/295

*&ualisation Cre!it. 5 credit 0iven to the investor )ho comes in a,ove the hi0h )ater

mar'= )hich is redeemed in shares at the end of the year.

Contingent Re!emtion. 5 redemption factor ca+cu+ated a0ainst an investor )ho comes

in ,e+o) the hi0h )ater mar'= to avoid an investor 0ainin0 a Kfree rideL.

=%8 E("ense Ca"s aivers and 5ei&burse&ents

Some funds operate under an e


77/295

C!a"ter : A$$untin+ -r Invest&ents

%1 E?uities

In e


78/295

E(a&"le E?uity ,ur$!ase

%ou0htG 6=""" 4e++ p+c Y N-.""

Trade 4ateG 3 Fe,ruary 2"1"

Sett+ement 4ateG * Fe,ruary 2"1"

4ea+in0 CostsG 1 of consideration

Items on contract note )i++ inc+udeG

Consideration $#=""" B6=""" < N-

4ea+in0 costs $#" B$#=""" < 1

Contract tota+ for sett+ement $#=$#"

A$$untin+ Entries

n trade date= 3 Fe, 2"1"G

,r 9:uity investment ,oo' cost B%(S N$#=$#"Cr utstandin0 sett+ements B%(S N$#=$#"

n sett+ement date= * Fe, 2"1"G

,r utstandin0 sett+ements B%(S N$#=$#"

Cr %an' B%(S N$#=$#"

n the sa+e of a security the accountin0 cost of the ho+din0 so+d is credit to the ,oo' cost

account and the difference ,et)een that and the sa+e proceeds is the profit B+oss on disposa+.

The ,oo' entries for the sa+e of shares areG

,r utstandin0 sett+ements B%(SCr 9:uity investment ,oo' cost B%(SCr rofit on disposa+s or ,r;oss on disposa+s

n sett+ementG

,r %an' B%(SCr utstandin0 sett+ements B%(S

E(a&"le E?uity Sale

So+dG 3=""" 4e++ p+c Y N1".""

Trade 4ateG 1$ 5pri+ 2"1"

Sett+ement 4ateG 1- 5pri+ 2"1"

4ea+in0 CostsG 1.$ of consideration

**

ABCD


79/295

Items on contract note )i++ inc+udeG

Consideration 3"="""."" B3=""" < N1".""

4ea+in0 costs B#$"."" BN3"=""" < 1.$

Contract tota+ for sett+ement 2-=$$"

A$$untin+ Entries

n trade date= 1$ 5pri+ 2"1"G

,r utstandin0 Sett+ements B%(S N2-=$$"

Cr 9:uity Investment %oo'cost B%(S N2*=2*"

Cr &ea+ised 0ain on Sa+e of Securities BE; N2=28"

n advice of sett+ement= 1- 5pri+ 2"1"G

,r %an' B%(S N2-=$$"

Cr utstandin0 sett+ements B%(S N2-=$$"

There is an added comp+ication )hen the fund purchases forei0n currency securities= due to

the introduction of e


80/295

E(a&"le Frei+n E?uity ,ur$!ase

%ou0htG 1"=""" Sony Corp Y @en1""

Trade 4ateG 16 /ay 2"1" Be


81/295

For accountin0 purposes the interest e+ement is treatment separate+y to the capita+ e+ement

,ecause un+i'e e:uities= the accrued amount of income can ,e easi+y identified ,y app+yin0

he fi


82/295

Items to ,e seen on the contract note )i++ inc+udeG

Consideration $#=""" B$"=""" < 1"8

5ccrued Interest 6-" B$"=""" < 8 < 63(36$ days

Contract tota+ for sett+ement $#=6-"

A$$untin+ Entries

n trade date= 2$ /arch 2"1"G

,r utstandin0 sett+ements B%(S $#=6-"

Cr Interest so+d B%(S 6-"

Cr Fi


83/295

A$$untin+ Entries

n va+ue date= 1" 5pri+ 2"1"G

,r Fi


84/295

%6 Cr"rate A$tins

A% 5i+!ts issues

&i0hts are issued ,y companies )ho )ish to raise funds for investment )ithout havin0 to

resort to ,orro)in0s. 5 ri0hts issue 0ives e


85/295

c Se++ sufficient ri0hts to ta'e up the ,a+ance. The accountin0 entries )i++ ,e a

com,ination of Ba and B, a,ove.

d ;et the ri0hts +apse= no accountin0 entries re:uired

n payment of the ca++ amount= shares o,tained via a ri0hts issue ,ecome a norma+ e:uity

investment and are treated accordin0+y= providin0 they ran' pari passu in a++ respects )ith the

main ho+din0. Shares received as a resu+t of a ri0hts issue )i++ ,e ama+0amated )ith the

main ho+din0 in due course.

Rights Issue '#ample

5 company announces a ri0hts issue of one $"p ordinary share at 1.$" for every five $"p

ordinary shares he+d Bi.e. 1 for $ on 2 5pri+ 2"1". The ca++ payment is due and paya,+e on *

5pri+ 2"1".

The midd+e mar'et price of the shares ,efore the start of dea+in0s )as 1.*$.

The estimated premium on the ne) shares Bni+ paid ,efore dea+in0s start is ca+cu+ated as

fo++o)sG

Initia+ Ho+din0 $"" shares Y

1.*$

orth 8*$.""

&eceives 1"" shares Y

1.$"

Cost 1$".""

Su,se:uent

ho+din0

6"" shares orth 1="2$.""

Therefore= each share shou+d no) ,e priced Y 1.*1 B1="2$ X 6""

9stimated premium on ne) shares Bni+ paid 1.*1 1.$" U 21p

Accounting 'ntries

n ca++ date= * 5pri+ 2"1"G

,r 9:uity Investment %oo' cost 1$" B1"" < 1.$"Cr %an' 1$"

)% )nus Issues

8#

ABCD


86/295

5 ,onus issue is used ,y a company to increase the shares in issue )ithout any

e


87/295

,r 9:uity Investment %oo'cost B%(S $""Cr 9:uity dividend BE; $""

D% St$* S"lits

5 stoc' sp+it is used ,y a company to increase the num,er of shares in issue )ithout

e


88/295

%8 A$$untin+ -r Derivatives

The most important concept in determinin0 ho) to account for derivatives is the accrua+s

concept= )hich permits the matchin0 of costs and income. This section dea+s )ith the

accountin0 for futures and options= )hich are pro,a,+y the most )ide+y used derivatives.

A% Futures

See also chater 5" Futures

5 -utures $ntra$tis a +e0a++y ,indin0 a0reement to ,uy or se++ a specified asset at a fi


89/295

E(a&"le # Futures Cntra$t

n 4ay 1 a fund ,uys Bto open $ 5u0ust FTS9 1"" Y 283$

Contract SiJeG O2$ per contract

Initia+ /ar0inG O2=$"" per contract

FTS9 1"" Inde< on 4ay 1G 283$

FTS9 1"" Inde< on 4ay 2G 283-

FTS9 1"" Inde< on 4ay 3G 282$

n day # the fund se++s Bto c+ose $ 5u0ust FTS9 1"" futures Y 28#"

Day 1

Initial $argin

The fund is re:uired to +od0e a deposit= referred to as initia+ mar0in= )ith the ,ro'er on 4ay

1. The initia+ mar0in is a fi


90/295

Day /

The variation mar0in on 4ay 3 is ca+cu+ated ,ased on the movement in the price of the indemar'et a,useA is deemed to

inc+ude insider dea+in0 and mar'et manipu+ation in re+ation to financia+ instruments traded on

a re0u+ated mar'et in the 995 area= i.e. 9 /em,er States W or)ay= ;ichtenstein and

Ice+and.

The &e0u+ations provide for the prevention= detection= investi0ation and sanctionin0 of

insider dea+in0 and mar'et manipu+ation.

,+i0ations imposed ,y the mar'et 5,use &e0u+ations inc+ude those onG

persons professiona++y arran0in0 transactions to notify suspicious transactions to the

Financia+ &e0u+atorR

issuers of financia+ instruments to pu,+ic+y disc+ose inside information )ithout de+ayR

issuers of financia+ instruments to dra) up +ists of persons )ith access to insider

informationR

those invo+ved in the mana0ement of issuers of financia+ instruments to comp+y )ith

notification ru+es re0ardin0 mana0ersR transaction. B)ith effect from 1st cto,er 2""$R

persons= inc+udin0 the media and ourna+ists= invo+ved in the preparation and

dissemination of recommendations Binc+udin0 research re0ardin0 the fair presentation of

research and the disc+osure of conf+icts of interests. B)ith effect from 1st cto,er 2""$

The Financia+ &e0u+ator has ,een appointed the competent authority for the purposes of the

/ar'et 5,use &e0u+ationsR ho)ever certain duties have ,een de+e0ated to the Irish Stoc'

9


104/295

The rospectus &e0u+ations provide that persons )ho ma'e an offer of securities to the

pu,+ic or see' admission of securities to tradin0 on an 995 re0u+ated mar'et Bin Ire+and= the

Irish Stoc' 9


105/295

C!a"ter 11 : Mney Launderin+ and Jn9 Kur Client@

11%1 !at is &ney launderin+

/oney ;aunderin0 is the term 0iven to the )ay that crimina+s attempt to concea+ the true

ori0in and o)nership of the proceeds of their crimina+ activity. Crimina+s )i++ attempt to use

the financia+ system to confer the appearance of +e0a+ity on money procured ,y i++e0a+

activity. ;aunderin0 is in fact= simp+y arran0in0 for the traces of the ori0in of the crimina+

cash to disappear.

The 0oa+ of a +ar0e num,er of crimina+As acts is to 0enerate a profit for the individua+ or

0roup that carries out the act. /oney +aunderin0 is the processin0 of these crimina+ proceeds

to dis0uise their i++e0a+ ori0in. This process is of critica+ importance= as it ena,+es the

crimina+ to enoy these profits )ithout eopardisin0 their source.

9


106/295

The increased inte0ration of the )or+dAs financia+ system and the remova+ of ,arriers to the

free movement of capita+ have enhanced the ease )ith )hich crimina+ money can ,e

+aundered and have comp+icated the trac'in0 process. Individua+ financia+ institutions )hich

,ecome invo+ved in money +aunderin0 )i++ ris' prosecution and the +oss of their 0ood mar'et

reputation.

11%2 Sta+es - Mney Launderin+

There is no one)ay of +aunderin0 money. /ethods can ran0e from the purchases and resa+e

of hi0hva+ue items Be.0. houses= e)e++ery= cars etc. to the passin0 on money throu0h a

comp+e< internationa+ )e, of +e0itimate ,usinesses and >she++A companies= the +aunderin0

process usua++y consists of the fo++o)in0 three sta0esG

Placement

The p+acement phase is the one durin0 )hich money is inected into the financia+ system.

This is a process ,y )hich cash is fina++y converted into a financia+ instrument. /any

techni:ues are used to provide the appropriate ustification. ne of the techni:ues invo+ves

Ksmurfin0L= )hich means many peop+e carryin0 comparative+y sma++ sums of money= )hich

are converted into ,an' accounts. KSmurfersL may use a commercia+ intermediary and

camouf+a0e strate0ies or create accounts )ith the comp+icity of a ,an' or at +east a mem,er

of the ,an'As staff. In a++ of these techni:ues= the distinction ,et)een +e0a+ and i++e0a+ funds

can prove difficu+t to identify.

The p+acement sta0e is one of the most important sta0es in the process of money +aunderin0

,ecause of the o,vious +ar0e amounts of cash= )hich are evident= and the 0enera+

vu+nera,i+ity.

The Transfer 50ent ( &e0istrar is un+i'e+y to ,e vu+nera,+e at this sta0e. It is not norma+

mar'et practice to accept cash or trave++ers che:ues as a payment medium for investments.

2ayering

The midd+e sta0e of the +aunderin0 process is the one )here traces of the true ori0in of the

money are K)ashed outL. The aim is to detach the funds from their ori0ina+ source and=

throu0h a num,er of comp+e< transactions= render the ori0ins tota++y o,scure in order to

dis0uise the audit trai+. %an' monies )i++ ,e used for a++ types of investments as )e++ as

,an' che:ues and trave++ers che:ues a++ of )hich can ,e converted into other financia+

instruments such as stoc's= shares= rea+ estate and other simi+ar assets.

1"$

ABCD


107/295

This pattern of s)itchin0= ,uyin0 and se++in0 is repeated over and over a0ain. The e+ectronic

transfer of money throu0h various countries= )hich do not have strict contro+s )i++ a+so serve

to o,scure ori0ins.

Transfer 50ents(&e0istrars cou+d ,e invo+ved in this K+ayerin0L e


108/295

.9 -inan$ial institutins $an $&bat &ney launderin+

Institutions shou+d at a++ times pay particu+ar attention to the fundamenta+ princip+e of 0ood

,usiness practice 'no) your c+ient. Havin0 a sound 'no)+ed0e of a customerAs ,usiness

and pattern of financia+ transactions and commitments is one of the ,est methods ,y )hich

financia+ institutions )i++ reco0nise attempts at money +aunderin0.

11%/ !at is t!e Finan$ial A$tin Tas* Fr$e 3FATF' 999%-at-:+a-i%r+

The Financia+ 5ction Tas' Force on money +aunderin0 )as esta,+ished in 1-8- ,y the 7*

Summit. Its main purpose )as to deve+op a coordinated approach to com,atin0 money

+aunderin0.

The F5TF is an inter0overnmenta+ ,ody= )hich deve+ops and promotes po+icies to com,at

money +aunderin0. Its main 0oa+ is to 0enerate the po+itica+ support necessary to ,rin0 a,out

reforms in nationa+ and internationa+ +e0is+ation and re0u+ation in this area.

The F5TF drafted #" recommendations= )hich set out the measures that 0overnments shou+d

ta'e to imp+ement comprehensive anti money +aunderin0 pro0rammes. In Dune 2""3 the

F5TF a0reed on a su,stantia+ revision of the Forty &ecommendations Bhere after referred to

as the &ecommendations to ta'e account of e


109/295

The ori0ina+ F5TF &ecommendations )ere dra)n up in 1--" as an initiative to com,at the

misuse of financia+ systems ,y persons +aunderin0 dru0 money. In 1--6 the

&ecommendations )ere revised for the first time to ref+ect evo+vin0 money +aunderin0

typo+o0ies. The 1--6 Forty &ecommendations have ,een endorsed ,y more than 13"

countries and are the Internationa+ antimoney +aunderin0 standard.

11%6 T!e Cri&inal usti$e A$t 16

In +ine )ith the 9 Counci+ 4irective B-1(3"8(99C on prevention of the use of the financia+

system for the purpose of money +aunderin0 and the &ecommendations of the F5TF= Ire+and

drafted the crimina+ Dustice 5ct 1--#. 5s a resu+t= the Irish +a) re+atin0 to money +aunderin0

is principa++y contained in the Crimina+ Dustice 5ct= 1--#= )hich has ,een amended since

then ,y different +e0is+ation. The +e0is+ation dea+s )ith a num,er of issuesG

a definition of )hat Kmoney +aunderin0L is.

imposition of measures on desi0nated ,odies to prevent and assist in the detection of

money +aunderin0.

o,+i0ations on desi0nated ,odies to report to the 7ardai and &evenue Commissioners=

suspicions of attempts to money +aunder.

o,+i0ations on desi0nated ,odies to report to the 7ardai= any transaction )ith a state or

territoria+ unit )ithin a state that is prescri,ed ,y the /inister for Dustice.

it is an offence to tip off a person a,out a report made to the 7ardai and &evenue

Commissioners= )hich cou+d preudice any investi0ation into such a report.

De-initin - &ney launderin+

Section 31 of the Crimina+ Dustice 5ct 1--# defines the office of Kmoney +aunderin0L as

fo++o)sG

K5 person is 0ui+ty of money +aunderin0 if= 'no)in0 or ,e+ievin0 that property is orrepresents the proceeds of crimina+ conduct or ,ein0 rec'+ess as to )hether it is or represents

such proceeds= the person= )ithout +a)fu+ authority or e


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Bii assistin0 another person to avoid prosecution for the crimina+ conduct

concerned= or

Biii avoidin0 the ma'in0 of a confiscation order or a confiscation cooperation order

B)ithin the meanin0 of section #6 of this 5ct or frustratin0 its enforcement

a0ainst that person or another person=

B, concea+s or dis0uises its true nature= source= +ocation= disposition= movement or

o)nership or any ri0hts )ith respect to it= or

Bc ac:uires= possesses or uses the property.L

Finan$in+ terrris&

The Crimina+ Dustice BTerrorist ffences 5ct= 2""$ has introduced the ne) offence of

financin0 terrorism. Some of the o,+i0ations on desi0nated ,odies ,e+o) in re+ation to

detection of money +aunderin0 no) a+so app+y to the offence of financin0 terrorism.

Obli+atins n desi+nated bdies

,+i0ations are imposed on Kdesi0nated ,odiesL to prevent and assist in the detection of

money +aunderin0 and financin0 terrorism. These inc+udeG

o,+i0ation to esta,+ish the identity of the c+ientR

o,+i0ation to retain records and documentsR

o,+i0ation to adopt measures to prevent and detect money +aunderin0 and the offence of

financin0 terrorismR

o,+i0ation not to Ktip offL c+ients a,out reports of suspicious transactions.

To train and educate staff

There is a )ide ran0e of financia+ institutions and ,odies descri,ed as >4esi0nated ,odiesA

for this purpose= the fo++o)in0 is a +ist of some of these desi0nated ,odies under the 5ctBSection 32B1G

%an' and %ui+din0 societies

/oney ,ro'ers

;ife assurance companies

roviders of services in futures and options e


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Stoc',ro'ers

%ureau de Chan0e

The /inister for Dustice has a+so prescri,ed other ,odies to ,e Kdesi0nated ,odiesL. 4etai+s

of )hich may ,e found in the 7uidance otes= pa0es 11 and 12.

5e"rtin+ sus"i$ius transa$tins

$a%ing a report

4esi0nated ,odies= inc+udin0 their directions= emp+oyees and officers= must ma'e a report to

the 7arda Siochana and the &evenue Commissioners )hereR

they KsuspectL that an offence of financin0 terrorism has ,een or is ,ein0 committedRand(or

they KsuspectL that an offence under the c+ient identification re:uirements has ,een or is

,ein0 committed= e.0. an individua+ provides evidence of identity that proves to ,e fa'eR

a transaction )ith any State prescri,ed ,y the /inister for Finance as ,ein0 a state )hich

has not in p+ace ade:uate procedures for the detection of money +aunderin0 or financin0

terrorism.

The term KsuspiciousL is not defined in re+ation to reportin0 suspicious transactions.

Ho)ever= a suspicious transaction )i++ often ,e one )hich is inconsistent )ith a customerAs

'no)n= +e0itimate ,usiness or persona+ activities or )ith the norma+ ,usiness for that type of

account. Therefore= the first 'ey to reco0nition is 'no)in0 enou0h a,out the customerAs

,usiness to reco0nise that a transaction= or series of transactions= is unusua+.

Tipping off

It is an offence to tip off anyone a,outG

any investi0ation into money +aunderin0 or financin0 terrorismR

any report made to the 7ardai and &evenue a,out suspicions to money +aunder or finance

terrorism or fai+ure to esta,+ish a c+ientAs identity.

T!e Le+al ,sitin

It is an offence to assist anyone )hom you 'no) or suspect to ,e +aunderin0 money

0enerated ,y crime. K%e+ievin0 property to ,e= or represent another personAs crimina+

proceeds inc+udes thin'in0 that the property )as= or pro,a,+y represented= such proceedsL.

This offence is punisha,+e ,y up to fourteen years imprisonment and(or fine.

11"

ABCD


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It is an offence for a desi0nated ,ody to fai+ to ta'e reasona,+e measures to esta,+ish the

identify of any person or third party= )here it 'no)s= or has reason to ,e+ieve= that the person

to )hom it proposes to provide the service is actin0 for a third party. This offence is

punisha,+e ,y up to five years imprisonment and(or a fine.

nder the 5ct= desi0nated ,odies must retain copies of a++ materia+s used to identify a

customer. &ecords must ,e retained for a period of at +east five years after the re+ationship

has ended. 4ocuments re+atin0 to transactions must a+so ,e retained for at +east five years

after the transaction has ta'en p+ace. It is an offence for a desi0nated ,ody to fai+ to maintain

these records. This offence is punisha,+e ,y up to five years (imprisonment and(or fine.

11%7 T!e Mney Launderin+ Guidan$e Ntes

The /oney ;aunderin0 Steerin0 Committee of the Irish Financia+ Services &e0u+atory

5uthority BFinancia+ &e0u+ator= issued 0uidance notes for financia+ institutions these

0uidance notes have ,een posted on mood+e . The 7uidance otes= )hi+e not +e0a++y ,indin0

may ,e ta'en into account in court proceedin0s. The Financia+ &e0u+ator may a+so use the

7uidance otes as a ,enchmar' a0ainst )hich to access the comp+iance of institutions under

its supervision. Therefore= the 5ct and the 7uidance otes must ,e +oo'ed at to0ether.

The 7uidance otices aim to e


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customers and retention of documents and records of transactions to prevent and assist in

final fund accounting study manual

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