April 10, 2019 - An essential part of the LSTA’s proposed “primary delayed compensation” regime is the requirement that agent banks and primary lenders complete all “onboarding requirements” in a timely manner.

Given current loan market practices, which seem to be inconsistent and indeed onerous, often far exceeding what is required under US law, this may prove challenging for many loan market participants, as became apparent during the KYC panel, “Know Your Customer – Preferable Before the Ready Date” at the LSTA’s Operations Conference in NYC on April 9th.   To give context to the session’s discussion, LSTA’s external counsel, Jeanine McGuinness of Davis Polk, first outlined the US legal and regulatory “know your customer” requirements as are set out in the LSTA’s 2016 KYC Guidelines.   The LSTA’s Guidelines are designed to assist banks in complying with applicable “customer identification program” (CIP) regulations and potential money laundering and Office of Foreign Assets Control (OFAC) compliance risks which are minimal in the context of syndicated lending and loan trading.  When a formal banking relationship is established between a bank and a customer / accountholder, the bank must obtain certain identification information on the customer before opening an account and that customer’s identity must then be verified.  Fortunately, however, in most instances in the loan market, an agent is not required under US law to perform CIP on the primary lenders (or counterparties in the secondary loan market) because it acts only as an intermediary, performing administrative functions for each lender and the syndicate which should not create a formal banking relationship.  Nor do lenders typically open transaction accounts with the agent in order to receive disbursements under a credit agreement; rather, such disbursements are accomplished by wire transfer from the agent, and they alone do not establish a formal banking relationship.  Thus, there is no regulatory requirement for banks to perform CIP on their counterparties in the primary loan market or in secondary loan trades.

Nevertheless, in certain circumstances, agents may consider it to be appropriate to take actions to mitigate AML and other potential risks in the loan market, such as by conducting risk-based due diligence on primary lenders or counterparties.  This could include obtaining the counterparty’s legal name and country of residence/operations (including its address) and performing sanctions screening on the counterparty, including against government watch lists such as the SDN List.  But even this falls far short of the current loan market “onboarding” practices.  It seems that many agent banks continue to perform CIP on primary lenders, requesting certified articles of incorporation, business licenses, charter documents, prospectuses, etc, although not required to in the US.

Admittedly, panelists also cited the collection of tax forms as a significant factor which contributes to delays in settling both primary and secondary trades. Given the way in which bank operations systems have been established, they prefer to gather a lender’s administrative detail forms and tax forms before they become a Lender under the credit agreement, but this, too, is strictly not necessary under US law, and in fact, the LSTA Form of Credit Agreement provides that such forms can be provided “on or about” the date such lender become a Lender under the credit agreement. Faced with the prospect of tax being withheld on that first interest payment, lenders no doubt would promptly submit those forms to the agent.

The results of the session’s audience polling revealed two sides to the story.  79% of respondent banks estimated that KYC is completed within 10 days, but the buy-side panelists shared a very different experience noting that it can take up to 3 months for KYC to be completed with agent banks often requesting many and varied lists of materials.  Nevertheless, although it seems that the buy-side entities have, at least for now, resigned themselves to this onerous and excessive due diligence process, one must wonder why banks continue to request this information when it is simply not required under US law.

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