The August 2012 edition of Corgentum Consulting's Operational Due Diligence Insights newsletter.

1. August 2012
Operational Due Diligence Insights
In This Issue
Welcome to Our Summer Issue
- Regulatory Focus: Singapore’s Failed
Attempt at Hedge Fund Regulation Welcome to the summer issue of Corgentum Consulting's Operational Due
Diligence Insights. This newsletter serves as a resource for news, opinions
- Business Continuity Corner: Is the
and insights focused on issues related to operational risk and operational
Cloud a Viable Hedge Fund BCP/DR
due diligence on fund managers including hedge funds, private equity funds
Solution?
and traditional managers.
- Private Equity: LP’s Are Utilizing
Operational Due Diligence to Make
Their Voices Heard Singapore’s Failed Attempt at
- IT Hub: Does Your Hedge Fund’s
Hardware Matter?
Hedge Fund Regulation
- Service Providers: The Importance of Recently Singapore announced a major change in its approach to hedge fund
Prime Brokerage Due Diligence regulation - and the hedge fund community celebrated.
-Term of the Month: Shadow Equity Previously in Singapore hedge funds were not required to be licensed as long
as they were classified as exempt fund managers. As long as they only
- Fraud Spotlight – Another Day, marketed themselves to so-called qualified investors and met some other basic
Another Hedge Fund Fraud In NJ criteria, there wasn't much oversight or regulation of their activities. All hedge
fund managers had to do was provide notification to the Monetary Authority
- The Importance of Understanding of Singapore ("MAS") of their choice as to whether to be licensed or not - and
FATCA most chose the latter.
- On the Calendar ...continued on next page
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2. 2 | Operational Due Diligence Insights
Regulatory - Continued from page 1... Additionally, it could be asked, why does the MSA only
require independent custody it for larger managers?
Perhaps a custody related fraud below S$250 million
This fast and loose approach to hedge fund regulation
does not outweigh the burden and costs of hiring a
was originally utilized as a marketing tool to lure fund
third-party custodian placed on smaller fund managers
managers to Singapore, and as a 2010 Bloomberg article
in the mind of the MSA, however such considerations
stated, "put the city back on the map" as an Asian hedge
would likely hold little recompense for the investors
fund destination.
who could lose capital in such a situation.
For the past two years, the MAS has been studying ways
Requirements for independent valuation of investor
to increase regulation of hedge funds. After two years
assets
of study, and seemingly taking cues from the U.S.'s
Dodd-Frank legislation and recent SEC registration
"Independent" is a vague term at best. Does this mean
requirements, the MAS decided to effectively require all
that a hedge fund that trades highly liquid positions
hedge fund managers above S$250 million to register.
such as equities, and is able to price such positions from
Specifically, under the Securities and Futures (Licensing
a third-party source such as Bloomberg, has satisfied
and Conduct of Business) (Amendment No 2)
this requirement? Or instead is the work of a third-party
Regulations (2012), hedge funds will now be classified
firm engaged by the hedge fund manager, such as a
into two different categories: Fund Management
fund administrator, required? Does this mean that it is
Companies ("FMC") and Registered Fund Management
now a violation of the Singapore regulations for FCM's
Companies ("RFMC") . RFMC replaces the old Exempt
to self-administer?
Fund Manager ("EFM") classification.
RFMCs can serve up to 30 qualified investors and
What about situations where positions are thinly traded
manage up to $250 million in Singapore dollars,
or initially manager marked? Would the hedge fund
(commonly written as S$). RFMCs do not need a license
manager hiring a third-party administrator, who may
but FMC's will need a license.
not have the competency to independently price such
thinly traded positions, still satisfy this requirement?
According to the MAS press release regarding these
new regulations, FMCs will subject to "enhanced
An overarching concern relating to the use of such
business conduct and capital requirements. These
third-party administrators is that administrators
include rules requiring independent custody and
themselves are hired by the fund managers. While they
valuation of investor assets, as well as requirements for
work for the fund, there are legitimate questions about
FMCs to undergo independent annual audits by external
the true independence of such relationships.
auditors and having an adequate risk management
framework commensurate with the type and size of
Requirement for FCMs to undergo independent annual
investments managed by the FMCs."
audit by external advisors
Let us analyze each of these items individually:
Would this requirement be satisfied by a hedge fund
manager’s regular annual financial statement audit
Requirements for independent custody –
Does this "new" requirement mean that it was
previously fine for a manager not to be audited?
Does anyone remember Bernard Madoff? The potential
for manipulation in self-custody relationships is too
Once again, it seems the MSA is finally catching up to
great. While it is commendable that the Singapore
what is common sense to investors. While investors
financial regulators now require independent custody
should in no way outsource their operational due
for FCMs- investors should avoid self-custodied
diligence responsibilities to a third-party auditor, the
managers, such relationships are generally not worth
work of an auditor and the subsequent financial
the potential risk to investors.
…continued on next page
Corgentum Consulting ©2012 Corgentum Consulting, LLC

3. August 2012 | 3
Regulatory - Continued from page 2... has unfortunately stopped short in its attempts to
implement real oversight and reform. By setting
artificially low limits for hedge fund transparency and
statements are extremely valuable to investors during
independence, the MSA has demonstrated that it is still
due diligence. If a hedge fund manager is not audited -
partially a captured regulator in the shadow of the
investors should move on.
hedge fund industry it seeks to regulate.
If on the other hand the "independent annual audit"
One of the more concerning themes of the recent MSA
language does not imply that a financial statement
reforms is the shifting of the onus towards hedge funds
audit will not encompass the "independent annual
themselves. It is up to hedge funds to ensure adequate
audit" language of the MSA, will FCM hedge funds now
risk management procedures are in place and that
be required to have a separate audit performed in
assets are independently valued. Yet, the MSA stops
addition to the financial statement audit?
short of saying how it will police these items.
Requirement to have an adequate risk management
Effectively, the MSA is hoping the largest hedge funds
framework commensurate with the type and size of
play by the rules and will likely utilize these new
investments managed by the FMCs
regulations as a fee generation tool to issue technical
fines. Unfortunately, pomp and circumstance seem to
Once again, this is perhaps so vague as to be useless.
have won the day, and little actual ongoing oversight
Many logical well-intentioned hedge funds may take
will be performed. With this new regulation the MSA
different approaches, some less conservative than
has asked investors to shoulder the burden of hedge
others, in regards to the definition of the word
fund oversight and due diligence.
“adequate”. Certainly, it would be considered adequate
to have an independent dedicated risk manager, but
While the recent MSA reforms are a step in the right
other fund managers may feel that non-dedicated
direction, it is unfortunate that meaningful hedge fund
oversight is sufficient. How will the MSA regulate this?
regulation has yet to come to Asia. Hopefully, it will not
take an Asian Madoff to sound the alarm and cause
Conclusion:
regulators to take meaningful action.
On the surface investors’ initial reactions to such
enhanced regulatory reforms may be that more
regulation is better for investors. However, it is
important that investors take measures to not only
understand the technical requirements of new
regulatory requirements but also whether these
Is the Cloud a
additional requirements will be effective.
Viable Hedge Fund
Singapore has grown as an Asian hedge fund center in
the past few years and is increasingly nipping at the BCP/DR Solution?
heels of Hong Kong for hedge fund business.
Additionally, despite recent efforts to create a more Cloud computing based information technology and
hospitable environment for hedge funds in other Asian business continuity and disaster recovery ("BCP/DR")
countries, scandals such as the AIJ fraud in Japan and solutions have becoming increasingly popular in recent
continued concerns related to fraud in mainland China, years among the hedge fund and private equity
continue to push Singapore to the forefront ahead of communities. Indeed, many investors seeking to
other Asian jurisdictions. perform operational due diligence on fund managers
may have come across more and more funds utilizing
In the case of recent MSA measures to further regulate the cloud as of late.
the domestic Singapore hedge fund industry, the MSA
…continued on next page
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4. 4 | Operational Due Diligence Insights
Business Continuity- Continued from page 3... design than an individual fund manager’s
system
It is important for investors to understand exactly what
 Application backup - Fund managers may utilize
the cloud is and both the challenges and opportunities
cloud based solutions to serve as a backup
it presents to fund managers, particularly in relation to
location from which applications could continue
BCP/DR.
to be run, in the event of a business disruption
or disaster type event. The continued
What is the cloud?
operation of applications during such an event
may be particularly critical for quantitative or
In the context of evaluating fund BCP/DR
high-frequency trading strategies.
infrastructures, the cloud can effectively be thought of
by investors as an internet based offsite solution.
What should investors ask their fund managers about
There are three types of cloud computing, all of which
the cloud?
are typically classified with the ending, "as a service."
They are:
The cloud presents a number of attractive benefits to
fund managers. As part of an evaluation of a hedge
 Platform as a service ("PaaS") - under this
funds BCP/DR planning, investors should take the time
model service providers provide a computing
to understand how their fund managers may make use
platform solution to funds such as an operating
of such technologies. Some key issues investors may
system or web server.
want to consider addressing include:
 Software as a service("SaaS") - this model
 What measures has the hedge fund taken to
allows funds to run and access applications on
evaluate the BCP/DR planning procedures of
cloud based servers.
the cloud provider?
 Infrastructure as a service ("IaaS") - under this
 How does the hedge fund monitor the testing
model service providers offer funds access to
and oversight of the BCP/DR plan at this
virtual machines, storage space and data
provider?
centers via the internet.
 What measures has a hedge fund taken to
How do fund managers utilize the cloud for BCP/DR
address security concerns related to storing
planning?
data and running applications at third-parties?
Hedge funds and private equity funds are increasingly
incorporating cloud based components into their  Does the fund manager incorporate testing of
BCP/DR plans in several ways: access to cloud based data and applications as
part of its own BCP/DR tests?
 Data storage - increasingly it is cost effective for
firms to archive data offsite on cloud based  Has the fund evaluated the cost benefit analysis
servers. This reduces expenditures on new of utilized cloud based technologies versus
servers and frees up office space for other bringing such technologies in house? At what
equipment and personnel point would any cloud benefits be outweighed
by internal cost considerations?
 Data backup - Cloud based data storage centers
typically serve a high volume of customers and
are therefore designed to handle large scale
data transfers. These facilities are also typically
designed with BCP/DR planning in mind, and
may be more robust in both equipment and …continued on next page
Corgentum Consulting ©2012 Corgentum Consulting, LLC

5. August 2012 | 5
Business Continuity- Continued from page 4... So consider for example, an LP who is considering
making an investment in a private equity fund. This LP
has wisely decided to perform operational due
While the increased use of the cloud may be the hottest
diligence on the GP. After the review, the LP has a list of
trend among hedge funds for BCP/DR data storage and
several operational deficiencies and areas in which the
application development. Investors should take care to
LP feels compared to their peers the GP could improve.
understand if a hedge fund has carefully evaluated their
use of this new technology, or if they are simply
Continuing our example, let us assume that from the
jumping on the bandwagon.
LPs perspective none of these items are so serious as to
preclude him from investing, but rather he would feel
more comfortable if the GP took corrective action on
PE LP’s Are Utilizing these matters. At a minimum, the LP feels it is
important to make the GP aware of these issues.
Operational Due
While previously a GP may have politely listened to such
feedback and taken little corrective action, more LPs are
increasingly monitoring how well GPs respond to this
Diligence to Make feedback. This includes performing ongoing operational
due diligence to both monitor process improvements,
Their Voices Heard as well as to detect any new operational risks.
Clinging to their old ways, however, many GPs aren't
frankly interested in this ongoing LP operational due
Increasingly, private equity investors, commonly diligence process or receiving any such feedback from
referred to as Limited Partners or LP's, are performing LPs that have already committed capital. To facilitate
operational due diligence prior to allocating to private this lack of dialogue, GPs utilize a structure whereby
equity funds. It is good to see that LP's have taken cues
they have so-called advisory boards upon which
from their hedge fund counterparts, and are
increasingly recognizing that private equity funds typically sit the largest investors in a particular fund. As
present just as many, if not more, operational risks to such, smaller LPs effectively become squeezed out of
investors as compared to hedge funds. the process. More LPs are beginning to realize the flaws
in such arrangements and have decided to become
Unfortunately, private equity fund managers, proactive not only in their due diligence efforts, but in
commonly referred to as General Partners or GP's, have
engaging with GPs in more frequent dialogues
been slower than their hedge fund portfolio manager
concerning both investment and operational issues.
counterparts in listening to LP feedback. This is to be
expected as GP's have long capitalized on the long-term
A program of initial and ongoing operational due
nature of private equity investing to insulate themselves
from frequent interaction with LPs. diligence for private equity can help ensure that an LP
detects operational issues before committing capital,
In the past, after an LP committed capital, there were and is alerted to any new potential problems before
little if any updates from GPs outside of prescheduled they spin out of control. As this trend continues, LPs
updates, generally quarterly, on portfolio performance. that do not engage in such programs may increasingly
Such an arrangement has effectively robbed LPs of their find themselves to be the exception rather than the
voice as partners in the investing process. More LPs
norm.
have come to acknowledge this fact, and are
increasingly pro-actively sharing feedback with GPs
after the initial and ongoing operational due diligence
processes.
www.Corgentum.com

6. 6 | Operational Due Diligence Insights
Does Your Hedge
Often times the equipment utilized in both internal
hardware and external hardware situations is similar.
Common types of information technology hardware and
Fund’s Hardware peripherals, includes desktop computers, routers and
servers. In addition to this standard equipment, many
fund managers may also have additional hardware,
Matter? which provides backup power generation capabilities,
such as generators or UPS devices.
It is worth noting that each of these types of equipment
When performing operational due diligence, investors is a broad umbrella term, which encompasses a wide
evaluating a hedge fund’s information technology variety of meanings. So for example, a fund manager
infrastructure have a tendency to focus intently on could have several different types of servers (i.e. -
software applications. Software is email/ Exchange
crucial to a fund manager's server, SQL server,
operations. Evaluating the ways in Blackberry sever etc.).
which software interacts with It is important for
other functions can provide critical investors to
insight into the operational understand the
infrastructure of a fund. But what different types of
about hardware? Isn't all hardware equipment in each
created equal? category so that they
can effectively
What kind of hardware are we evaluate the overall
talking about? information
technology function.
First of all, in evaluating a fund
manager's hardware it is Investors should take
important to clarify what exactly stock of a manager's
we are talking about. Fund managers effectively hardware inventory when reviewing the information
interact with hardware in one of two ways. The first is technology function during the operational due
that they purchase or lease hardware that is under their diligence process. With this inventory map in place,
control. We can classify this type of hardware as investors will have a roadmap by which they can
internal hardware. navigate and evaluate the hardware review process.
The second type of hardware is not owned by the hedge Do brand names matter?
fund but by a third-party, and is where a fund
manager's data is stored or passes through in the case After an investor has developed an understanding of
of trading platforms. We can classify this type of the types of hardware utilized by a fund manager, it is
hardware as external hardware. One of the more recent also important for investors to learn of the brand names
examples of the ways in which fund managers interact of the manufacturers of such hardware. Certain types of
with external hardware is the increased use among fund hardware are considered to be of higher quality than
managers of colocation solutions, cloud computing and others. Additionally, different types of hardware from
cloud based storage solutions. In these cases, managers different manufacturers may have different capabilities.
are often utilizing large third-party servers on which By inquiring not only as to the types of hardware in
they have space allocated to them. It is important for place, but also as to the brand names of the
investors to understand the distinction between manufacturers of such hardware
internal hardware and external hardware in order to
effectively evaluate a fund manager's hardware …continued on next page
infrastructure.
Corgentum Consulting ©2012 Corgentum Consulting, LLC

7. August 2012 | 7
Hardware - Continued from page 6... Evaluating a fund's hardware infrastructure can provide
valuable insights beyond just the specifics of the
hardware. By asking more detailed questions during the
(in conjunction with evaluating hardware capabilities),
operational due diligence process investors can glean
investors may be able to make more fully informed
information as to how the firm approaches other
decisions when evaluating the overall strength of the
operational issues, such as business planning and
information technology function.
scalability as well.
How much is enough?
Returning to our question of how much storage space is
enough - there is no definitive answer. Each fund
During the operational due diligence process investors
manager's situation will be different. However,
will often take a tour of a fund manager's information
investors should ask themselves if during the due
technology closet. This room is often loud (due to the
diligence process they are asking the fund manager
buzzing of cooling fans), and cold (so that the
questions such as:
equipment does not overheat). When many investors
walk into these rooms they often see large columns of
 How do you evaluate how much storage space
equipment in racks with numerous flashing lights and
you need?
wires running between them.
 How much space do you currently have?
Many investors may not be able to distinguish between
different types of hardware, because they may not be
aware of what these different pieces of hardware  Have you taken measures to plan ahead so that
actually look like. Putting this aside, investors seeking to the firm's storage architecture is scalable?
evaluate the strength and scalability of a fund
manager's information technology function may also be By digging deeper into the hardware evaluation process
unable to answer a more basic question - how much during operational due diligence on information
hardware is enough? technology, investors will not only have a much more
detailed picture of a fund manager's overall information
This question is perhaps most easily thought of in terms technology framework, but also a better understanding
of data storage space. Consider the following two fund on how those in charge organize their business.
managers: Fund Manager A is a small fund manager
who has five employees and has been in business for
three years. Fund Manager B is a larger firm with 35 Service Providers: The
employees and has been in business for eight years.
Which Fund Manager is likely to need more data Importance of Prime
Broker Due Diligence
storage space?
The answer is obvious when such a stark comparison
among organizations is in place. Although it is clear that
Fund Manager B would require more data storage
space, the next logical question is - how much is A recent Corgentum study has demonstrated that in the
post-Lehman environment investors have increasingly
enough?
and somewhat dangerously downgraded the roles of
prime brokers. The majority of those surveyed ranked
Consider a prospective investor who is considering
fund administrators and auditors as being more
making an allocation to Fund Manager A. During the
operational due diligence process, they take the tour of important than prime brokers. Specifically, only 17% of
the aforementioned standard clean, cold and loud those investors surveyed indicated that they felt that
server closet. To most investors, unfortunately, if
everything looks and sounds good this is where they
stop their hardware due diligence. …continued on next page
www.Corgentum.com

8. 8 | Operational Due Diligence Insights
Prime Brokers - Continued from page 7... and on the advice of their legal departments, prime
brokers have become increasingly difficult to deal with.
prime brokers were the most important hedge fund
So for example, if an investor reaches out to a prime
service provider.
broker to ask certain questions regarding the nature of
their relationship with a fund manager, many times
When investors perform operational due diligence on
prime brokers will send back generic responses that do
fund managers, such as hedge funds, evaluating the
not address the investor’s questions in detail.
fund and firm service providers is a critical element of
Furthermore, such responses are often rife with legal
the process. Included in this list of service providers
disclaimer language making them difficult to evaluate in
should be a fund's prime brokerage relationships.
certain circumstances. The onus is then put back on
investors to follow up with the prime brokers to
This survey data suggests a trend whereby investors are
attempt to have their specific questions answered. In
increasingly minimizing the roles of prime brokers. As a
many cases, prime brokers may be unresponsive or
result of this minimized importance, resource limited
slow to respond which can elongate the due diligence
investors run the very real risk of focusing their due
process and make it more difficult. However, just
diligence efforts away from prime brokers, and instead
because it may be difficult does not mean that investors
on other service providers which they view as being
are not up to the challenge.
more important. As the failure of Lehman brothers has
demonstrated, investors can not solely rely on the fact
By acknowledging the importance played by prime
that a prime broker is a big name bank or a leader in the
brokers, and constructing a detailed service provider
industry.
review program which encompasses the specifics of
prime brokerage relationships, investors will develop
Additionally, different fund managers may be receiving
more comprehensive operational due diligence
different levels of services from prime brokers. Without
solutions, and perhaps avoid indirect exposure to the
delving into the specifics of such relationships, during
next Lehman.
the due diligence process investors may not have the
information they need to make
an effective determination as to
the service provider risks to the
Understanding Fund
hedge funds.
Terms: Shadow Equity
Operational due diligence on
prime brokers also provides
investors with a useful avenue
for independent fund manager Operational due diligence is a multidisciplinary subject.
asset verification. Investors who An investor beginning the operational due diligence
do not even attempt to contact process for the first time may encounter subjects with
prime brokers, or who are only which they have little to no familiarity. As the scope of
confirming a fund manager’s operational due diligence has become broadened in
relationships with a prime broker recent years, even seasoned operational due diligence
and doing nothing more, are professionals may encounter terms which they may be
missing this valuable unfamiliar. The purpose of this section of Operational
opportunity. Due Diligence Insights is to cast a spotlight on some of
the words and terms which investors may have not
For those investors that wisely perform evaluations of previously encountered, or which tend to get
fund manager prime brokerage relationships during the overlooked in operational due diligence reviews.
operational due diligence process, a word of caution is
necessary. Perhaps taking a cue from the audit industry
…continued on next page
Corgentum Consulting ©2012 Corgentum Consulting, LLC

9. August 2012 | 9
Shadow Equity- Continued from page 8...
This issue's word:
Fraud
Shadow Equity (also known as Phantom Equity) Spotlight:
Defined: Another
Shadow equity refers to a type of compensation scheme
for hedge fund investment professionals. Employees
Day, Another Hedge
compensated via a shadow equity scheme are not
compensated as if they were direct owners of the hedge Fund Fraud in NJ
fund (i.e. - General Partner), but are effectively treated
as investors of the fund.
According to authorities, another classic Ponzi scheme
What investors should know: has hit the state of NJ.
The way in which a fund manager compensates its Daniel Dragon of Lebanon, NJ and Carmelo Provenzano
employees can provide useful insights into how it values of Garfield, NJ have pleaded guilty to wire fraud in a
and retains its professionals. Shadow equity schemes Camden, NJ courtroom. This guilty plea comes on the
are compensation schemes that seek to align the heels of accusations of fraud against a Jersey City, New
interest of personnel with those of investors. The Jersey based fund and Osiris Partners.
theory is that this so-called skin in the game helps to
generate harder working investment professionals who In this case, Dragon and Provenzano told investors that:
will act in the best interest of investors. Employee
compensation schemes can also contain vesting  The firm had created a proprietary black box
components which facilitate the retention of employees computer algorithm that had produced returns
through financial incentives for remaining at a firm. of 170% from 2009 to July 2011 in the FX
markets.
During the operational due diligence process investors
should analyze not only the management and  Investors could get their money back at any
performance fees generated by a fund manager, but time with only one day’s notice.
also the ways in which these fees are distributed to
employees via internal compensation structures, such When some investors started asking questions the duo
as shadow equity. Funds that have carefully structured emailed investors screenshot of fictitious investor
employee compensation to incentivize employees and account statement from a completely made up investor
retain talent often have lower turnover. named Mel Tannenbaum.
The entire operation was a fraud and investors lost
more than $3.5 million. Dragon and Provenzano used
the money they stole to furnish an extravagant lifestyle,
which included giving a $4,000 tip on an $18,241 bar bill
in a Los Angeles nightclub. The two men face up to 20
years in prison and $250,000 in fines.
A third co-conspirator named George Sepero is
currently awaiting trial.
www.Corgentum.com

10. 10 | Operational Due Diligence Insights
The Importance of
The US is seeking to work in cooperation with
international governments to enforce FATCA. In 2012,
the US Treasury and the IRS released a statement
Understanding FATCA alongside France, Italy, Germany, Spain and the US
stating as much. The IRS' master plan is to allow non-US
fund managers to deal more directly with international
The Foreign Accounting Tax Compliance Act ("FATCA") is tax authorities and then the IRS would step in to
a 2010 US tax law which has implications for both hedge collaborate.
fund managers and investors. Tax is an area that
unfortunately causes many investors eyes to glaze over Although FATCA was signed into law in 2010, it does not
during the operational due diligence process. The goal technically take effect until January 1, 2013.
of analyzing tax structures during due diligence is not to Withholding for FATCA, what in IRS speak is known as
necessarily develop a formal tax opinion as would be so-called fixed or determinable annual or periodical
received from an investors tax advisers (i.e. - tax payments or FDAP, will not begin until January 1, 2014.
counsel or accountant) but rather to gain a better
understanding of whether a hedge fund's trading How do hedge funds and private equity funds comply
activities could potentially generate negative tax with FATCA?
consequences for its investors. Examples of common
tax hedge fund and private In order to comply with FATCA, fund
equity tax issues which can fall managers must provide US Internal
into this classification include an Revenue Service ("IRS") with
analysis of whether or not a fund documentation on its investors.
may have generated or Specifically, those investors that have
anticipates generating unrelated more than $50,000 invested outside of
business taxable income or the US. Similar to anti-money
effectively connected income, laundering documentation, these
more commonly referred to as documents include certain client
UBTI and ECI. balances, receipts, withdrawals and
account identification numbers.
Furthermore, as with most things
related to operational due diligence, the way in which a Why do investors need to understand FATCA?
hedge fund manager approaches detailed issues such as
tax structuring can provide valuable operational insights Although FATCA will not take effect until 2014, there
into the ways in which it approaches its larger business are a number of reasons why investors need to inquire
infrastructure. now about their fund managers plan to comply with
FATCA. The penalties for non-compliance are steep. If a
What is FATCA? fund manager violates FATCA, they will be penalized by
a 30% withholding tax being placed upon the foreign
FATCA, was formally enacted in March 18, 2010 with financial institution’s US assets or sourced income. This
the goal of preventing US citizens from tax evasion is a materially negative consequence and could have
through hiding income or assets abroad in foreign large negative implications for both investors and the
businesses. FATCA applies to many different types of fund.
firms including hedge funds and private equity funds
both within the US and international. FATCA technically Additionally, because FATCA is effectively a US tax
classifies these non-US fund managers, sometimes regulation which has international implications, there
referred to as passive foreign investment companies or are privacy concerns raised.
PFIC in IRS jargon, as so-called Foreign Financial
Institutions or FFIs.
…continued on next page
Corgentum Consulting ©2012 Corgentum Consulting, LLC

11. August 2012 | 11
FATCA- Continued from page 10... (iv) Classify investors into FATCA groups and
ensure FATCA compliant documentation on
each investor is maintained
For instance a hedge fund may be required under
FATCA to make FATCA related disclosures to the
During the operational due diligence process investors
Canadian regulators. Under Canadian privacy it is
should take measures to effectively vet the approach
unclear whether such disclosures may be
their fund managers take to FATCA before the IRS
mandated or voluntary in nature. Furthermore, a hedge
shows up at their door.
fund manager which makes such disclosures may be
subjected to potential liability for violating privacy
concerns.
Investors can often obtain some guidance in regards to
how their hedge funds and private equity funds
approach FATCA by asking their fund managers how
they plan to develop a plan to comply with FATCA.
Typically, most fund managers seeking to develop a
plan to comply with FATCA will work with external
accountants and legal counsel to address this issue.
Some key questions investors can ask to gauge if a fund
manager has thought about FATCA and has developed a
plan for compliance include:
 Does the fund manager, or operations
personnel, understand what FATCA is?
 Do they understand the timeline by which they
need to comply?
 Has the fund spoken to their accountants and
lawyers about FATCA?
 What advice did they give the fund?
 Has the fund begun to think of the specific
details of FATCA compliance including:
(i) Identifying so-called "Responsible Officers"
who must certify FATCA compliance
(ii) Developing a plan for fund offering
memorandum and subscription documents with
FATCA disclaimers
(iii) Analyze internal AML/KYC procedures as
well as the work with the fund's administrator
to ensure AML/KYC procedures will be
appropriately in compliance with FATCA
www.Corgentum.com

12. 12 | Operational Due Diligence Insights
On the Calendar
Please see below for a list of upcoming operational risk items of note and events:
 Opal Investment Trends Summit (Santa Barbara, CA)
September 12-14, 2012. Jason Scharfman to moderate Private Equity panel
Presented by Opal Financial Group.
 Opal Family Office & Private Wealth Management Forum (Nappa Valley, CA)
October 24-26, 2012. Corgentum to monitor Private Equity panel
Presented by Opal Financial Group.
 Opal Endowment & Foundation Forum (Boston, MA)
November 12-14, 2012. Corgentum speaking on Consultant's panel
Presented by Opal Financial Group.
About Corgentum Consulting
Corgentum Consulting is a specialist consulting firm which performs operational due diligence reviews of
fund managers.
We work with investors including fund of funds, pensions, endowments, banks and family offices to
conduct the industry's most comprehensive operational due diligence reviews. Our work covers all fund
managers and strategies globally including hedge funds, private equity, real estate funds and traditional
funds. Our sole focus on operational due diligence, veteran experience, innovative original research and
fundamental bottom up approach to due diligence allows us to ensure that our clients avoid
unnecessary operational risks. More information is available at www.Corgentum.com or follow us on
Twitter @Corgentum.
Email: Info@Corgentum.com
Main Tel. 201-918-520
Corgentum Consulting ©2012 Corgentum Consulting, LLC