Secondary Transactions: KYC and Background Checks in Fund Interest Transfers
The global secondary market reached a volume of more than USD 140 billion in 2024, surpassing every previous year. What was once seen as a side arena of the private equity ecosystem is now a standalone asset class with its own fund structures, specialized advisers, and increasingly complex regulatory requirements. For General Partners (GPs), fund administrators, and their compliance teams, that means every transfer of a limited partner interest is its own onboarding process, with the full set of KYC, AML, and sanctions obligations.
The central thesis of this article: If you treat secondaries as a mere documentation exercise, you systematically underestimate the risk. A change in the beneficial owner triggers the same obligations for the GP as a first-time onboarding — within a timeframe that rarely leaves more than 14 days between term sheet and closing. This article puts the regulatory obligations into context, highlights common failure patterns, and outlines a workflow you can operationalize.
What are Secondary Transactions?
Secondary Transactions are secondary transfers of interests in closed-end funds — in other words, transactions in which the fund is not raising new capital, but an existing investor transfers all or part of its position to another investor. The market breaks down into three basic structural forms, each with its own KYC implications.
LP-led Secondaries: A limited partner sells its commitment and existing capital interests to a new LP. Classic motivation: portfolio rebalancing, liquidity needs, or a shift in strategy. The GP must fully onboard the incoming LP.
GP-led Secondaries: The GP initiates the transaction, typically by setting up a continuation vehicle into which selected portfolio assets are transferred. Existing LPs choose between exiting and rolling over. This is regulatory demanding because conflicts of interest (the GP as both seller and buyer) must be disclosed.
Structured Secondaries: Hybrid structures such as preferred equity, NAV financing, or collar transactions. These combine secondary elements with debt-like characteristics and require especially careful beneficial owner analysis, because control and economic rights can diverge.
In all three scenarios, the GP — represented by its compliance team and the fund administrator — is the regulated obligated party. The obligation does not arise from the buyer or seller, but from the fund itself.
Regulatory obligations when the beneficial owner changes
Every secondary transaction triggers a change in the beneficial owner at the fund-interest level. From an anti-money laundering perspective, this is not an administrative step, but the entry of a new contractual party into a business relationship. The obligations cluster around four core topics: identification, PEP/sanctions screening, proof of source of funds and source of wealth, and ongoing monitoring.
Identification and verification of the incoming LP
The GP must treat the new LP exactly like a first-time investor: commercial register extract, articles of association, proof of authority to represent, and a beneficial-owner chain down to the natural person with at least 25 percent beneficial ownership or factual control. In family structures, trusts, or nominee arrangements, the chain often extends over multiple steps — and it often becomes opaque across borders, especially with foreign family offices.
PEP and sanctions screening
The incoming LP, all identified beneficial owners, and the authorized signatories must be screened against PEP databases (Politically Exposed Persons) and sanctions lists. Relevant lists include at least the EU consolidated list, the OFAC SDN list (USA), the HMT list (UK), and — mandatory for Switzerland — the SECO sanctions list. Hits must be documented and, depending on the quality of the match, further assessed through enhanced due diligence.
Source of Funds and Source of Wealth
For investments of typically one million euros or more — and in practice often for secondary volumes — regulators require reliable proof of both the specific payment source (Source of Funds) and the underlying assets (Source of Wealth). For family offices, that often means tracing back to an exit by the founder generation, inheritance records, or the operating business activities that created the wealth.
What applies in Switzerland, Austria, and across the EU?
The regulatory landscape in the DACH region is not harmonized; instead, it follows three separate regimes that differ in thresholds, review depth, and documentation requirements. From 2027 onward, the rules within the EU will converge through the Anti-Money-Laundering Regulation (AMLR). Switzerland remains sovereign, but traditionally orients itself toward FATF standards and, in practice, follows suit.
Germany
Capital management companies (KVGs) and self-managed alternative investment funds are subject to the Anti-Money Laundering Act (GwG). The central provision is Section 10 GwG, which governs the general due diligence obligations: identification of the contracting party, determination of the beneficial owner, collection of information on the purpose and intended nature of the business relationship, and continuous monitoring. Section 14 GwG governs enhanced due diligence in higher-risk cases — for example, PEP status or high-risk countries. This is supplemented by the Transparency Register (Sections 18 et seq. GwG), which has been operated as a full register since 2021 and maintains a data set that must be cross-checked.
Switzerland
Financial intermediaries — including fund management companies and managers of collective assets under FINIG — are subject to the Anti-Money Laundering Act (GwG, SR 955.0). Art. 3 GwG governs the identification obligation, and Art. 4 GwG the determination of the beneficial owner. The FINMA Anti-Money Laundering Ordinance (GwV-FINMA) specifies the requirements, especially for business relationships with increased risk (Art. 13 GwV-FINMA). Also important is the role of the self-regulatory organizations (SROs), whose rules in practice are often more granular than the statutory minimum requirements.
Austria
For Alternative Investment Fund Managers (AIFMs), the Financial Market Anti-Money Laundering Act (FM-GwG) applies. Its structure largely corresponds to the 5th EU Anti-Money Laundering Directive. Section 6 FM-GwG governs standard due diligence obligations, and Section 9 FM-GwG the enhanced obligations. The Beneficial Owners Register Act (WiEReG) also requires a plausibility check of the register and a report if discrepancies are identified.
EU-wide from 2027: AMLR and AMLA
With the AMLR (Regulation EU 2024/1624), core terms — especially the PEP definition — will be harmonized across the EU, thresholds will be standardized, and a direct cross-check against national beneficial-owner registers will become mandatory. The newly established Anti-Money-Laundering Authority (AMLA), based in Frankfurt, will directly supervise financial institutions operating across borders. For GPs with a pan-European LP base, that means consistent review depth, but also less room for national interpretation.
The blind spot of fund admin platforms
Established platforms such as SunGard InvestOne, eFront FrontInvest, Allvue, or Gen II do excellent work in fund accounting, capital call management, and investor reporting. Where they regularly hit their limits is in the depth of integrated screening. Many systems do offer a field for PEP status or a checkbox for sanctions screening — but no built-in real-time connection to the relevant data sources, no automated adverse media research, and no structured documentation of the beneficial-owner chain across multiple layers.
The practical result: the actual screening ends up in Excel lists, manual database queries, or external advisory mandates — with a fragmented audit trail and no reliable reproducibility. For an annual SOC 1 audit or a FINMA audit, that is a risk.
Typical problem pattern: foreign family offices as secondary buyers
Secondary buyers differ structurally from classic institutional LPs. Pension funds and insurers bring stable, transparent UBO structures; with specialized secondary buyers — family offices, private wealth vehicles, or sovereign-wealth-adjacent vehicles — the situation is more complex:
Multi-layer holding chains: The investing vehicle is often based in Luxembourg or the Cayman Islands, control lies with a foundation in Liechtenstein or a trust in Singapore, and the beneficial owners are natural persons in third jurisdictions.
Nominee structures: Formal shareholders are trustees acting on behalf of behind-the-scenes principals. Here, the regulator requires look-through to the actual settlor or trustor.
Inconsistent register data: Entries in the German Transparency Register, the Austrian WiEReG, and foreign UBO registers do not match. AMLR 2027 will require a cross-check — anyone who only pulls one register today will be documented as incomplete from 2027 onward.
14-day workflow: Secondary transaction with integrated screening milestones
In practice, the period between the letter of intent and closing of a secondary transaction is typically compressed into two to three weeks. The following workflow shows how KYC steps can be integrated into that schedule without delaying the transaction.
Day | Step | Responsible | Deliverable |
|---|---|---|---|
Day 1 | Letter of Intent, preliminary KYC request to incoming LP | GP / Secondary Advisor | KYC questionnaire sent |
Day 2–4 | Receipt of KYC documents, commercial register extract, UBO structure | Incoming LP | Complete KYC package |
Day 5 | Identification, UBO breakdown, register cross-check | Fund Admin / Compliance | UBO tree documented |
Day 6 | PEP, sanctions, and adverse media screening of all parties | Compliance | Screening report |
Day 7 | Source of Funds / Source of Wealth review | Compliance | SoF/SoW memo |
Day 8 | Risk classification (standard / enhanced) | MLRO | Risk rating |
Day 9–10 | If EDD is required: deeper review, if necessary adverse media deep dive | Compliance / external service provider | EDD report |
Day 11 | Approval by MLRO, documentation in the GP system | MLRO | Onboarding approval |
Day 12 | Transfer Agreement, Side Letter Assumption, GP Consent | GP / Legal | Signed transfer documents |
Day 13 | Purchase price payment, bank account screening | Fund Admin | Payment confirmation |
Day 14 | Closing, register update, activation of ongoing monitoring | Fund Admin | Closing memo |
Special case: sanctions exposure and tiered transfer restrictions
Since the EU sanctions packages against Russia beginning in 2022, review is no longer binary (hit yes/no), but tiered. Three constellations are especially relevant in secondary transactions:
Direct sanctions-list entry: The transaction is not permitted; funds must be frozen and the competent authority must be notified (in Germany: Bundesbank and BAFA; in Switzerland: SECO; in Austria: OeNB and BMF).
50 percent rule: A sanctioned beneficial owner holds, directly or indirectly, more than 50 percent; the vehicle is deemed sanctioned in practice. This requires precise UBO aggregation across multiple layers.
Sectoral restrictions: Certain activities are prohibited even if the person is not listed by name. Here, it is the nature of the business that matters, not the identity of the buyer.
Side letters with existing LPs increasingly contain "tiered transfer restrictions" — that is, staged consent requirements depending on the buyer’s jurisdiction, its beneficial-owner structure, and the sanctions risk score. The GP is required to operationalize these clauses and obtain the consent of existing LPs in time.
Operationalization with bulk screening tools
For AIFM fund administrators handling several secondary transactions per quarter, the manual approach is no longer sustainable. Modern screening platforms — such as the GDPR-compliant solution from Indicium Technologies — integrate three layers into a single workflow:
Structure data capture: Upload of a UBO tree, automatic extraction of register data from the German Transparency Register, Austrian WiEReG, Swiss Zefix, and foreign UBO registers.
Bulk screening: Parallel screening of all identified natural persons against PEP databases, consolidated sanctions lists (EU, OFAC, HMT, SECO, UN), and structured adverse media feeds.
Audit-ready documentation: Timestamps, data source, and reviewer are logged for each decision — the basis for any later audit request from a regulator or for the SOC 1 review.
Side-letter wording for secondary rights and CRD VI implications
Experienced LPs are increasingly negotiating explicit secondary rights in side letters: rights of first refusal, consent requirements for buyers from high-risk countries, and information rights regarding ongoing secondary processes. For the GP, that means KYC processes must be presentable and understandable not only to regulators, but also to existing LPs.
The Capital Requirements Directive VI (CRD VI), which has been transposed into national law since 2025, also changes how third-country actors operating into the EU are treated. For secondary buyers from non-EU jurisdictions, this can mean a branch requirement or, at minimum, a more stringent review of the business structure — another reason to treat the buyer’s jurisdiction as a separate checkpoint in the KYC workflow.
Conclusion
Secondary transactions are not an administrative process, but a full onboarding with regulatory depth — within a time frame that leaves little room for manual work. If you want to remain competitive in 2026 and into the AMLR era, you need integrated workflows that bundle KYC, beneficial-owner cross-checks, and sanctions screening into a reproducible process. The good news: the technology is ready, and the regulatory obligations are clearly defined — it is a question of implementation, not possibility.
Do you want to see how Indicium Technologies automates your secondary processes in a GDPR-compliant way? Book a demo and experience bulk screening, UBO chain analysis, and audit trails in a single interface.
Further reading — related articles
Nabil El Berr
