The Financial Crimes Enforcement Network (FinCEN) proposed on August 25, 2015, a rule that would require certain registered investment advisers to have in place anti-money laundering (AML) policies and procedures and to also report suspicious activity to FinCEN as required by the Bank Secrecy Act (BSA). This is the third try in 12 years by FinCEN to require advisers to comply with AML rules. Previous proposals in 2003 and 2007 were withdrawn. Along with the current proposed rule requiring the adoption of AML programs, FinCEN announced the intention to include investment advisers in the definition of “financial institution” which would subsequently require them to file Currency Transaction Reports (CTRs) for transactions exceeding $10,000 and keep records relating to the transmittal of funds. Currently, the BSA does not expressly include “investment adviser” among its list of entities defined as a financial institution.
The proposed rule highlights the need for the new requirements, saying, “presently, illicit actors seeking to access the financial system may attempt to gain such access through an investment adviser as a means to avoid detection of their activity which might otherwise occur in dealings with financial institutions that have AML programs and suspicious activity reporting requirements,” adding “as long as investment advisers are not subject to AML program and suspicious activity reporting requirements, money launderers may see them as a low-risk way to enter the U.S. financial system.”
The proposal would apply to investment advisers that are required to be registered with the U.S. Securities and Exchange Commission (SEC), including advisers to certain hedge funds, private equity funds, and other private funds. FinCEN would delegate its authority to examine investment advisers for compliance with these requirements to the SEC.
The proposed regulations would require: 1- each-investment adviser to develop and implement a written anti-money laundering program, 2- the AML program to be approved in writing by the adviser’s board of directors or other persons that have functions similar to a board of directors and 3- the investment adviser shall make its anti-money laundering program available for inspection by FinCEN or the SEC upon request.
The anti-money laundering program should at a minimum:
- Establish and implement policies, procedures, and internal controls reasonably designed to prevent the investment adviser from being used for money laundering or the financing of terrorist activities and to achieve and monitor compliance with the applicable provisions of the Bank Secrecy Act and the implementing regulations thereunder;
- Provide for independent testing for compliance to be conducted by the investment adviser’s personnel or by a qualified outside party;
- Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the AML program; and
- Provide ongoing training for appropriate persons of the investment adviser.
Our Perspective
While best practices should already include AML policies and procedures, the proposed rule would explicitly require investment advisors to establish AML programs, file reports of suspicious activity and would bring them under similar regulations as other financial institutions subject to the BSA, such as mutual funds, broker-dealers, banks and insurance companies. Compliance with the rule, if adopted, would be mandated six months after being finalized. Advisers should closely monitor the proposed rule and be prepared to incorporate policies and procedures relating to the prevention of money laundering which will aid in being on the lookout for red flags. Red flags could include, for example, a customer refusing to reveal any information about business activities, an advisor refusing to disclose the identity of a client where he/she is acting as an agent, or when a client exhibits a total lack of concern regarding performance returns or risk.
SEC3 can assist your firm in creating, implementing and maintaining your policies and procedures. For further information, please contact your SEC3 representative or contact us at info@seccc.com.
