FinCEN Proposes Extending Anti-Money Laundering Compliance Requirements to Investment Advisers

August 28, 2015 at 5:30 am

By: Eric Mikkelson

Yesterday, the United States Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) proposed a rule that would require SEC-registered investment advisers, including private equity and hedge funds, to comply with certain anti-money laundering (AML) rules. These rules already apply to other types of financial institutions such as banks and securities broker-dealers.

PURPOSE AND BACKGROUND

With these rules, FinCEN expects investment advisers to assist it in protecting the integrity of the overall financial system by making it harder for a client “trying to move or stash dirty money,” including terrorist financers, in this multi-trillion dollar sector. FinCEN perceives that investment advisers currently provide a relatively low-risk way for such illicit money to enter the system. This proposal has been discussed for years (similar rules have previously been proposed and withdrawn), and thus was not unexpected.

AML PROGRAMS AND SUSPICIOUS ACTIVITY REPORTING

The rule would require SEC-registered investment advisers to adopt and comply with tailored AML policies and file suspicious activity reports (SARs) with FinCEN as applicable. Many investment advisers have already implemented AML programs, either voluntarily or in response to an SEC-no action letter that allows broker-dealers to rely on investment advisers to perform their AML-related customer identification program obligations under certain circumstances. However, for other investment advisers, the development and implementation of a required, written AML policy and compliance with the applicable new reporting requirements could be a significant undertaking.

An AML policy should, at a minimum, (a) establish and implement policies, procedures and internal controls; (b) provide for independent testing for compliance; (c) designate a compliance officer; and (d) provide a training program. SARs would be required to be filed for transactions in excess of $5,000 which the adviser knows, or has reason to know, involve illegal or other suspicious activity.

CURRENCY TRANSACTION REPORTING

By expanding the definition of “financial institution” pursuant to the Bank Secrecy Act (which includes the PATRIOT Act) to include SEC-registered investment advisers, FinCEN would require them to file Currency Transaction Reports (CTRs), and keep and share other fund transmittal records that currently apply to other financial firms. Investment advisers are already  generally required to file Form 8300 for the receipt of more than $10,000 in cash or negotiable instruments. The new rule would replace the Form 8300 requirement with the CTR and would apply to transfers of more than $10,000 in actual currency, which may be less burdensome for the investment adviser in the case of transactions using negotiable instruments (not currency) that were previously reportable (although depending on the context those might now need to get picked up on an SAR). Additional records requirements imposed by the new rule apply for other transmissions exceeding $3,000. Such records will be required to be shared with other financial institutions in the payment chain. Some are similar to records already kept by the advisers, but advisers would need to confirm compliance with the nuances of the new rule.

EXAMINATION

FinCEN proposes to delegate its authority to examine advisers for compliance with this new rule to the SEC. FinCEN is expected to propose additional related rules jointly with the SEC, including requirements for a customer identification program for investment advisers.

View the full text of the proposed rule changes, and FinCEN’s explanation of it.

COMMENT PERIOD

Written public comment on the proposal will be accepted by FinCEN for a period of 60 days from the proposed rule’s publication in the Federal Register. If this rule is finalized, FinCEN is proposing that investment advisers have six months from the rule’s effective date to adopt compliant programs.

To discuss the proposed rule changes and the potential effect on your operations, please contact the attorneys listed below or your usal Stinson Leonard Street LLP attorney.

Eric Mikkelson

816.691.2680

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John Granda

816.691.3188

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David Jenson

612.33531464

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Tom Jensen

312.335.1809

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Jack Bowling

816.691.2314

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Vicki Westerhaus

816.691.2427

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Steve Quinlivan

612.335.7076

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Entry filed under: BSA/AML. Tags: , , , .

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