Alerts

AML and Investment Advisers: Understanding FinCEN's New Anti-Money Laundering Rules

Alerts / September 2, 2015

On August 25, 2015, the Financial Crimes Enforcement Network (FinCEN) proposed rulemaking that would require registered investment advisers, including certain hedge funds and asset managers, to establish anti-money laundering (AML) programs and monitor and report suspicious activity.[1] In 2003, a similar rule was proposed and later withdrawn, and this new proposal comes amid an increasing focus on criminal and regulatory enforcement actions for AML, Office of Foreign Assets Control (OFAC), and Foreign Account Tax Compliance Act (FATCA) violations.

In announcing the proposed rule, FinCEN Director Jennifer Shasky Calvery noted that “[i]nvestment advisers are on the front lines of a multi-trillion dollar sector of our financial system.”[2] The impetus for the proposed rule is regulatory concern that money launderers or terrorist financers may access the U.S. financial system through the “back door” because investment advisers are not subject to the same regulatory requirements as other financial entities such as banks and broker-dealers. The proposed rules address three regulatory changes, addressed in turn.

Adding “Investment Advisers” Definition

First, the proposal amends the implementing regulations of the Bank Secrecy Act (BSA) to include investment advisers within the definition of “financial institution,” thereby subjecting investment advisers to BSA requirements. The proposed definition of “investment adviser” is limited to those registered or required to register with the U.S. Securities and Exchange Commission (SEC), generally those advisers with over $100 million in regulatory assets under management, or subject to an exemption. The proposed rule subjects investment advisers to requirements of the BSA, including filing Currency Transaction Reports (CTRs) for transactions of more than $10,000 in currency. Advisers would also be required under the Recordkeeping and Travel Rules to keep a record of “transmittal of funds” in an amount equal to or greater than $3,000 and cross-border transfers and extensions of credit for amounts greater than $10,000. Moreover, investment advisers would be subject to FinCEN’s regulations implementing sections 314(a) and 314(b) of the USA PATRIOT Act, which address sharing of information with the government and among entities in order to detect money laundering and terrorist financing. FinCEN delegated authority to the SEC to examine investment adviser compliance with the proposed rules.

AML Programs

The rule as proposed would require defined investment advisers to, at a minimum, (1) establish and implement written AML programs, policies, and internal controls; (2) conduct periodic, independent testing; (3) designate an individual or committee responsible for AML compliance; and (4) provide ongoing training. The AML program would be required to encompass all advisory activity, including primary adviser and subadvisory services, as well as services that do not pertain to managing a client’s assets, for example, issuing research reports. Investment advisers should apply a “risk-based approach” to their AML programs, analyzing, for example, the type of client, the source of funds, and type of services provided. FinCEN specifically states its expectations for evaluating risks relating to certain types of advisory clients; for example, advisers should consider the “type of accounts offered (e.g., managed accounts), types of clients opening such accounts, and how accounts are funded” for non-pooled investment vehicle clients.

FinCEN acknowledged that investment advisers are already required to implement programs, policies, and internal controls in connection with federal securities laws, and these programs could be “adapted” to the requirements in this proposal. FinCEN also indicated that investment advisers could delegate the responsibilities for creating and implementing AML programs, but the advisers would “remain fully responsible for the effectiveness of the program, as well as for ensuring that FinCEN and the SEC are able to obtain information and records relating to the AML program.”[3]

Suspicious Activity Reporting

The rule requires investment advisers to report suspicious activity, per the proposed standard, in connection with transactions of at least $5,000 in funds or other assets. The proposal states that in monitoring suspicious activity, investment advisers should evaluate the activities of their clients for money-laundering risks. For example, suspicious activity could include “unusual wire activity that does not correlate with a client’s stated investment objectives” or “funding a managed account or subscribing to a private fund by using multiple wire transfers from different accounts maintained at different financial institutions.”[4] Investment advisers would also be subject to certain recording, filing, and confidentiality requirements.

FinCEN noted that investment advisers already have programs in place to comply with anti-fraud and manipulation provisions of the Advisers Act, which would need to be adapted to the requirements in the proposed rules if they were to go into effect. Similar to the AML program rules, FinCEN would allow investment advisers to delegate suspicious activity reporting to third parties, but the investment adviser would be ultimately responsible for the program.

Conclusion

The proposed rule is open for comment for 60 days after publication in the Federal Register, but investment advisers should take note of the proposed changes in implementing their compliance responsibilities. Furthermore, FinCEN has signaled potential rulemaking on the addition of unregistered advisers to the definition of “investment adviser” and the requirement of investment advisers to comply with customer identification and verification rules. In light of the proposed rules and increase in enforcement actions, it is important for investment advisers, as actors in the U.S. financial system, to continually review their compliance programs and ensure that they know their customers.

If you have any questions about this alert, please contact John J. Carney at jcarney@bakerlaw.com or 212.589.4255; George A. Stamboulidis at gstamboulidis@bakerlaw.com or 212.589.4211; Marc D. Powers at mpowers@bakerlaw.com or 212.589.4216; Lauren J. Resnick at lresnick@bakerlaw.com or 212.589.4241; or any member of BakerHostetler’s White Collar Defense and Corporate Investigations or Hedge Fund Industry teams.

Authorship Credit: Lauren J. Resnick and Margaret E. Hirce


[1] Financial Crimes Enforcement Network: Anti-Money Laundering Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers, 31 CFR Chapter X (proposed Aug. 25, 2015) (“Proposed Rule”).
[2] U.S. Department of the Treasury, Financial Crimes Enforcement Network, Release, FinCEN Proposes AML Regulations for Investment Advisers (Aug. 25, 2015).
[3] Proposed Rule at 34.
[4] Proposed Rule at 42-43.


Baker & Hostetler LLP publications are intended to inform our clients and other friends of the firm about current legal developments of general interest. They should not be construed as legal advice, and readers should not act upon the information contained in these publications without professional counsel. The hiring of a lawyer is an important decision that should not be based solely upon advertisements. Before you decide, ask us to send you written information about our qualifications and experience.