Mark Taylor
Senior Editorial Manager
In a new rule 20 years in the making, the US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) is to impose Bank Secrecy Act (BSA)-type regulations on asset managers.
The new rule would apply to all investment advisers registered or required to register with the US Securities and Exchange Commission (SEC) and that report to the SEC as Exempt Reporting Advisers.
Advisers will have to establish AML programs, file suspicious activity reports (SARs), and comply with AML reporting and recordkeeping obligations as a “financial institution” under the BSA. Amongst other requirements, this involves filing currency transaction reports (CTR) and adopt more stringent record-keeping policies around money transfers.
Most advisers, other than those that are also licensed as a bank (or are a bank subsidiary), are registered as broker-dealers, or advise mutual funds, are not currently obligated to adhere to the proposed BSA requirements.
The rule will capture dealings over $10,000 in US currency, foreign currency, cashier's checks, bank drafts, traveller's checks, and money orders, effective in 2024, “cash” will also include digital currencies.
What is the background to the new FinCEN rule?
FinCEN previously proposed similar rules in 2002, 2003 and 2015, but they were never adopted.
Heavy lobbying from industry sank the proposals, however FinCEN’s last efforts in 2015 bear striking resemblance to the new rules, which have expanded the definitions of advisers requiring stronger AML defences.
In the regulator’s 2024 Investment Adviser Risk Assessment, investment advisers were singled out as particularly vulnerable to money laundering, terrorist financing and other illicit activity exploitation.
The industry serves as an entry point into the US market for dirty money associated with foreign corruption, tax evasion and fraud, the regulator said.
“If we can take away one thing from this, it is that interrupting funds from foreign illicit activity, from sanction evasion to corruption, is at the forefront of national security priorities,” said Alma Angotti, partner in the financial crime team at expert consultancy Guidehouse and former SEC enforcer.
What is the scope of FinCEN’s new AML rule?
Asset managers and funds to establish and maintain an effective written AML/CTF compliance program tailored to the specific risks associated with their business.
It will cover customer due diligence requirements (CDD), requiring investment advisers to develop risk-based procedures for assessing clients. Firms will be made to conduct background checks and outline details of the nature and purpose of the client relationship.
FinCEN has also directed it will use the newly enacted Corporate Transparency Act (CTA), which was passed as part of the AML Act, ensuring certain kinds of domestic and foreign entities must submit specified beneficial ownership information directly to FinCEN.
FinCEN has the authorisation, subject to certain protocols, to share this data with government agencies, financial institutions, and financial regulators.
The proposed rule also requires advisers to conduct “know your customer” due diligence in order to understand the nature and purpose of the client/investor relationship. This would be used as a measure to gauge unusual or suspicious transactions.
Advisers will have to file suspicious activity reports with FinCEN when identifying transactions that do not serve an apparent business or lawful purpose.
“While some investment advisers have willingly adopted internal AML/CTF programs that integrate various elements outlined in FinCEN’s proposed rule, the introduction of the mandatory requirement to file SARs would represent an entirely new and unfamiliar requirement for almost all investment advisers and possibly create implementation challenges for many advisers,” said Gerald Francese, partner at Locke Lord law firm.
Chief compliance officers will also have to take on additional workloads, including training new AML officers and remodeling existing compliance programmes to implement the new policies. This will involve the usual elements of ensuring tone from the top is followed, updated internal controls, and testing and audit.
Firms must also bolster their record-keeping and reporting compliance, as it will be central to the new requirements to maintain and keep detailed records of transactions, suspicious activity, and other relevant information.
“The due-diligence process for determining the identity of investors and the source of their funding — similar to the process at banks dealing with high-net-worth clients — would likely be the biggest component for IAs to comply with the new suspicious activity monitoring and reporting requirements,” said Angotti.
What are the next steps?
FinCEN is seeking responses to the proposals, and has added 60 specific questions, which are due by April 15, 2024. Advisers will be granted 12-month phasing in period following the final rule’s effective date to ensure compliance.
“Today’s policy and regulatory landscape is vastly different from 2003 or 2015, and the Biden Administration has made it a point of pride to address illicit finance concerns head-on,” said Wilmer Hale financial regulation expert Zachary Goldman, a partner at the firm. ‘Given these strategic priorities, demonstrated by Treasury’s 2024 National Money Laundering and Investment Adviser Risk Assessments, it is likely that FinCEN’s latest proposed rule ... will, in fact, be finalised. Those operating in the asset management sector should therefore prepare to comply with the NPRM’s requirements and with additional rulemaking expected to follow.”