Why it matters
More than 12 years after initially proposing to extend the Bank Secrecy Act's anti-money laundering compliance programs and recordkeeping and reporting requirements to investment advisers, the Financial Crimes Enforcement Network (FinCEN) reproposed requiring investment advisers registered or required to register with the Securities and Exchange Commission (SEC) to implement AML programs, report suspicious activity under the Bank Secrecy Act (BSA), file currency transaction reports and comply with certain recordkeeping requirements. Observers are not expecting the same level of opposition that led to the withdrawal of the past proposals, due to the fact that many of the investment advisers who would be subjected to the new rule are already subject to this regulatory regime as broker-dealers.
FinCEN recently issued a notice of proposed rulemaking (NPRM) seeking to include investment advisers on the list of those required to comply with BSA and anti-money laundering (AML) regulations.
Pursuant to the NPRM, all investment advisers that are registered or required to register with the SEC would be covered by the proposal. FinCEN acknowledged that different types of advisers may face different levels of AML risks and did not include exempt reporting advisers or foreign private advisers in the NPRM. The regulator did request comment on whether additional types of advisers—particularly those that pose a low risk of money laundering—should be exempt from the rules.
To satisfy the proposed standard, investment advisers would be required to design and implement an AML program "reasonably designed to prevent the investment adviser from being used for money laundering or the financing of terrorist activities," FinCEN said. In addition, compliance with AML reporting and recordkeeping requirements would be necessary. The NPRM noted that the AML program would need to be in writing and approved by the adviser's board of directors or similar corporate entity.
An adviser's AML program would need to be individually tailored to the specific risks presented by the services it offers and the clients it works with, FinCEN explained, with four necessary elements: internal controls, independent testing, the designation of an AML officer responsible for implementing and monitoring the program, and ongoing training.
Suspicious activity reports (SARs) would also be required under FinCEN's proposed rules. Investment advisers would need to file a SAR where a transaction is conducted or attempted by, at or through the investment adviser that involves or aggregates funds or other assets of at least $5,000 when the investment adviser knows, suspects or has reason to suspect that the transaction involves money laundering, is designed to evade FinCEN's regulations, has no business or apparent lawful purpose (or is not the type the customer would normally be expected to engage in) or involves the use of the investment adviser to facilitate criminal activity.
Additional requirements related to SAR recordkeeping (including maintaining the confidentiality of a SAR and keeping documentation supporting the SAR on hand for not less than five years) were included in the NPRM. Other reporting requirements imposed by the BSA—responding to information requests from U.S. law enforcement, for example, as well as rules applying to cross-border transfers—would also require compliance under FinCEN's proposed rule.
Policies, procedures and internal controls to ensure that suspicious transactions are promptly identified and reported would be part of the AML program, FinCEN said, and the failure to have a monitoring process in place or file the required SARs could trigger civil liability as well as criminal prosecution for investment advisers.
Comments will be accepted on the NPRM until Nov. 2.