AML/CFT coming to Investment Advisers

On 2/15/24, FinCEN published a Notice of Proposed Rulemaking (NPRM) that would require certain investment advisers to apply AML/CFT requirements pursuant to the Bank Secrecy Act, including implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements.  FinCEN’s view is that investment advisers are at risk of abuse by money launderers, corrupt officials, tax evaders and other bad actors due to the fact that investment advisers are “generally” not subject to comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) measures.  As a result, the illicit actors are likely to “shop around” for investment advisers that do not need to inquire about the illicit actors source of wealth and act as entry points to the U.S. securities, real estate, and other assets markets.  Covered investment advisers would be required to comply with the rule on or before 12 months from the final rule’s effective date.

FinCEN states that: “While certain investment advisers may be subject to AML/CFT requirements or perform some AML/CFT requirements voluntarily or via contract, Treasury’s risk assessment found that the lack of comprehensive AML/CFT requirements across the sector contributed to its vulnerability to illicit finance activity. Further, Treasury has found that the investment adviser sector has nearly doubled in assets under management (AUM) since Treasury’s issuance of a prior NPRM in 2015 proposing to apply AML/CFT measures to certain investment advisers. The size and rapid growth of this sector underscores the importance of recalibrating the regulatory environment.”

FinCEN’s definition of Investment Advisers

“Investment advisers are entities that provide advice to investors about securities for compensation as part of a regular business. Investment advisers provide their expertise to a wide range of clients, including retail investors, high-net-worth individuals, private institutions, and governmental entities (including local, state, and foreign government funds). Advisers typically provide ongoing advice about buying, selling and/or holding investments and will monitor the performance of clients’ investments and their alignment with clients’ overall investment objectives. Many clients grant the adviser the power to manage assets on a discretionary basis, meaning the adviser has the authority to decide which securities to purchase and sell for the client”.

Investment Advisers Covered by the Proposed Rule

The proposed rule would include certain investment advisers in the definition of “financial institution” under the BSA:

• Investment advisers registered with the Securities and Exchange Commission (SEC), also known as registered investment advisers (RIAs), and
• Investment advisers that report to the SEC as exempt reporting advisers (ERAs).

Requirements of the Proposed Rule

The proposed rule would require RIAs and ERAs to:

• Implement an AML/CFT program;
• File certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
• Keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
• Fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

The proposed rule would also:

• Apply information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions to investment advisers, along with subjecting investment advisers to the “special measures” imposed by FinCEN pursuant to Section 311 of the USA PATRIOT Act.
• Because investment advisers provide services to open-end investment companies such as mutual funds, which are already defined as “financial institutions” under the BSA, and because of the regulatory and practical relationship between mutual funds and their investment advisers, the proposed rule would not require investment advisers to apply AML/CFT program or SAR filing requirements to mutual funds they advise.
• Propose to delegate its examination authority to the SEC, the federal functional regulator responsible for the oversight and regulation of investment advisers. The proposed delegation would be consistent with FinCEN’s existing delegation to the SEC of the authority to examine brokers and dealers in securities and mutual funds for compliance with the BSA and FinCEN’s implementing regulations.

More rulemaking is Expected

In this NPRM, FinCEN is not proposing:

• a customer identification program requirement for investment advisers.
• an obligation for investment advisers to collect beneficial ownership information for legal entity customers.

Despite the above, it is expected that FinCEN will address these requirements in subsequent rulemaking and in future rulemaking with the SEC.

The NPRM would bring the U.S. in line with international counterparts and address deficiencies noted by the Financial Action Task Force (FATF)

FinCEN states that: “The proposed rule would also help bring the United States into full compliance with several international AML/CFT standards established by the Financial Action Task Force (FATF). In the 2016 FATF Mutual Evaluation Report (MER) of the United States, the United States was rated (and remains rated) “partially compliant” on nine of the 40 FATF Recommendations. These included partially compliant ratings on Recommendations 1, 12, and 20 for the failure to apply AML/CFT requirements to investment advisers, among other reasons”.

The FATF is an independent inter-governmental entity that develops policies for protection of our global financial system from money laundering, terrorist financing and financing of weapons of mass destruction.  It is considered to be the global money laundering and terrorist financing “watchdog” and more than 200 countries and jurisdictions are committed to following the FATF Recommendations/Standards.  Its Recommendations (a total of 40) are considered to be a gold “Standard” for AML/CFT.

Will you be ready for the forthcoming rulemaking?

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