FinCEN Proposes Rules to Make Investment Advisers Subject to Anti-Money Laundering Requirements

Since the implementation of the U.S.A. Patriot Act, Investment Advisers have been exempted from Financial Crimes Enforcement Network (FinCEN) requirements to implement a comprehensive Anti-Money Laundering (AML) program. However, this may soon change.

FinCEN’s mission, as stated on the U.S. Treasury Department website, is to safeguard the financial system from illicit use and combat money laundering and promote national security through the collection, analysis, and dissemination of financial intelligence and strategic use of financial authorities.

On February 13, 2024, FinCEN proposed a rule under its authority to designate a business or agency as a ‘‘financial institution’’ as defined by the Bank Secrecy Act “(BSA). The proposed rule would add investment adviser to the definition of financial institution under the BSA.

If this change is adopted, both Securities and Exchange (SEC) Registered Investment Advisers (RIAs) and Exempt Reporting Advisers (ERAs) would be subject to FinCEN’s anti-money laundering (AML) and combatting the financing of terrorism (CFT) requirements.

This is a proposed rule, and FinCEN is currently seeking public comment. The comments period ends on April 15, 2024. An investment adviser will have 12 months from the effective date of the final rule to implement these procedures.

Why Is This Happening?

Regulators are concerned that investment advisers could be exploited for illegal activities or by foreign governments to gain access to sensitive information. They believe that existing regulatory requirements for Advisers are not designed to address money laundering, terrorist financing, and other illicit financial activity risks.

While some investment advisers have implemented certain AML/CFT requirements, they are not uniform across the industry and the implementation of such measures is not subject to comprehensive enforcement or examination.

FinCEN has authority under the BSA to authorize financial institutions to share financial information in specified circumstances and to require financial institutions to keep records and maintain procedures to ensure compliance with the BSA and its implementing regulations to guard against money laundering.

What Is the Expected Impact?

If adopted, this rule will significantly change the regulatory landscape for investment advisers by requiring them to implement new AML/CTF programs and comply with various reporting and recordkeeping obligations.

FinCEN has proposed delegating its examination authority to the SEC because of the agency’s expertise in the regulation of investment advisers.

What Are the Proposed Requirements?

The BSA requires financial institutions to establish reasonably designed risk-based AML/CFT programs to combat the laundering of money and financing of terrorism through the institution. Under the proposed rule, Advisers would need to establish a(n):

• Written AML program: The program would need to cover all advisory relationships and should address risks associated with different types of clients, including private funds.
• Policies and procedures: Internal policies, procedures, and controls reasonably designed to prevent or detect money-laundering would need to be developed.
• Designation of a compliance/AML officer responsible for the program: The person or persons would need to have full responsibility and authority to develop and implement appropriate policies, procedures, and internal controls reasonably designed to prevent the investment adviser from being used for those risks.
• Independent testing: The AML program would need to be tested periodically by an independent party.
• Suspicious activity reporting: Advisers would need to file Suspicious Activity Reports (SARs) with FinCEN for suspicious transactions and other recordkeeping requirements related to fund transfers and cross-border transactions are also outlined.
• Training: All employees would need to receive regular AML training; this includes the Board and certain groups may require additionally focused training relevant to their job function.
• Customer/enhanced due diligence: Investment Advisers would be subject to due diligence standards similar to those of other BSA financial institutions. This would include the maintenance for correspondent banking for foreign financial institutions and private banking.
• Currency transaction reports: RIAs and ERAs would be required to report transactions in currency over $10,000.
• Record keeping and travel tule: Advisers would need to create and retain records for the transmittals of funds and ensure the relevant information “travels” to the next financial institution.
• Information sharing: Advisers would be required to share information with other financial institutions and government entities.

What the Rule Does Not Include:

• Customer Identification Programs (CIP): FinCEN is not proposing a customer identification program (CIP) requirement, nor is it proposing to include within the AML/CFT program requirements an obligation to collect beneficial ownership information for legal entity customers at this time. FinCEN anticipates addressing CIP via future joint rulemaking with the SEC and addressing the requirement to collect beneficial ownership information for legal entity customers in subsequent rulemakings.
• Mutual Funds: The proposed regulations would not require investment advisers to apply AML/CFT program or SAR reporting requirements to mutual funds as they are already subject to their own comprehensive requirements under the BSA.
• Form 8300: The proposed regulations would remove the existing requirement that investment advisers file reports for the receipt of more than $10,000 in cash and negotiable instruments using the joint FinCEN/Internal Revenue Service Form 8300 (Form 8300). Investment advisers would instead be required to file a Currency Transaction Report (CTR) for a transaction involving a transfer of more than $10,000 in currency by, through or to the investment adviser, unless subject to an applicable exemption.
• State Registered Advisers: FinCEN’s proposed rule would not apply to state-registered investment advisers because Treasury Department’s risk assessment found few examples of state-registered investment advisers being misused for money laundering, terrorist financing, or other illicit financial activities.

What Can You Do to Prepare for Adoption of the Proposed Rule?

• RIAs and ERAs with voluntarily developed AML programs should consider whether these programs are sufficient to make them compliant under the new rules.
• Those without a current AML program should plan policies and implement controls to become compliant with the new rules.

We Can Help

Weaver has a long-standing practice serving financial institutions, including compliance with BSA/AML regulations. For more information and to find out how Weaver can assist RIAs and ERAs investment advisers prepare for the proposed AML requirements a contact our Investment Adviser Compliance team.

We can tailor a compliance program that meets regulatory requirements and fits your organization. Contact us or visit our Asset Management Consulting page to see our full range of accounting and advisory services.

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