CFO Forum: need for AML-preparedness on the rise

Anti-money laundering preparedness is of increasing importance to private fund advisors, and can be implemented with greater ease and lower cost than other regulatory requirements, according to delegates at Private Equity International’s 2017 CFOs and COOs Forum in New York on Thursday.

“It’s something firms are going to be more sensitive to in the next couple of years,” said one delegate specialized in AML-related preparedness.

He cited the Financial Crimes Enforcement Network (FinCEN) rules, which will likely be finalized in 2017 and require all registered investment advisors to establish AML programs in the same vein as has been asked of other financial institutions, such as banks.

“The good news is that it’s not expensive and it only takes a couple of hours a week or a month,” said another delegate, who works at a New York-based private equity firm.

Firms should consider AML implications in two types of relationships: with their limited partners and with portfolio companies.

When setting up an AML program, advisors should think of defining specifically how a service provider might conduct screening, identify specific risk for their firm and red flags that may occur during their business activities. They should also consider how they will report any AML issues arising and how they will conduct responses to any potential AML violations.

One firm explained that toward the end of the fundraising process but prior to a final close, it typically runs a background check of all LPs through software that identifies politically exposed persons and high risk individuals and organizations. 

“We check the prospective LPs and at that time we assess if an LP will be low, medium or high risk,” said the delegate. When the LP is low risk, the firm runs a check on it every three years; medium-risk LPs are checked every other years and those that are high risk are checked every year.

It runs new screenings every time an LP provides new wire instructions or when there’s a secondaries transaction that brings in a new LP. If an issue with an LP persists, the firm communicates with the LP’s lawyers. “That’s a delicate dance,” the New York-based delegate said.

AML checks should also be thorough during due diligence preceding an investment in a portfolio company. “We hire a myriad of consultants including an investigative services firm as a deal becomes more promising,” added the delegate. “It should be a critical step of the due diligence process.”

General partners should pay close attention to potential changes in the AML watch-list as the new administration takes power in the White House.