Private funds to face anti-money laundering scrutiny(2)

The SEC and FinCEN are working together to extend AML program and suspicious activity reporting requirements to registered investment advisers.

Private funds will soon face anti-money laundering (AML) regulations, said US Treasury Undersecretary for Terrorism and Financial Intelligence, David Cohen, at the ABA/ABA Money Laundering Enforcement Conference last week.

The US Securities and Exchange Commission (SEC) is working in conjunction with the Financial Crimes Enforcement Network (FinCEN) to create draft rules for registered investment advisers. Back in 2012 GPs managing north of $150 million were required to enter the SEC's remit, and register as investment advisers.

“FinCEN, in consultation with the SEC, is working to define SEC-registered investment advisers as financial institutions and, because of their unique insight into customer and transaction information, to extend AML program and suspicious activity reporting requirements to them,” stated Cohen.

The threat of increased AML regulation has been brewing for more than a decade, with FinCEN and the US Department of the Treasury proposing increased AML compliance requirements and customer identification data collection requirements for investment advisers and hedge funds back in 2002 and 2003. The proposals were withdrawn after languishing un-enacted for years.

“There have been rumors that this has been forthcoming for a long time,” said Satish Kini, Debevoise & Plimpton partner and chair of the firm’s banking group in an interview with pfm. “More likely than not we will see a proposed rule in the next year.”

The proposal will likely require investment advisers to adopt AML programs, identify customers and designate an AML compliance officer to do testing and training, said Kini. Although many in the industry have already established these practices, the proposal is expected to increase the rapidly growing compliance burden for private fund managers.

“Even if certain funds have already adopted these programs, it’s a different story when you’re doing this voluntarily under your firm’s best practices than when you’re doing it for regulators under examination. There’s much greater opportunity for criticism,” noted Kini. “This is a big deal, even for those who may have AML programs in place as a best practice.”