Anti-money laundering (AML) regulation has continued to evolve since it was introduced in 1970 under the broad regulatory scheme commonly known as the Bank Secrecy Act. While funds and investment advisers have not been subject to AML regulation so far, we expect that to change in the next six to twelve months. Whether or not you currently have a voluntary AML compliance program in place, this year is the time to begin to address AML compliance in more depth and detail.
Historically, the Financial Crimes Enforcement Network (FinCEN) has taken a number of hard looks at the private investments industry: in 2002, FinCEN proposed that unregistered investment companies establish AML programs; in 2003, they proposed requiring certain investment advisers to establish AML programs; and in 2007, FinCEN announced they were re-considering how to apply AML across the private investments landscape; then, in 2008, they withdrew both proposed rules.
In August 2015, FinCEN announced proposed rules that would include certain investment advisers in the definition of “financial institution” and thus make a number of AML reporting and recordkeeping requirements applicable, including establishing an AML program and reporting on currency transactions and suspicious activities.
While the proposed rules apply only to investment advisers who are registered (or required to be registered) with the U.S. Securities & Exchange Commission, FinCEN has announced it may expand AML coverage to exempt or state-registered investment advisers.
The AML programs adopted by investment advisers subject to the regulation will need to include: development of policies, procedures and controls; designation of a compliance officer; an ongoing employee training program; and an independent audit program to test the program.
These will apply to investment advisers advising private pooled investment vehicles, including real estate funds, offshore funds and offshore offerings.
In May 2016, FinCEN released separate, final rules on AML compliance programs that apply to all financial institutions. With this release of detailed AML compliance regulations now complete, FinCEN is likely to move on to the next item on its to-do list, releasing final rules based on those proposed a year ago to include certain investment advisers within the definition of “financial institution.”
Once the proposed rules are formally adopted, those investment advisers included in the expanded definition of “financial institution” will have six months to comply with the AML regulations.
Given the consistent policy orientation of FinCEN over the past 15 years, aimed at bringing private funds and their investment advisers into the ambit of mandatory AML compliance programs, we believe FinCEN will eventually expand the proposed rules to cover all private funds and their investment advisers, regardless of whether they are exempt or state-registered.
Matthew J. Ertman
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Investment Management Group
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