AML Rules are Coming For Investment Adviser

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By John Leahy Senior Product Manager
May 13th 2024 | 4 minute read

Investment advisers beware: the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) is coming with a new anti-money laundering and countering the financing of terrorism (AML/CFT) rule – and this time there may be no escape.

FinCEN’s proposed rule would make registered investment advisers (RIAs) and exempt reporting advisers (ERAs) subject to the Bank Secrecy Act (BSA), and force them to implement risk-based AML/CFT programs, report suspicious activity and meet strict recordkeeping obligations. The proposal would apply to most RIAs and ERAs, including those acting as sub-advisors (such as RIAs for managed account programs), global law firm Morgan Lewis observed. Certain non-U.S. advisers would also be captured, “even if they only provide investment advice to non-U.S. private funds and other non-U.S. clients.” A comment period ended on April 15.

FinCEN unsuccessfully proposed extending AML requirements to investment advisers and private funds in 2002, 2003 and 2015. But rapid subsequent growth of the sector – which has seen adviser assets under management nearly double since 2015 – and the increasingly important role of private funds in the financial system “underscore the importance of recalibrating the regulatory environment,” FinCEN noted, making passage of the rule more likely.

Proposed AML requirements

If adopted as proposed, the rule represents “a substantial undertaking for investment advisers in terms of building and implementing a compliant operating infrastructure,” observed the Morgan Lewis report.

Advisers would need to:

  • Implement a written, risk-based AML/CFT program covering all advisory relationships with all types of clients (except mutual funds), including registered closed-end funds, private funds, sub-advisory relationships and non-discretionary advisory relationships.

The program requires board of director approval, and to be overseen by a designated AML officer and independently tested. In addition, firms would need to establish risk-based procedures that enable them to carry out ongoing customer due diligence. These include:

  1. Developing customer risk profiles based on a clear understanding of the nature and purpose of customer relationships.
  2. Conducting ongoing monitoring to identify and report suspicious transactions.
  3. Maintain and update customer information in line with their risk.
  • File Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs) with FinCEN.

SARs are required for any suspicious transaction that involves or aggregates at least $5,000 in funds or other assets, and where the adviser knows or suspects the transaction involves funds that stem from illegal activity, is designed to evade any Bank Secrecy Act requirements or involves the adviser facilitating criminal activity.

CTRs would replace the current obligation to file Form 8300 with FinCEN. Reports are needed for any transaction involving a payment or transfer of more than $10,000 (including the equivalent in a foreign currency or multiple transactions structured to avoid the reporting requirement) by, through or to the adviser.

  • Comply with the BSA’s Recordkeeping and Travel Rule.

Advisers will need to keep appropriate records of transactions that meet the definition of a transmittal order. Identifying information on the transmitter (name, address, etc.) must “travel” with the transmittal to the next financial institution in the payment chain. Advisers also have to obtain or retain identifying information on the recipient.

Under the proposal, advisers will be allowed to contractually delegate the implementation and operation of aspects of their AML/CFT programs to an affiliate or third party, such as a fund administrator. Delegation will be especially useful for smaller firms that lack the necessary internal compliance capabilities. However, the adviser will remain fully responsible and legally liable for its AML/CFT program.

Possible future rule extensions

For the time being, the proposed rule does not require investment advisers to establish a customer identification program. Nor will they need to collect beneficial ownership information for legal entity customers. FinCEN anticipates introducing these requirements though in future rulemakings.

How to achieve AML compliance

The Morgan Lewis report noted that the FinCEN proposal was submitted to the Office of Management and Budget’s Office of Information and Regulatory Affairs on April 5, 2024, “indicating that we can expect the proposal to be issued within the next 90 days.” Compliance would become necessary within 12 months of the final rule being adopted.

In the interim, the market for AML professionals is likely to get increasingly competitive, Morgan Lewis warned.

Relying on extra headcount to cope with the compliance workload could therefore become prohibitively expensive – assuming advisers or their third-party service providers can even recruit the necessary staff.

Alternatively, firms can automate their AML/CFT tasks.

A modern AML technology infrastructure equips advisers with digitalized, risk-based customer onboarding; ongoing due diligence and screening for sanctions and politically exposed persons; real-time monitoring of suspicious transactions/behaviours and hands-free SAR filing. Such end-to-end automation ensures firms can meet their compliance obligations efficiently and at scale.

With extended AML obligations looking ever more likely for advisers, it is their best solution.

John Leahy
John has been with the Deep Pool Group since 2012. He drives product development, vision, strategy, and execution across a cross-functional team, serving 3 Fintech/Regtech products. John holds a Postgraduate Diploma in Product Management from Technological University Dublin.