The U.S. Treasury Department appears poised for success in its third bid to extend anti-money laundering and countering the financing of terrorism (AML/CFT) rules under the Bank Secrecy Act to cover investment advisers. Amid a politically fervent environment with an increased focus on guarding against economic crimes, the department’s persistent efforts, including its publication of risk assessments, seem on the brink of bearing fruit.
Notwithstanding the fact some advisers already implement numerous AML/CFT regulations voluntarily or due to associations with banks and broker-dealers, all those registered with the Securities and Exchange Commission (SEC), including exempt reporting advisers, may need to begin gauging their risks and determining routes to compliance in anticipation of the extended laws. In order to initiate this process, advisers can refer to thorough advice on AML/CFT already available to companies under the aegis of the law. One such resource is the SEC’s Anti-Money Laundering Source Tool which provides comprehensive compliance resources.
A rule proposed by the Treasury in February infers that registered investment and exempt reporting advisers must introduce an AML/CFT program, comprising written regulations, procedures and internal controls fashioned to ward off money laundering, terrorist financing, and similar illegal activities. This obligation engulfs advisers to individual funds such as hedge, venture capital, and private equity funds, with investment advisers registered at state level – typically those managing less than $100 million in assets – being exempt.
The Treasury, in this context, has highlighted that investment advisers pose a significant vulnerability in the safeguarding against financial crimes, money laundering, and terrorism financing. As indicated in its 2024 investment advisor risk assessment, the lack of consistent applicability and compliance across the industry begets opportunities for unlawful activity. The advisor’s AML/CFT program needs to be approved by its board and a dedicated individual will be in charge of its execution. Advisers are expected to adapt these programs to identify and mitigate implicit risks for their unique business structure, clientele, geographies, and strategies.
FinCEN is welcoming comments on the proposal until April 15, with a focus on areas that might evolve prior to its finalization. As the proposed regulation is a significant federal rule change, it is to be noted that it might face legal challenges. However, well-informed investment advisers will initiate internal review and preparation processes for a timely compliance, and keep abreast of developments regarding the rule’s implementation.