U.S. Investment Advisers Face Tightened Anti-Money Laundering Rules: New Regulation Targets Illicit Finance in Private Funds Sector

The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) has proposed sweeping new regulations aimed at bolstering the fight against money laundering within the private funds sector. Under the proposed rule, investment advisers registered with the SEC, overseeing assets exceeding $110 million, must implement stringent anti-money laundering (AML) and counterterrorism financing measures.

Key Points:

1. Scope of Regulation:
   The proposed rule extends to SEC-registered investment advisers and exempt reporting advisers overseeing private funds, mandating the establishment of comprehensive AML compliance programs. However, approximately 17,000 state-registered advisers fall outside the purview of the proposed regulations.
2. Compliance Requirements:
   Investment advisers subject to the rule must file suspicious activity reports with FinCEN, institute AML compliance programs, and maintain records related to fund transfers, akin to obligations incumbent upon banks and broker-dealers.
3. Rationale and Background:
   FinCEN’s proposal reflects growing concerns over the prevalence of illicit finance within the investment adviser sector, fueled by a lack of comprehensive AML controls. The agency cites instances of bad actors exploiting regulatory gaps to access U.S. financial markets.
4. Industry Impact:
   While larger firms may possess existing AML frameworks, smaller and midsize advisers could face implementation challenges. Alma Angotti, a financial crimes expert, emphasizes the importance of risk-based compliance programs across the board.
5. National Security Implications:
   The proposed rule aligns with broader efforts to enhance financial transparency, especially concerning national security. FinCEN’s risk assessment highlights instances of foreign adversaries leveraging investment advisers to access sensitive technologies and information.
6. Road to Adoption:
   FinCEN is soliciting public feedback on the proposed rule until April 15, with a 12-month compliance window anticipated upon adoption. The move aligns with President Biden’s emphasis on combating corruption and enhancing financial integrity.
7. Optimism Amid Challenges:
   Despite previous regulatory setbacks, stakeholders express optimism regarding the potential finalization of the proposed rule. Angotti underscores the urgency of addressing illicit financing risks, positioning the current regulatory efforts as crucial to national security imperatives.
8. Broader Regulatory Landscape:
   FinCEN’s initiative forms part of a broader push to enhance financial transparency, evidenced by recent proposals targeting anonymous shell companies and trusts in real estate transactions.

As regulatory scrutiny intensifies, U.S. investment advisers face a pivotal juncture, navigating evolving compliance obligations to combat illicit finance effectively.