New Proposed FinCEN AML Rules
AML Time (Again)
New Proposed FinCEN AML Rules
More rulemaking to hit the Investment Adviser Industry – AML Time
On February 13, 2024, the Financial Crimes Enforcement Network (“FinCEN”) released a rule proposal which would require certain investment advisers to apply AML/CFT requirements pursuant to the Bank Secrecy Act (“BSA”), including implementing risk-based AML/CFT programs, reporting suspicious activity to FinCEN, and fulfilling recordkeeping requirements.
The fourth time’s the charm
The fourth time’s the charm
Why is FinCEN introducing this rule now? The Department of Treasury (“Treasury”) conducted a risk assessment of the investment advisers sector that identified several illicit finance and national security risks. The Treasury’s risk assessment identified cases of foreign adversaries, including China and Russia, investing in early-stage companies through investment advisers to access sensitive information and emerging technology.
The 40-page risk assessment highlighted that:
“A review of law enforcement cases, BSA reporting, and other information available to the U.S. government has identified several illicit finance threats involving investment advisers. First, IAs have served as an entry point into the U.S. market for illicit proceeds associated with foreign corruption, fraud, and tax evasion, as well as billions of dollars ultimately controlled by Russian oligarchs and their associates. IAs (including those that are exempt from SEC registration) and their advised funds, particularly venture capital funds, are also being used by foreign states, most notably the People’s Republic of China (PRC) and Russia, to access certain technology and services with long-term national security implications through investments in early-stage companies. Finally, advisers (RIAs, ERAs, and state-registered advisers) have defrauded their clients and stolen their funds.”
2024 Treasury Investment Adviser Risk Assessment
As a result of these findings, FinCEN has issued a notice of proposed rulemaking (“NPRM”) detailing a new proposed rule that would apply comprehensive AML/CFT measures to certain investment advisers.
Investment advisers covered
The proposed rule would include certain investment advisers in the definition of “financial institution” under the BSA:
investment advisers registered with the Securities and Exchange Commission (SEC), also known as registered investment advisers (RIAs), and
investment advisers that report to the SEC as exempt reporting advisers (ERAs).
Requirements of the proposed rule
The proposed rule would require RIAs and ERAs to:
implement an AML/CFT program;
file certain reports, such as Suspicious Activity Reports (SARs), with FinCEN;
keep records such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rule); and
fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.
The proposed rule would also apply information-sharing provisions between and among FinCEN, law enforcement government agencies, and certain financial institutions to investment advisers, along with subjecting investment advisers to the “special measures” imposed by FinCEN pursuant to Section 311 of the USA PATRIOT Act.
Requirements of the proposed rule (continued)
Though as of now, FinCEN is not proposing a customer identification program requirement for investment advisers, it does anticipate to propose one for RIAs in a future joint rulemaking with the SEC. Additionally, this rule does not propose an obligation for investment advisers to collect beneficial ownership information for legal entity customers, however, FinCEN anticipates addressing this requirement for investment advisers in subsequent rulemaking. So, there might be even more rulemaking and obligations for RIA in the coming years.
AML Examination
FinCEN is proposing to delegate its examination authority to the SEC, who is presently responsible for the oversight and regulation of investment advisers. The proposed delegation would be consistent with FinCEN’s existing delegation to the SEC of the authority to examine brokers and dealers in securities and mutual funds for compliance with the BSA and FinCEN’s implementing regulations.
Based on the Fact Sheet released by FinCEN, the proposed rule, “… would significantly improve efforts to protect the U.S. financial system, provide highly useful information to law enforcement authorities and national security agencies, and safeguard the investment adviser sector against illicit activity. Furthermore, the proposed rule would make it easier for U.S. investment advisers and the U.S. government to identify attempts by foreign adversaries to invest in early-stage companies with ties to important and sensitive technologies with national security implications.”
It is unsure whether there will be any exemptions for RIAs which custody all their clients’ assets with a qualified custodian, already subject to the AML regulations.
Timing
Under the proposed rule, covered investment advisers would be required to comply with the rule on or before 12 months from the final rule’s effective date. The comment period for the rule is open until April 15, 2024, then it is back to FinCEN to finalize and potentially adopt.
Next Steps
For now, we are in a holding pattern awaiting final approval and potentially some guidance from the SEC. If you want to evaluate your compliance program and present AML policies, reach out to altPilot!
About altPILOT
At altPILOT Lodestar, our goal is to make the seemingly opaque and obscure world of risk management more transparent and more easily accessible: in other words, to be your Lodestar through the choppy waters and dark nights of the investment advisory industry. To that end, we will continually monitor SEC Risk Alerts and Exam Priorities to bring you via our Lodestar Alerts timely and accessible explanations of some of the most significant shifts in the regulatory landscape.
