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Compliance & Risk

What are US financial advisers’ AML expectations under recent FinCEN proposal?

Jason Wallace  Senior Editor / Thomson Reuters Regulatory Intelligence

· 5 minute read

Jason Wallace  Senior Editor / Thomson Reuters Regulatory Intelligence

· 5 minute read

As anti-money laundering becomes a bigger priority for regulators, some investment advisors in the US are being asked to adopt more stringent prevention programs

The Financial Crimes Enforcement Network (FinCEN), a unit of the U.S. Treasury Department, has released a new proposal that would require certain investment advisers to adopt anti-money laundering (AML) programs.

The proposal has been more than 20 years in the making and will require advisers registered with the U.S. Securities and Exchange Commission (SEC) and exempt reporting advisers (ERAs) to establish AML programs, file suspicious activity reports (SARs), and comply with AML reporting and recordkeeping obligations as a “financial institution” under the Bank Secrecy Act (BSA), which, among other things, would require firms to file currency transaction reports (CTRs) and keep records relating to money transfers.

The proposal would apply only to advisers required to be registered with the SEC and ERAs; however, future rulemaking may include other types of advisers, such as state-regulated advisers. If adopted, FinCEN would delegate its examination authority to the SEC.

In 2003 and again in 2015, FinCEN proposed to include certain investment advisers within the definition of “financial institution” and impose AML compliance obligations on such advisers. The proposals were met with heavy resistance from the industry and never formalized. In fact, the 2015 proposal was substantially similar to the current one but has now been expanded to include ERAs as a covered adviser for AML program requirements.

Since then, many advisers have voluntarily implemented an AML program on their own initiative as a best practice. In addition, programs were implemented to satisfy the requirements of counterparties or to allow broker-dealers to rely upon them for part of their AML program.

AML program requirements

Under the latest proposal, an adviser would be required to develop and implement a written, risk-based program that is reasonably designed to prevent the adviser from being used to facilitate money laundering and the financing of terrorism.

The program must include a designated AML compliance officer, AML training and periodic independent testing of the program’s compliance. It must also be approved in writing by the organization’s board of directors or trustees, and if there is no such board, by the sole proprietor, general partner, trustee, or other person(s) with functions similar to a board of directors.

Since the AML compliance program requirement is risk-based, advisers and ERAs will have the flexibility to tailor their programs to the specific risks associated with their businesses.

Notably, FinCEN did not impose a Customer Identification Program (CIP) requirement in this proposal; however, FinCEN did state it anticipates the CIP requirement will be addressed through future joint rulemaking with the SEC.

FinCEN also is not proposing an obligation for advisers to collect beneficial ownership information for legal entity customers. FinCEN anticipates addressing this requirement in a subsequent rulemaking.

Firms that are dually registered with the SEC as investment advisers and broker-dealers would not be required to establish multiple or separate programs, provided that a comprehensive AML program covered both activities.

SARs requirement

The proposed rule would subject advisers to suspicious activity reporting obligations similar to those required of broker-dealers. An adviser must report suspicious transactions that are conducted or attempted by, at, or through an adviser and involve or aggregate at least $5,000 in funds or other assets.

Advisers would be required to assess client activity and relationships for money-laundering risks and develop a suspicious transaction monitoring program that is suitable for the adviser in the context of such risks. In circumstances that require immediate attention, advisers must notify the appropriate law enforcement authority at once and submit timely SARs.

FinCEN suggests suspicious activity monitoring could include screening for fraud indicators (e.g., paying for investments through multiple transfers from different financial institutions) or the use of negotiable instruments common to money-laundering schemes (e.g., money orders).

Other regulations would be similar to those applicable to broker-dealers, including requirements around SAR-filing times (i.e., 30 calendar days after initial detection of reportable facts), record retention (i.e., five years after the SAR was filed) and confidentiality requirements.

Bank Secrecy Act and currency transaction reports

FinCEN also proposes to incorporate advisers into the BSA’s definition of a “financial institution.” These financial institutions are subject to additional AML regulations beyond the standard program requirements.

For example, a “financial institution” is required to file a currency transaction report for any single-day transaction involving the transfer of more than $10,000 by, through, or to the investment adviser. This would replace the current measure requiring an adviser to file reports on Form 8300 for the receipt of more than $10,000 in cash and negotiable instruments.

FinCEN regulations require firms to file currency transaction reports electronically within 15 days of the reported transaction(s). Reports must be retained for a minimum of five years following the date of filing. Additionally, firms must be conscious of recordkeeping and travel rules obligating them to create and retain fund-transmittal records and to ensure that certain transmittal information “travels” to the next financial institution in the payment chain. Accordingly, the proposed rule requires that records be maintained for transmittals of $3,000 or more.

The FinCEN proposal is now available for comment, although a final compliance date has yet to be determined.

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