United States: FinCEN Proposes Anti-Money Laundering Regulations For Registered Investment Advisers

In an attempt to address or prevent any money launderer's access to the U.S. financial system through accounts serviced by registered investment advisers, the Department of Treasury's Financial Crimes Enforcement Network ("FinCEN") published a Notice of Proposed Rulemaking on September 1, 2015. The proposed regulations would subject investment advisers registered (or required to be registered; collectively, "RIAs") with the Securities and Exchange Commission ("SEC") under the Investment Advisers Act of 1940 (the "Advisers Act") to regulations comparable to those imposed on financial institutions by the USA PATRIOT Act.

Money laundering is the processing of criminal proceeds through the financial system to disguise their illegal origin or the ownership or control of the assets, or the promoting of illegal activity with illicit or legal source funds. Generally, money laundering involves three stages, known as placement,1 layering,2 and integration.3 The crime of money laundering also encompasses the movement of funds to finance terrorism, whether these funds come from illegitimate or legitimate sources.

According to FinCEN, an RIA's asset management operations are vulnerable at each stage of the money laundering process. Money launderers may see the $61.9 trillion in assets under management by RIAs as a low-risk way to enter the U.S. financial system. FinCEN believes that RIAs are also uniquely situated to appreciate a broader understanding of their clients' movement of funds through the financial system because of the types of advisory activities in which they engage.

The proposed regulations are open to public comments until November 2, 2015.

The Proposed Regulations

The proposed regulations generally impose three obligations on RIAs under the Bank Secrecy Act (the "BSA"):

1. Implementing anti-money laundering ("AML") programs. 

The proposed regulations would require an RIA to develop and implement a written AML program approved by its board of directors, sole proprietor, general partner or other person(s) in a similar function. The AML program must be reasonably designed to prevent the RIA from being used to facilitate money laundering, and to achieve and monitor compliance with the applicable provisions of the BSA and FinCEN's regulations.

The four minimum requirements for the AML program are comparable to the requirements for banks, broker-dealers, mutual funds and other financial institutions under the BSA. They are:

i. Establishing and implementing risk-based and reasonable written policies, procedures, and internal controls;

ii. Providing for periodic independent testing of the AML program (employees of the RIA, its affiliates or unaffiliated service providers are considered independent to conduct such testing so long as those same employees are not involved in the operation and oversight of the AML program);

iii. Designating a compliance officer responsible for monitoring the operations and internal controls of the program; and

iv. Providing ongoing employee training that covers a general awareness of overall BSA requirements and money laundering issues as well as more job-specific guidance regarding particular employees' roles and functions in the AML program.

To meet these requirements, an RIA is expected to perform a risk analysis of the money laundering and terrorist financing risks posed by its clients to determine the extent and frequency of the programs. This analysis and implementation must cover all of an RIA's advisory activity, whether the adviser is acting as the primary adviser or a subadviser, and must include advisory activity that does not entail the management of client assets. FinCEN expects the AML program to extend to an RIA's services to all of its clients, including its separate account clients and fund clients based outside of the United States. As proposed, the AML program would need to be in effect six months from the date of the issuance of the final rulemaking.

2. Filing suspicious activity reports ("SARs").

An RIA would be required to report suspicious transactions that are conducted or attempted by, at, or through the RIA and involve or aggregate at least $5,000 in funds or other assets. An RIA who files SARs or any other voluntary reports of suspicious transactions is protected from liability against any other authority or person for such disclosure or any failure to provide notice of such disclosure; however, this limitation of liability does not extend to any civil or criminal action brought by any government to enforce any law or regulation.4

At a minimum, the rule requires an RIA to report a transaction if the RIA "knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part):"

i. involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity;

ii. is designed, whether through structuring or other means, to evade the requirements of the BSA;

iii. has no business or apparent lawful purpose, and the investment adviser knows of no reasonable explanation for the transaction after examining the available facts; or

iv. involves the use of the investment adviser to facilitate criminal activity.

FinCEN noted current industry reliance on "red flags" for purposes of detecting suspicious transactions: (i) a client exhibits an unusual concern regarding the adviser's compliance with government reporting requirements or is reluctant or refuses to reveal any information concerning business activities, or furnishes unusual or suspicious identification or business documents; (ii) a client appears to be acting as the agent for another entity but declines, evades, or is reluctant to provide any information in response to questions about that entity; (iii) a client's account has a pattern of inexplicable and unusual withdrawals, contrary to the client's stated investment objectives; (iv) a client requests that a transaction be processed in such a manner as to avoid the adviser's normal documentation requirements; or (v) a client exhibits a total lack of concern regarding performance returns or risk.

Where the proposed regulations stray from comparable regulations for other financial institutions is their allowance for an RIA to share SARs with other RIAs. Therefore, where more than one RIA, or another financial institution with a separate suspicious activity reporting obligation, is involved in the same transaction, only one report is required to be filed. This alleviates an RIA's SARs compliance burden when working with other financial institutions required to file.

FinCEN would require an RIA to file an SAR within 30 days after the RIA becomes aware of a suspicious transaction by completing and filing an SAR with FinCEN in accordance with all form instructions and applicable guidance. Copies of the SAR filings and their supporting documents, which are deemed to have been filed with an SAR, are required to be kept for a period of five years from the date of filing. An SAR and any information that would reveal the existence of an SAR are confidential and cannot be disclosed by an RIA, except as authorized. SAR compliance applies only after the full initiation of the AML programs, and thus must begin six months from the date of the issuance of the final rulemaking.

3. Maintaining general recordkeeping requirements.

Defining an RIA as a "financial institution" would require an RIA to comply with all BSA regulatory requirements generally applicable to financial institutions, including (a) Currency Transaction Report ("CTR") filing requirements, (b) the recordkeeping, transmittal of records, and retention requirements for the transmittal of funds under the Recordkeeping and Travel Rules and other related recordkeeping requirements, (c) and information sharing requests pursuant to the USA PATRIOT Act.

An RIA would be required to file CTRs for a transaction involving a transfer of more than $10,000 in currency by, through or to the RIA in a single business day. CTR filings would replace the former requirement to file reports on Form 8300 for the receipt of more than $10,000 in cash and negotiable instruments, which are defined much more broadly than currency.5 It seems unlikely in view of the typical practices of an RIA that an RIA would engage in any reportable currency transactions. Moreover, an AML program should already include prohibitions or restrictions on forms of payment that figure in money laundering schemes, such as currency, money orders, travelers checks, multiple cashier's checks or third party payments.

Under the Recordkeeping and Travel Rules and proposed regulations, an RIA must create and retain records for transmittals of funds for a period of five years, and ensure that certain information pertaining to the transmittal of funds "travel" with the transmittal to the next financial institution in the payment chain.6 The dollar threshold to implicate these particular rules is $3,000. These rules would then require an RIA to obtain and retain not only the name, address and other information about the transmittor and the transaction, but also identifying information on the recipient.

The USA PATRIOT Act helps law enforcement identify, disrupt, and prevent terrorist acts and money laundering activities by encouraging further cooperation among law enforcement, regulators, financial institutions, and, now as proposed, RIAs, to share information regarding those suspected of being involved in terrorism or money laundering. Such information may include whether particular individuals, entities or organizations: (i) maintain a current account with the institution; (ii) have maintained an account with the institution during the preceding twelve months; or (iii) have been involved in any transaction or transmittal of funds by or through the institution during the preceding six months. If so, an RIA must thereafter provide the name of the person, entity or organization identified, together with other information such as the account number, social security number, date of birth or other similar identifying information as appropriate.

Looking Ahead

FinCEN has announced its intention to propose further regulations. Specifically, FinCEN stated that future proposals will contemplate an RIA implementing a customer identification program ("CIP") and customer due diligence ("CDD"). An RIA must undergo risk assessments to comply with the AML programs and SAR requirements, and these risk assessments overlap to satisfy similar requirements under CDD. CDD requirements (and enhanced due diligence or "EDD" requirements for higher risk customers) would include obtaining an understanding of who a customer (natural or legal) is, the nature of the person's wealth and sources of funds, and whether public information about the person raises money laundering red flags that the person's funds for investment could be from an illegal source. Therefore, it may be advantageous for an RIA preparing for compliance with these proposed regulations to prepare concurrently for CIP and CDD/EDD future compliance.

In addition, FinCEN stated in these proposed regulations that it may consider expanding the application of the BSA in future rulemakings to include investment advisers not registered or required to be registered with the SEC, since unregistered investment advisers may also be at risk for abuse by money launderers, terrorists financers, and other illicit actors.

Conclusion

It is prudent at this time to acknowledge that regulations regarding anti-money laundering programs covering RIAs will be implemented in the near future. Given the potentially short time periods in which to comply with the proposed regulations, now is the time to review your current compliance policies and procedures, and formulate additional provisions regarding the anticipated regulations. Unregistered investment advisers may also consider developing policies and procedures at this time.

For more information regarding these proposed regulations or for counsel on compliance policies and procedures, please feel free to contact Patrick D. Sweeney or Richard M. Morris of Herrick, Feinstein LLP or your Herrick, Feinstein LLP attorney.

Footnotes

1 At the "placement" stage, proceeds from illegal activity or funds intended to promote illegal activity are first introduced into the financial system. For example, this could occur in the investment advisory business when a money launderer tries to fund an investment advisory account with cash or cash equivalents derived from illegal activity. Money launderers also may approach investment advisers seeking to obtain the adviser's assistance as an intermediary in placing funds into custodial accounts.

2 The "layering" stage involves the distancing of illegal proceeds from their criminal source through a series of financial transactions to obfuscate and complicate their traceability. A money launderer could place assets under management with an investment adviser as one of many transactions in an ongoing layering scheme. Layering may involve establishing an advisory account in the name of a fictitious corporation or an entity designed to break the link between the assets and the true owner. A money launderer also may place assets under management with an adviser and then shortly thereafter arrange for their removal.

3 "Integration" occurs when illegal proceeds previously placed into the financial system are made to appear to have been derived from a legitimate source. For example, once illicit funds have been invested with an investment advisor, the proceeds from those investments may appear legitimate to any financial institution thereafter receiving such proceeds.

4 See Proposed 31 CFR 1031.320(e).

5 Currency is defined as the coin and paper of the United States or of any other country that is designated as legal tender and that circulates and is customarily used as a medium of exchange in a foreign country.

6 See 31 CFR 1020.410 and 1010.430(d).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions