Treasury's Proposal to Apply AML Regulations to Investment Advisers
On Tuesday, February 13, 2024, the Treasury Department's watchdog released proposed regulations aimed at combating corruption. The goal is to make investment advisers comply with anti-money laundering (AML) regulations like those followed by banks. This draft is part of a series of recent initiatives by the Treasury Department. These efforts aim to safeguard U.S. markets against illicit funds.
Suspicious Activity Reports (SARs)
According to these proposed rules by the Treasury's Financial Crimes Enforcement Network (FinCEN), all investment advisers, who are either registered or reporting to SEC, would be required to submit Suspicious Activity Reports (SARs) to FinCEN and disclose additional client information under specific circumstances. These regulations would exclude approximately 17,000 state-registered investment advisers, according to FinCEN estimates.
While the proposed regulations do not mandate investment advisers to implement formal customer identification programs similar to banks, nor require reporting beneficial ownership information to FinCEN for clients who are legal entities like LLCs, FinCEN indicated its intention to pursue these regulations in the near future.
Background:
Investment advisers have mostly evaded federal anti-money laundering reporting and due diligence requirements, despite of a plenty of evidence showing that the $20 trillion private investment sector is still at risk of exploitation by malicious individuals.
Andrea Gacki, FinCEN's director, highlighted the current regulatory gaps in the investment adviser sector during a press call, noting that these loopholes enable illicit actors to seek advisers who are not required to inquire about the source of their wealth.
Treasury investigations have revealed that money launderers, tax evaders, and other criminals exploit U.S. investment advisers to invest in U.S. securities, real estate, and other assets. Some cases involve nations like China and Russia investing in early-stage companies to access sensitive data and modern technologies.
FinCEN has been attempting to address these regulatory gaps for over two decades. Previous attempts in 2003 and 2015 to propose similar rules expanding the Bank Secrecy Act provisions to cover investment advisers were unsuccessful in finalization.
Conclusion:
In summary, the Treasury's proposal to extend anti-money laundering regulations to investment advisers aims to close regulatory loopholes and combat financial crime. This move, led by FinCEN, emphasizes transparency and accountability, addressing longstanding vulnerabilities in the private investment sector. This initiative clearly signals a proactive approach to safeguarding U.S. markets against financial crime and bolstering national security measures.
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