AML Update for Investment Advisers

Most of the U.S. AML regulatory framework applies primarily to registered investment companies and broker-dealers (or “Securities Financial Institutions”) and not registered investment advisers, however, a 2015 Rulemaking Proposal from FinCEN would subject registered investment advisers to the U.S. AML Regime (the “2015 FinCEN Proposal”). The 2015 FinCEN Proposal and several other financial crime risks make AML requirements relevant for investment advisers and other participants in the securities and financial industry.

This update summarizes key developments in the AML space during the first half of 2021 and how they may impact your firm.

Increased Pressure to Apply AML Regulations to Investment Advisers

Since at least mid-2020, investment advisers and private funds have faced increased pressure to be subject to more stringent AML regulations. A leaked memo dated May 2020 from the FBI’s Criminal Investigative Division noted specifically that private equity and hedge funds were susceptible to money laundering activity because they are not regulated. The FBI provided several real-life examples on how perpetrators used these vehicles in various attempts to launder money.

The recent administration change, in which many expect an increase in regulatory reach, has also triggered calls to revive the 2015 FinCEN Proposal. Various organizations, like the independent Financial Accountability & Corporate Transparency Coalition and Congress, have reached out to the Biden Administration specifically requesting that the Obama-era proposal gets finalized.

The FinCEN 2015 Proposal would require SEC-registered investment advisers to implement an AML Program that includes risk-based written policies and procedures, training, designation of an AML Compliance Officer, and periodic independent testing of the Program. Suspicious activity monitoring and Suspicious Activity Report (SAR) filing, as well as additional filings would also be required.

Presently, there are industry expectations, standards, and best practices for AML requirements that investment advisers and wealth managers should consider to address money laundering risks. Some of these include:

1. Initial and ongoing due diligence of key third parties with reliance or delegation of AML and Know Your Customer (KYC) responsibilities. Third parties include custodians, brokers, and third-party fund administrators.
2. Development and enforcement of policies around investment-related risks, including diligence of foreign assets in both private markets and certain listed securities subject to US sanctions.
3. Consistency between advisers’ AML letters and representations made to counterparties, investors, or other third parties, and actual processes.

AML Act of 2020

On January 1, 2021, the U.S. Congress enacted the Anti-Money Laundering Act of 2020 (AML Act) as part of the National Defense Authorization Act for 2021. The AML Act creates a broad range of updates to the U.S. AML regulatory regime directing FinCEN and other regulators to, among other things:

• Create a non-public registry of legal entity beneficial owners (or a “UBO Registry”)
• Implement a whistleblower program
• Provide enhanced resources for FinCEN and other regulators
• Impose increased penalties for violations
• Implement and communicate national AML Priorities

The implementation of these provisions will require rulemakings, analyses, industry comments and other measures. Therefore, most of the impact of the AML Act is expected to be rolled out over the next few years. On April 1st, for instance, FinCEN issued an advance notice of proposed rulemaking regarding the UBO Registry, seeking industry comments to help shape its implementation, including defining the types of legal entities subject to reporting. FinCEN is required to issue regulations on the UBO Registry by January 1, 2022.

SEC Priorities and Enforcement

On March 3, 2021, the U.S. Securities and Exchange Commission’s (SEC) Division of Examinations released its examination priorities for 2021. These policies indicate that it will continue to prioritize examinations of Securities Financial Institutions for compliance with their AML obligations to assess, among other things, whether firms have established appropriate customer identification programs and whether they are satisfying their SAR filing obligations, conducting due diligence on customers, complying with beneficial ownership requirements, and conducting robust and timely independent tests of their AML programs. Further evidence of this priority being in place for some time was an SEC exam sweep initiative of AML-specific examinations targeting registered investment companies during 2020.

It has been a particular focus of the SEC and other regulators’ enforcement actions to penalize financial institutions that fail to report suspicious activity or file SARs. On May 12, 2021, the SEC imposed a $1.5M penalty to a broker-dealer for failures to file SARs when it was required to do so, and because certain filed SARs were inadequate. Earlier this year, FinCEN assessed a $390M penalty to a large retail bank for similar reasons concerning failures to file SARs.

How we help

Our AML and Financial Crimes practice offers advisory services and solutions to assist financial services firms in addressing financial crimes-related threats and regulatory concerns. Specific areas for investment advisors include AML requirements, Foreign Corrupt Practices Act (FCPA) and Anti-Bribery, and cybersecurity services.

We work with investment advisers, private funds and Securities Financial Institutions in risk assessing, developing policies and procedures, and performing independent tests or gap analyses of their AML Programs.

Our AML KYC/CIP offering is designed to assist your firm in developing and implementing effective AML practices that meet industry best practices and comply with applicable laws and regulations in the U.S., Europe, and Cayman Islands. Our solution combines our ComplianceAlpha^® regulatory technology with managed services to help your firm meet its data screening, ongoing monitoring, remediation, and reporting needs.

Questions

If you have any questions about this or how ACA can support you to meet your regulatory obligations, please reach out to your ACA consultant or contact us here.

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