SEC AML Enforcement: Do What You Say

The U.S. Securities and Exchange Commission (SEC) brought an enforcement action against a former registered investment adviser on January 14, 2025 for making misrepresentations related to its anti-money laundering (AML) procedures and related compliance failures.

The SEC alleged that the adviser failed to comply with representations it made to investors about its AML due diligence policies and procedures. In the press release announcing the case, the SEC alleged that the firm failed to meet the “fundamental duty of investment advisers to say what they do and do what they say”. The SEC’s order also cites violations of Section 206(4) of the Advisers Act and Rule 206(4)-8, failure to adopt and implement policies and procedures to comply with the Advisers Act.

AML guidance

The order offers key takeaways for adequate design and implementation of an AML program.

• Consider AML representations carefully – To mitigate their own AML risks, prospective investors, financial institutions, and other business partners often ask advisers to implement certain controls to prevent money laundering, even when the adviser itself is not subject to specific AML regulations.
  
  Advisers often make representations that they have these controls, but fail to implement them, risking not only legal liability to their counterparties, but also SEC fraud charges under the Advisers Act.
  
  When negotiating AML representations, advisers should:
  • Confirm they can comply with the proposed AML requirements before accepting them
  • Conform their AML policies and procedures reflect any representations they make
  • Periodically confirm that their internal practices comply with their AML policies and procedures
• Comply with CIP/KYC representations – In this enforcement action, the adviser represented that it would conduct “Know Your Customer” (KYC) reviews to confirm the identity of each prospective investor and assess any risk that the investor might be using the firm to launder money before accepting money from the investor. The SEC alleges that the firm failed to collect some of the required KYC documentation, and collected other documentation only after the adviser had already accepted investments. (In some cases, years after the firm had already accepted investments.)
  
  Firms that decide to handle AML requirements on the fly are likely to find themselves navigating an unfamiliar, tedious, and overwhelming KYC process without adequate compliance support. To implement AML policies and procedures effectively, advisers should understand, plan, and adequately resource their AML compliance process when the business is first being organized or a fund is being created, including adequate resources for investor onboarding and due diligence.
• High-risk investors require more diligence – Certain investor categories can present higher risks of money laundering, including foreign investors, politically exposed persons (PEPs), complex legal entities, and cash-intensive businesses. In this enforcement case, the SEC alleged that the adviser accepted investments from high-risk persons it failed to investigate in compliance with its procedures and representations.
  
  As the adviser acknowledged in its compliance manual, these failures could jeopardize the safety of investor or client assets or impair the adviser’s ability to manage investor accounts. In this case, the SEC alleged that the adviser allowed a suspicious person to acquire a majority stake in one of the adviser’s feeder funds. When a foreign country moved to freeze this person’s assets, the assets of the feeder fund were also frozen.
  
  An adviser’s AML procedures should identify the types of investors to be deemed high-risk and subject them to enhanced due diligence, including comprehensive database screening, adverse media searches, beneficial ownership look through and understanding sources of investors’ wealth.

Upcoming AML requirements for investment advisers

Although this adviser was not required by regulators to implement an AML program, and only failed to do what they told investors they would do, the stakes for AML policies and procedures will soon be increased when firms are required to comply with the new FinCEN rule on January 1, 2026.¹

For a snapshot of the new rule and its requirements, please download our cheat sheet here.

How we help

Our AML and Financial Crimes practice supports investment advisers and broker-dealers in meeting regulatory obligations and managing risk. We offer:

• AML risk assessments and policy development: Risk assessment of the adviser’s compliance with relevant AML and sanctions regulations.
• AML program reviews: An independent review of the adviser’s AML program, aligning with FinCEN and SEC AML rules and industry best practices.
• Outsourced managed services: A full-service, single-vendor solution supported by our team of compliance professionals, including Certified Anti-Money Laundering Specialists (CAMS) and other industry-leading financial crimes experts.
• ComplianceAlpha^® regulatory technology: Our platform serves as a command center that automates data screening, enables continuous risk surveillance, maintains detailed records for regulatory reporting, and helps ensure compliance with global AML standards, including OFAC, FinCEN, the USA PATRIOT Act, MLD5, FINRA, SEC, and BSA.

Whether launching, growing, or safeguarding your business, we provide end-to-end compliance support. Contact us today to get started.

^{1 Subject to a 60-day postponement for further review, per White House Executive Order - Regulatory Freeze Pending Review, dated January 20, 2025.}