Fincen to subject investment advisors to anti-money laundering rules

Bloomberg News

WASHINGTON — The Treasury's Financial Crimes Enforcement Network proposed a rule Tuesday to require investment advisers to comply with Bank Secrecy Act requirements, including implementing anti-money laundering controls and filing suspicious activity reports to FinCEN.

"Investment advisers are important gatekeepers to the American economy, overseeing the investment of tens of trillions of dollars. The current patchwork of AML/CFT requirements create regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth, and compromise American innovation," said FinCEN Director Andrea Gacki. "This proposed rule would level the regulatory playing field, protect U.S. economic and national security, and safeguard American businesses."

The agency has never subjected investment advisors to the full AML requirements of the Bank Secrecy Act, despite attempting to bring them under the BSA regime multiple times in the past, most recently in 2015. Under the proposal, registered investment advisors, who are accredited by the Securities and Exchange Commission, and investment advisers that report to the SEC as exempt reporting advisers would both be subject to the proposed rule. 

Fincen notes it is tailoring the requirements of the proposed rule to balance minimizing the burden on businesses and bolstering transparency. The proposed rule wouldn't impose AML/CFT program or SAR filing obligations on the mutual funds overseen by investment advisers, and Fincen will delegate some of its BSA examination authority to the SEC under the rule — just as it already does for broker/dealers and mutual funds.

Fraud cost $500B, illicit money topped $3T in 2023: Report

The most recent proposed rule differs from previous efforts in that it does not seek to hold investment advisors accountable for identifying customers. A senior Fincen official noted the agency will craft a separate joint proposal with the Securities and Exchange Commission outlining customer ID requirements for investment advisors in the future.  

Fincen also published a report detailing how various state actors  — including from sanctioned jurisdictions, tax evaders, terrorist organizations and illicit actors of various kinds — tap into U.S. investment industry to circumvent sanctions and hide illicit activity. 

"The investment adviser sector is generally not required to implement comprehensive [AML] obligations, which creates arbitrage opportunities for bad actors by allowing them to access the U.S. financial system through investment advisers with weaker or non-existent client due diligence," the report noted. "In many cases, advisory business activities are segmented across intermediaries [creating] an information asymmetry: To the extent that AML obligations apply, the obliged entities (such as custodian banks or broker-dealers) working with an investment adviser may not necessarily have a direct relationship with the client (or, in the private fund context, underlying investor in the private fund) and may be unable to require an adviser to disclose relevant information."

Covered investment advisers must adhere to the rule within 12 months of the final rule's effective date. The comment period for the NPRM will be open until April 15, 2024.