FinCEN Proposal Could Impact Registered Investments, Exempts Reporting Advisors | Holland & Knight LLP

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has issued a new Notice of Proposed Rulemaking (NPRM), herein referred to as the “Proposed Rule.”¹ This makes SEC-registered investment advisers (RIAs) subject to anti-money laundering (AML) and counter-terrorist financing (CTF) compliance requirements under the Bank Secrecy Act (BSA), while reporting advisers (ERAs) are exempt. That will happen.

The proposed rule would require RIAs and ERAs to a) develop and implement an AML/CTF compliance program (AML Program) within 12 months of the effective date of the final rule, and b) monitor suspicious activity and report it to FinCEN. It is mandatory to report. . FinCEN proposes to delegate authority to the SEC to review compliance with the proposed rule’s requirements. FinCEN is soliciting comments on the proposed rule until April 15, 2024.

background

The BSA, as amended by the USA PATRIOT Act (PATRIOT Act), imposes minimum requirements on “financial institutions”, including the development of internal policies, procedures and controls, the appointment of a compliance officer, and continued employment. Requires companies to maintain a comprehensive AML program. Training programs, independent testing capabilities, and steps to conduct ongoing customer due diligence. The BSA imposes certain recordkeeping and travel rules on financial institutions that apply to transfers of funds of $3,000 or more (Recordkeeping and Travel Rules). Currently, the definition of “financial institution” does not include RIAs or ERAs, and as a result, RIAs and ERAs are generally exempt from most AML program requirements under U.S. law.

In 2015, FinCEN issued a similar NPRM extending AML program requirements to certain investment advisers but excluding ERA. However, his 2015 NPRM was never finalized, and he was formally withdrawn by FinCEN upon publication of the proposed rule.

proposed rules

The proposed rule seeks to amend the BSA Implementing Regulations to add certain “investment advisors” (i.e., RIAs and ERAs) to the definition of “financial institution,” thereby providing certain provisions for RIAs and ERAs. Due diligence, record-keeping and reporting obligations will be expanded. However, the proposed rule would exclude 1) state-registered investment advisers who do not qualify for SEC registration, and 2) certain advisers who are not strictly “investment advisers” (e.g., certain real estate funds that do not provide advice regarding “investment advisers”). etc.) does not apply. securities”) and 3) foreign private advisors.

AML program under the proposed rule

The proposed rule would require RIAs and ERAs to adopt AML programs that include, at a minimum, the following requirements:

• Implementing policies, procedures, and controls reasonably designed to a) detect money laundering and other illicit financial activities, and b) comply with other applicable provisions of the BSA.
• Appointment of one or more AML compliance officers
• Providing ongoing AML training to appropriate personnel
• Independent testing of AML programs
• Risk-based procedures for conducting ongoing customer due diligence. a) Understand the nature and purpose of the customer relationship for the purpose of developing a customer risk profile. b) Identify and report suspicious transactions and maintain and renew customers on a risk-based basis.information

RIAs and ERAs will continue to have the flexibility to tailor their AML programs to the specific risks associated with their business.

Report suspicious activity

The proposed rule would impose suspicious activity reporting requirements on RIAs and ERAs. Transactions attempted by, at, or through an RIA or ERA are reportable if:

• The transaction involves or aggregates at least $5,000 of funds or other assets
• The Adviser knows of, suspects, or has reason to suspect that the Transactions (or related trading patterns).
  • Involves funds derived from illegal activities or is intended or intended to conceal or disguise funds or assets derived from illegal activities;
  • Designed to avoid BSA reporting requirements
  • The transaction does not have a business or apparent legal purpose or is not of the type in which a client would normally be expected to engage, and the investment advisor does not know of any available facts or reasonable explanation for the transaction after conducting an investigation. .
  • Including using an investment advisor to facilitate criminal activity

Additionally, although not required, the proposed rule would encourage voluntary reporting of other suspicious transactions, such as transactions that do not meet the $5,000 threshold.

Recordkeeping and travel rules

The proposed rule would require RIAs and ERAs to comply with record-keeping and travel rules only if the RIA’s or ERA’s business model transacts within the scope of these rules.

Special information sharing procedures

The proposed rule would subject RIAs and ERAs to FinCEN rules implementing special information sharing procedures in Section 314 of the Patriot Act. These provisions provide that, upon a request from FinCEN, an RIA or ERA may search its records to determine whether the RIA or ERA maintains an account for, or has entered into any transaction with, a party specified in FinCEN’s request. It is necessary to be able to judge whether or not it has been done.

special measures

Including RIAs and ERAs in the definition of “financial institution” makes these advisors subject to Section 311 of the Patriot Act, which provides that if the U.S. Secretary of the Treasury determines that a foreign jurisdiction , RIAs and ERAs will be required to implement certain “special measures”. The financial institution, type of transaction, or type of account is the “primary money laundering concern.”

Special standards for diligence

Including RIAs and ERAs in the definition of “financial institution” also makes these advisors subject to Section 312 of the Patriot Act, and RIAs and ERAs are subject to due diligence programs for foreign financial institution correspondent accounts and established private banking accounts. It will be mandatory to maintain it. or maintained for persons outside the United States.

conclusion

This proposed rule is a first step toward requiring RIAs and ERAs to comply with AML/CTF requirements applicable to other financial institutions. FinCEN requested comment on whether ERA should be considered a covered investment advisor for purposes of AML program requirements. RIAs and ERAs should carefully consider the proposed rule and identify potential opportunities to comment on the proposed rule’s components.

Note

¹ FinCEN news release.