Alphabet Soup: FinCEN Proposal Would Add AML/CFT Obligations Under the BSA for RIAs & ERAs

Sherman & Howard L.L.C.

Sherman & Howard L.L.C.

Let me start by translating that headline to English. On February 15, 2024, the Financial Crimes Enforcement Network (FinCEN) division of the Department of Treasury issued a rule proposal that would require investment advisers registered with the Securities and Exchange Commission ("RIAs") and investment advisers reporting to the SEC as Exempt Reporting Advisers ("ERAs") to be subject to certain anti-money laundering and countering the financing of terrorism provisions ("AML/CFT") in the Bank Secrecy Act ("BSA"). FinCEN believes this change will help it identify bad actors, especially Russian oligarchs and funds controlled by the People's Republic of China, who are investing funds through United States investment advisers for nefarious purposes.

The proposal would define RIAs and ERAs as “Financial Institutions” under the BSA subject to the requirement to develop and implement written AML/CFT programs designed to prevent the use of the investment adviser as a conduit for illegal activities. Specifically, the programs must (i) establish and implement policies, procedures, and internal controls to prevent the investment adviser from being used for money laundering, terrorist financial, or other illicit activities and to ensure compliance with the BSA; (ii) provide for independent compliance testing; (iii) designate the team responsible for implementing the program; (iv) provide ongoing training; and (v) implement risk-based procedures for conducting ongoing customer due diligence to develop a customer risk profile and conduct ongoing monitoring for suspicious activities.

Investment advisers are already required to file Form 8300 to report transactions in excess of $10,000; however, the proposal would require RIAs and ERAs to file Currency Transaction Reports ("CTRs") instead. Additionally, RIA's and ERAs would be obligated to file Suspicious Activity Reports ("SARs") for dubious transactions of $5,000 or more. RIAs and ERAs would also be subject to additional recordkeeping requirements with respect to all transmittals of funds of $3,000 or more. The SEC would have examination authority with respect to compliance with the AML/CFT provisions since they already examine RIAs and ERAs.

As currently proposed, state registered investment advisers and other investment advisers exempt from the Investment Advisers Act of 1940 (such as family office investment advisers) would not be subject to these requirements, although the proposal asks for comments as to whether they should be.

FinCEN has asked for comments to this proposal by April 15, 2024. We will follow up with an additional advisory if this proposal is adopted.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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