The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has proposed a sweeping expansion of the Bank Secrecy Act’s (BSA) affirmative anti-money laundering (AML) and countering the financing of terrorism (CFT) obligations. The proposal would extend these obligations to federally registered investment advisers and “exempt reporting advisers,” i.e., advisers to venture capital funds and private funds. Historically, these types of investment advisers have been excluded from the BSA’s affirmative AML/CFT obligations. The proposed rules would represent a significant addition to their obligations when screening potential investors.
Background
The BSA imposes affirmative AML/CFT obligations on “financial institutions.” In particular, the BSA requires each financial institution to i) establish a compliance program designed to detect and prevent money laundering, terrorist financing, and other illicit financial activities, ii) file certain reports, and iii) maintain certain records. Since the passage of the BSA, investment advisers generally have not been covered by the BSA’s definition of “financial institution.” Accordingly, investment advisers are not currently subject to the AML/CFT measures that apply to financial institutions.
However, on February 13, 2024, FinCEN issued a notice of proposed rulemaking (NPRM) that would extend the applicability of the BSA to certain investment advisers. This NPRM marks the third time FinCEN has proposed AML/CFT rules to cover investment advisers—thus far, unsuccessfully. issued a notice of proposed rulemaking (NPRM) that would extend the applicability of the BSA to certain investment advisers. This NPRM marks the third time FinCEN has proposed AML/CFT rules to cover investment advisers—thus far, unsuccessfully.
Who’s Covered Under the Proposed Rule?
The NPRM extends the applicability of the BSA to investment advisers that are registered or required to register with the U.S. Securities and Exchange Commission (SEC) (RIAs), and those that are exempt reporting advisers (ERAs).
Generally, RIAs are investment advisers that have more than $100 million in assets under management (AUM). ERAs are investment advisers that are statutorily exempt from registering with the SEC because they either advise only venture capital funds, or advise only private funds and have less than $150 million in AUM in the U.S. While ERAs are not required to register with the SEC, they are required to file a truncated version of Form ADV with the SEC. Covered RIAs, venture capital advisers, and private fund advisers should be aware of this NPRM and the projected impact of implementing and maintaining a BSA-required AML/CFT compliance program.
Proposed Rule Requirements
Among other requirements, the NPRM would require covered investment advisers to do the following:
- Implement and maintain a written AML/CFT program, including:
- establishing and implementing risk-based internal policies, procedures, and controls designed to combat money laundering, terrorist financing, and other illicit financial activity;
- conducting independent testing of the AML/CFT program;
- designating an AML/CFT compliance officer;
- providing ongoing training for relevant personnel; and
- conducting ongoing customer due diligence.
- File Suspicious Activity Reports (SARs) (on suspicious transactions at or above a $5,000 threshold), and Currency Transaction Reports (CTRs) (on currency transactions at or above a $10,000 threshold).
- Maintain certain records, including records of compliance with the BSA’s AML/CFT requirements, records related to SARs, and records related to fund transfers of $3,000 or more (the “Travel Rule”).
Importantly, the NPRM does not require covered investment advisers to adopt a customer identification program (CIP)—i.e., to follow specific rules applicable to banks, broker-dealers, and other financial institutions regarding the type of identification information that must be obtained and verified for each customer—or collect beneficial ownership information for legal entity customers. As the NPRM currently stands, the AML/CFT requirements imposed on covered investment advisers are more similar to those imposed on money services businesses (another type of financial institution). However, the NPRM states that “FinCEN anticipates addressing CIP via a future joint rulemaking with the SEC and addressing the requirement to collect beneficial ownership information for legal entity customers in subsequent rulemakings.”
Next Steps
The NPRM’s comment period closes on April 15, 2024. If adopted as is, covered investment advisers would be required to comply with the final rule within 12 months after the final rule’s effective date.
The proposed change could have a material impact on the screening procedures that investment advisers use when onboarding potential investors. The change might be particularly burdensome for smaller investment advisers and could represent a significant barrier for new investment advisers seeking to launch.
Violations of the BSA, depending on severity and repeat offenses, may result in civil and criminal liability, including imprisonment. In addition, violations may result in the imposition of operational restrictions by the SEC (the NPRM delegates FinCEN’s enforcement authority to the SEC), and reputational harm as a result of public enforcement actions.
