Greenberg Traurig LLP
12/02/2024 | News release | Distributed by Public on 12/02/2024 09:46
FinCEN Adopts New Anti-Money Laundering Program, Recordkeeping and Reporting Requirements for Certain Investment Advisers
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On Sep. 4, 2024, FinCEN published a final rule (Final Rule) adding certain RIAs and ERAs (collectively, Covered Advisers) to the definition of "financial institution" under the regulations implementing the BSA, and imposing on Covered Advisers broad AML and CFT program requirements, as well as other BSA recordkeeping and reporting requirements. The Final Rule represents a significant regulatory change for Covered Advisers and requires them to comply by Jan. 1, 2026.
FinCEN has delegated examination authority for compliance with the Final Rule to the SEC. Accordingly, Covered Advisers should expect that the SEC will begin focusing on these programs in future examinations.
In 2002, 2003, and 2015, FinCEN made efforts to extend AML/CFT program requirements to private funds and investment advisors, but these were ultimately withdrawn in part due to industry opposition and claims that imposing AML/CFT program requirements on investment advisers would be unnecessary and redundant given that their cash and securities transactions must be processed through financial institutions already subject to these requirements. To support the promulgation of the Final Rule, however, FinCEN pointed to the Treasury Department's February 2024 risk assessment, which highlights cases where sanctioned persons, corrupt officials, fraudsters, and other criminals have exploited the investment adviser industry to access the U.S. financial system and launder funds.
Covered Investment Advisers
The Final Rule generally applies to any person, wherever located, (i) who is registered or required to register with the SEC under section 203 of the Investment Advisers Act of 1940 (Advisers Act) - also known as registered investment advisers (i.e., RIAs); or (ii) who is exempt from SEC registration under section 203(l) or 203(m) of the Advisers Act (i.e., ERAs), subject to certain exceptions discussed in the next paragraph.
FinCEN has excluded from the Final Rule (i) RIAs that register with the SEC solely because they are (a) mid-sized advisers, as set forth in Section 203A(a)(2)(B) of the Advisers Act; (b) multi-state advisers as defined under 17 C.F.R. 275-203A-2(d); or (c) pension consultants as defined under 17 C.F.R. 275-203A-2(a); (ii) RIAs that do not report any assets under management in their Form ADV; (iii) state-registered investment advisers; (iv) foreign private advisers as defined in Section 202(a)(30) of the Advisers Act; and (v) family offices as defined in 17 C.F.R. 75.202(a)(11)(G)-1).
For Covered Advisers with a principal office and place of business outside the United States, the Final Rule applies only to advisory activities that (i) take place within the United States, including through the involvement of the investment adviser's U.S. personnel; or (ii) provide services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. FinCEN declined to require that investment advisers utilize persons in the United States to establish, maintain, and enforce the AML/CFT program, in contrast to FinCEN's proposed limitation to that effect for all other financial institutions, as announced in a June 2024 proposed rulemaking.
Final Rule Requirements
The Final Rule requires each Covered Adviser to develop and implement a written AML/CFT program that is risk-based and reasonably designed to prevent the Covered Adviser from being used for money laundering, terrorist financing, and other illicit finance activities. The AML/CFT Program must be approved in writing by the board of directors or similar governing body and, at a minimum, include:
(1) Policies, procedures, and controls reasonably designed to prevent the Covered Adviser from being used for money laundering, terrorist financing, or other illicit finance activities and to comply with applicable BSA requirements;
(2) independent testing of the AML/CFT Program;
(3) a designated AML/CFT officer(s) responsible for implementing the AML/CFT Program and monitoring compliance;
(4) ongoing training of appropriate personnel; and
(5) risk-based procedures for conducting ongoing customer due diligence (CDD) that includes (i) understanding the nature and purpose of customer relationships for purposes of developing a customer risk profile; and (ii) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.1
The Final Rule requires Covered Advisers to apply the AML/CFT Program to all advisory services provided to customers except for customers who are (i) mutual funds; (ii) bank- and trust company-sponsored collective investment funds; and (iii) another Covered Adviser that is independently subject to the Final Rule. Covered Advisers will not be required to apply their AML/CFT Programs to non-advisory services.
In the Final Rule, FinCEN notes that a Covered Adviser dually registered as a broker-dealer or that is a bank (or bank subsidiary) does not need to establish a separate AML/CFT Program so long as a comprehensive program covers all of its relevant activities.
Delegation of AML/CFT Requirements
Covered Advisers will be permitted to contractually delegate implementing and operating some or all aspects of their AML/CFT Programs to third-party service providers, including fund administrators. Because advisers operate through a variety of business models, Covered Advisers will have flexibility to decide which aspects of the AML/CFT Program are appropriate to delegate. That said, if a Covered Adviser chooses to delegate any aspect of its AML/CFT Program, pursuant to the Final Rule, the Covered Adviser "will remain fully responsible and legally liable for, and be required to demonstrate to examiners, the [AML/CFT Program's] compliance with AML/CFT requirements and FinCEN's implementing regulations." The Covered Adviser will also be required to ensure that FinCEN and the SEC are able to obtain information and records relating to the AML/CFT Program.
Other BSA/AML Requirements
(1) Suspicious Activity Reports (SARs)
The Final Rule requires Covered Advisers to file SARs with FinCEN to report any suspicious transaction conducted or attempted by, at, or through the Covered Adviser that involves or aggregates funds or other assets of at least $5,000. Covered Advisers will have up to 30 calendar days from the date they detected grounds for filing a SAR.
The Final Rule notes that a Covered Adviser's non-advisory activities are not subject to the SAR filing obligation.
(2) Currency Transaction Reports (CTRs)
Under the Final Rule, Covered Advisers are required to file CTRs for transactions in currency over $10,000 (both incoming and outgoing), replacing the obligation to file a FinCEN Form 8300 for the receipt of more than $10,000 in currency and certain negotiable instruments. Covered Advisers typically do not conduct transactions in currency; therefore, complying with CTR requirements may not be burdensome.
(3) Recordkeeping and Travel Rule
Under the Final Rule, Covered Advisers will be required to obtain and retain originator and beneficiary information for certain transactions and pass on this information to the next financial institution in funds transmittals over $3,000 involving more than one financial institution.
(4) Respondto Section 314(a) Requests
The Final Rule requires Covered Advisers to comply with FinCEN's rules implementing the special information-sharing procedures to detect money laundering or terrorist activity of Sections 314(a) of the USA PATRIOT Act. These provisions generally require Covered Advisers, upon FinCEN's request, to expeditiously search their records for specified information to determine whether they maintain or have maintained any account for, or have engaged in any transaction with, an individual, entity, or organization named in FinCEN's request, and report such identified information. Covered Advisers would also be able to participate in voluntary information sharing with other financial institutions under Section 314(b) of the USA PATRIOT Act.
(5) Special Measures and Special Due Diligence Standards
The Final Rule requires Covered Advisers to comply with Sections 311 and 312 of the USA PATRIOT Act. Generally, Section 311 requires U.S. financial institutions to implement certain ''special measures'' if the Treasury secretary finds that reasonable grounds exist to conclude that a foreign jurisdiction, institution, class of transaction, or type of account is a ''primary money laundering concern." Similarly, Section 312 of the USA PATRIOT Act establishes special due diligence requirements for private banking and correspondent bank accounts involving foreign persons.
Key Takeaways
The Final Rule will add significant compliance burdens on Covered Advisers, even for those that already maintain an AML/CFT program on a voluntary basis. Covered Advisers should review their AML/CFT Programs and be prepared to make modifications to ensure compliance with the Final Rule requirements including considering, among other things,
- revising policies and procedures to comply with new recordkeeping and reporting requirements;
- reviewing and revising current procedures for collecting investor information;
- appointing an experienced, dedicated AML/CFT compliance officer who has adequate training in AML/CFT matters;
- ensuring the board or equivalent governing body is adequately incorporated into the AML/CFT program;
- ensuring adequate staff training on BSA/AML matters;
- establishing procedures for the filing of SARs; and
- reviewing contracts with third-party service providers to ensure these include any appropriate requirements of the Final Rule.
1 The Final Rule does not require Covered Advisers to collect customer identifying information and verify that information, which will be addressed in a separate rulemaking by FinCEN and the SEC. The Final Rule also does not include a categorical requirement to collect beneficial ownership information (BOI) from legal entity customers (e.g., corporations, limited partnerships, limited liability companies, trusts, etc). Nevertheless, the Final Rule directs Covered Advisers to collect a legal entity customer's BOI on a risk-based basis. By comparison, banks and broker-dealers have an obligation to collect BOI from their legal entity customers.