FinCEN wants investment advisers to implement risk-based AML/CFT programs

Rick Steves

This escalation in regulatory requirements signifies an increasing demand for third-party services that simplify compliance with AML/CFT and regulatory reporting.

U.S. regulators have once again amplified the regulatory complexity for the financial services industry, this time focusing on investment advisers.

The U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has proposed a new rule aimed at preventing the misuse of the U.S. financial system by criminals and foreign adversaries through investment advisers. This move is part of a broader effort to enhance the transparency of the financial system, particularly targeting the risks associated with anonymous companies and all-cash real estate transactions.

Investment advisers to be classified as “financial institutions” under the BSA

The proposed rule mandates certain investment advisers to incorporate Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) protocols as per the Bank Secrecy Act (BSA). This includes establishing risk-based AML/CFT programs, reporting suspicious activities to FinCEN, and adhering to specific recordkeeping requirements. The initiative underscores the uneven application of AML/CFT requirements across the sector, which currently enables both legitimate and illicit investors to seek advisers less stringent about the origins of their wealth.

With this regulatory update, investment advisers will join the list of entities classified as “financial institutions” under the BSA, thereby subjecting them to a set of comprehensive AML/CFT and reporting obligations. This regulation extends to advisers registered with or reporting to the Securities and Exchange Commission (SEC) as exempt reporting advisers.

Increased demand for RegTech firms

This escalation in regulatory requirements signifies an increasing demand for third-party services that simplify compliance with AML/CFT and regulatory reporting.

The complexity and scope of these new obligations pose significant challenges for investment advisers, particularly in maintaining compliance while managing operational efficiencies. Third-party service providers, specializing in regulatory technology (RegTech), are poised to play a crucial role in enabling the financial services industry to navigate these complexities more efficiently.

These providers offer solutions that streamline the implementation of compliance programs, automate reporting processes, and ensure adherence to evolving regulatory standards, thereby mitigating the burden on financial institutions and safeguarding the integrity of the U.S. financial system.

“Investment advisers are important gatekeepers to the American economy”

Andrea Gacki, Director of FinCEN, said: “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 creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth, and compromise American innovation. This proposed rule would level the regulatory playing field, protect U.S. economic and national security, and safeguard American businesses.”

Additionally, the Treasury has released a risk assessment of the investment adviser sector, highlighting the potential threats and vulnerabilities to illicit finance, especially the issue of “shopping around” for advisers with less stringent inquiries into sources of wealth.

Moreover, the rule proposes enhanced information-sharing among FinCEN, law enforcement, government agencies, and certain financial institutions, alongside special measures under Section 311 of the USA PATRIOT Act. It also suggests delegating examination authority to the SEC, leveraging its regulatory expertise in the sector.

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