It has long been best practice for certain investment advisors to maintain AML programs consistent with Section 352 of the USA PATRIOT Act, even where such requirements are not imposed by law or regulation. Still, BSA/AML regulations do not require AML programs for investment advisors.

 

Attempts to mandate AML requirements were first proposed by the Financial Crimes Enforcement Network (FinCEN) in 2002 and 2003 for unregistered investment companies, commodities traders, and investment advisors. However, both proposed rules were withdrawn by FinCEN in October 2008. FinCEN’s reasoning for the withdrawal was that unregistered investment companies, investment advisors, commodities traders, and their clients conduct transactions through, and their assets are carried by, other financial institutions that are subject to BSA/AML requirements. Therefore, FinCEN reasoned, their activity was not entirely outside the current BSA/AML regulatory regime. FinCEN’s explanation fails to recognize that the broker-dealers and banks that provide accounts for hedge funds and other pooled investment vehicles often have little insight into the investors in those funds. Banks and broker-dealers frequently require those funds to provide copies of their AML compliance programs, but may not be able to verify that the programs are appropriately risk-based or properly implemented. FinCEN did leave the door open to considering BSA/AML requirements for investment advisors in the future. 

The Obama administration revisited the issue and published the 2015 Proposed Rule for Registered Investment Advisers (Proposed Rule) to expand the definition of “financial institution” to cover RIAs. FinCEN reasoned that investment advisors are engaged in activities that are “similar to, related to, or a substitute for” financial services that are provided by other BSA-defined financial institutions and, therefore, should be subject to its provisions. The proposed definition included “[a]ny person who is [(1)] registered or [(2)] required to register with the SEC under Section 203 of the Investment Advisers   Act of 1940 [(Advisers Act)] (15 U.S.C. 80b-3(a)).” This typically includes primary advisors and sub-advisors with greater than USD $100 million assets under management (AUM)³. FinCEN proposed to delegate its authority to the SEC to examine investment advisors for compliance with these requirements. The Proposed Rule also left open the possibility for broader application, noting that “future rulemakings may include other types of investment advisers, such as state-regulated investment advisers or investment advisers that are exempt from SEC registration.” 

In its current form, the Proposed Rule did not incorporate Customer Identification Program (CIP) and Customer Due Diligence (CDD) requirements. For CIP, FinCEN noted that SEC rules already require investment advisors to adopt and implement written policies and procedures reasonably designed to prevent violation of the Advisers Act. FinCEN contemplated that investment advisors would be able to adapt existing policies, procedures, and internal controls in order to comply with the Proposed Rule. In its reasoning, FinCEN highlighted the fact that some RIAs already implemented AML programs either voluntarily or in conjunction with performing some or all aspects of a broker-dealer’s CIP obligations.

Additionally, when FinCEN issued the Proposed Rule, CDD had not yet been formally codified until May 11, 2016 (CDD Rule). The CDD Rule officially documented CDD expectations, including the identification of beneficial ownership, and may be applicable in the event the Proposed Rule is implemented. Lastly, the recent December 2020 enactment of the Anti-Money Laundering Act of 2020 (AMLA) did create beneficial ownership reporting requirements for certain entities, though the law was largely targeted toward shell companies. Pooled investment vehicles, investment companies, and investment advisors were among a list of entities specifically excluded from the AMLA’s beneficial ownership registry requirements.

The 2015 Proposed Rule was, however, never implemented by the Trump administration.

Guidehouse anticipates that the Proposed Rule may be reproposed and finalized. Given the maturity of BSA/AML regulations, regulators may be less apt to give newly designated financial institutions like investment advisors a long runway to comply with a rule’s requirements if a version of the Proposed Rule is implemented. Perhaps most importantly, investment advisors should implement robust AML compliance programs for sound risk management. It is a criminal offense to facilitate laundering the proceeds of crime, whether or not there is a regulatory requirement to have a compliance program. An adequate and effective compliance program is a factor that the Department of Justice uses to determine whether to bring charges, negotiate pleas, or other agreements. Accordingly, investment advisors should consider proactively assessing if they have an appropriately risk-based program to detect and prevent money laundering, terrorist financing, and other financial crime. Investment advisors should assess: