Investment advisors need to prepare for a new regulatory requirement, as the Treasury Department, through its Financial Crimes Enforcement Network (FinCEN), has issued a final rule mandating that most firms implement a formal anti-money-laundering (AML) program.
The rule redefines certain investment advisors as “financial institutions” under the Bank Secrecy Act, expanding their regulatory responsibilities. These firms must now file suspicious activity reports (SARs) with FinCEN to flag unusual transactions that could indicate attempts by illicit actors to channel money through the U.S. financial system.
FinCEN has identified significant threats of illicit finance involving investment advisors, with particular concern over activities by Chinese and Russian agents. These actors have reportedly used private funds, especially venture capital funds, to gain access to sensitive technology from early-stage companies.
"Investment advisors have often served as gateways into the U.S. financial system and economy for illicit proceeds linked to foreign corruption, fraud, tax evasion, and billions of dollars controlled by sanctioned entities, including Russian oligarchs and their associates," according to FinCEN.
The rule targets investment advisors registered with the Securities and Exchange Commission (SEC), as well as exempt reporting advisors. It narrows the scope from the original proposal by exempting advisors who registered with the SEC solely due to their status as midsize advisors, multistate advisors, or pension consultants. Advisors who report no assets under management on their Form ADV filings are also excluded from the requirement.
FinCEN has evaluated smaller RIAs that register with state regulators rather than the SEC and determined that they pose a lower risk than their larger counterparts, leading to their exemption from the AML rule. However, FinCEN will continue to monitor state-registered investment advisors for signs of money laundering, terrorist financing, or other illicit activities and may take further action if necessary.
In addition to the investment advisor AML rule, FinCEN also issued a final rule requiring certain real estate professionals to report nonfinanced residential property transfers. This rule is designed to address money laundering in the U.S. housing market.
"The Treasury Department is committed to disrupting efforts to use the United States as a haven for illicitly obtained wealth," says Treasury Secretary Janet Yellen. "These new rules address significant regulatory gaps, closing critical loopholes in the U.S. financial system that have been exploited by bad actors to facilitate serious crimes, including corruption, narcotrafficking, and fraud."
