The proposed rules, issued by the Treasury's Financial Crimes Enforcement Network (FinCEN), would necessitate covered investment advisers to submit Suspicious Activity Reports (SARs) to FinCEN and disclose additional client information under specific conditions.
These regulations would affect investment advisers registered with or reporting to the Securities Exchange Commission (SEC), excluding approximately 17,000 state-registered investment advisers, as estimated by FinCEN. However, the proposed regulations do not mandate investment advisers to establish formal customer identification programs like banks, nor do they require advisers to report beneficial ownership information to FinCEN for clients operating as legal entities, such as LLCs.
Nevertheless, FinCEN has expressed intentions to pursue both these requirements in the near future, as stated in a fact sheet accompanying a recent AML proposal.
Despite managing vast sums of money, investment advisers have thus far been largely exempt from AML regulations stemming from the 1970 Bank Secrecy Act and subsequent legislation. These regulations typically apply to banks and other financial institutions defined by FinCEN, including stockbrokers and casinos.
Representatives from FinCEN cited by cnbc.com highlighted the current regulatory gaps in the investment adviser sector during a press call on Monday, suggesting that these loopholes enable illicit actors to seek advisers who do not scrutinise their source of wealth.
Treasury investigations have revealed instances of money launderers and tax evaders using US investment advisers as gateways to invest in US securities, real estate, and other assets, according to a FinCEN statement. Some cases involve foreign entities such as China and Russia investing in early-stage companies to access sensitive data and new technologies.
FinCEN has attempted to address these regulatory gaps for over two decades. Previous proposals in 2003 and 2015 aimed to extend Bank Secrecy Act provisions to cover investment advisers in efforts to combat money laundering and terrorist financing. However, these rules were never finalised.
The latest announcement represents the third attempt to enact such regulations, in the context of what a senior FinCEN official described as a significant increase in illicit finance through investment advisers. The official noted instances of abuse by nation-state actors and oligarchs from countries such as Russia and China, who rely on US investment advisers to facilitate the movement and concealment of their funds.
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