Hedge fund, private equity and other private fund managers will have to develop anti-money laundering programs under rules proposed Tuesday by the Treasury Department's Financial Crimes Enforcement Network.
The changes, once finalized, would also require managers to file currency transaction and suspicious activity reports to FinCEN. The Securities and Exchange Commission would examine managers for compliance with the new requirements, which include securities fraud as a potential money laundering tactic.
Money managers “may be at risk” of money launderers or terrorist financiers using them to access the U.S. financial system because they are not currently required to keep anti-money laundering programs or report suspicious activity, the proposal said. “If a client is trying to move or stash dirty money, we need investment advisers to be vigilant in protecting the integrity of their sector,” FinCEN Director Jennifer Shasky Calvery said in a statement.
A 60-day comment period begins once the proposal is published in the Federal Register. Compliance would begin six months after a final rule.
While larger firms might have anti-money laundering programs in place because of their affiliations with banks and broker-dealers, those other parties might not have sufficient information, such as the identity of investors, according to the proposal. “Such gaps in knowledge make it possible for money launderers to evade scrutiny more effectively” by going through money managers who “may be uniquely situated to appreciate a broader understanding of their clients' movement of funds through the financial system,” the proposal said.
“Many advisers and managers already have (an AML policy) as a best practice, but they don't necessarily have the training and independent audit performed annually. Those two things will add significant cost to advisers big and small,” said John Gebauer, president of compliance firm National Regulatory Services, in an interview.
It could also affect investors, said Paul Miller, a partner in law firm Seward & Kissel's investment management group. “It may impact their clients in the sense that an adviser is going to have to request more information. It's going to have a significant impact,” Mr. Miller said in an interview.
The Managed Funds Association said in a statement that it supports “FinCEN's mission to help safeguard the financial system from illicit use.”