Hedge fund and other private fund managers will have to revisit whether they know enough about their clients under recently proposed anti-money laundering rules, experts said.
The Treasury Department's Financial Crimes Enforcement Network proposed on Aug. 25 that private funds have formal anti-money laundering programs in place, including a dedicated AML officer and reporting of suspicious activity. A 60-day comment period begins once the proposal is published in the Federal Register. Compliance would begin six months after a final rule.
The rules — already in force for banks and broker-dealers — would apply to any investment adviser to hedge funds and other private funds that is required to register with the Securities and Exchange Commission, which will enforce them.
Private fund advisers also should expect further regulations, requiring them to create a customer identification program and to conduct enhanced due diligence on higher risk accounts, which FinCEN officials said they will take up later in joint rulemaking effort with the SEC.
“That is a bigger deal,” said Karen Barr, president and CEO of the Investment Adviser Association in Washington.
Money managers might be vulnerable to money launderers or terrorist financiers trying to access the U.S. financial system because, unlike banks and broker-dealers that already have been subject to similar rules for years, they are not now required to have anti-money laundering programs or report suspicious activity, said FinCEN Director Jennifer Shasky Calvery.
“We need investment advisers to be vigilant in protecting the integrity of their sector,” she said in a statement issued last month.
Anti-money laundering protections are not new to many money managers, which have voluntarily implemented policies as regulators focused on other financial firms. But after the new rules are finalized, the biggest changes will be more reporting requirements to prove that fund managers are asking the right questions of their clients, more staff training to make sure that all divisions are talking to each other, and annual independent audits. Thorough documentation of all those steps will be key, experts say.
While the costs may not be noticeably different, the amount of time and attention could be, experts say. Public pension fund clients might already have their own state AML rules that advisers should be aware of, too.
“The big impact is going to be clearly suspicious activity reporting, the confidentiality of that reporting, and sharing with other entities. That will be something new for advisers,” said Paul Miller, a Washington partner in law firm Seward & Kissel LLP's investment management group. “There will be a formal assessment of each type of client.”
Even if firms already have anti-money laundering measures in place, “you still have to do some assessment. There's almost a belt-and-suspenders approach. The adviser is not going to get off the hook,” Mr. Miller said.