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Money laundering safeguards being extended to managers

Jennifer Shasky Calvery said money managers could be vulnerable because they now are not required to have programs in place.

Treasury Department proposes new rules for hedge funds and others

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.

Closer look

Being moved to the front lines of AML means taking a closer look, the experts say.

“It's about understanding things about the customer and the transaction. You have to ask, and the answer has to make sense,” said Alma Angotti, Washington-based managing director of the global investigations and compliance practice for management consulting firm Navigant Consulting Inc. While private fund managers “might think they know, it's also about whether it is appropriately documented,” said Ms. Angotti, who helped develop FinCEN's original AML rules in 2002 and 2003.

The new rules' risk-based approach means private fund advisers “have to start by figuring out the risk by client, business, geography, products and services,” she said.

Said Brent Newman, executive vice president and chief strategy officer at Accuity, a New York compliance firm: “From a transactional perspective, it's about making sure (clients) are who they say they are.”

Most of the larger institutional advisers already have AML in place, Ms. Barr said. “They have best practices and a lot of larger investment advisers (to private funds) are also part of larger groups already required to have them.”

Members of the Managed Funds Association in Washington have had AML best practices since 2009, a spokesman said.

While all private funds will be affected by the rules, “hedge funds are the most likely to have potential issues,” said John Gebauer, president of Accuity affiliate National Regulatory Services, New York. “The biggest gap right now is there's not a lot of clarity in the differences (between different types of funds). There's a lot of work to be done to know.”

Private equity officials are hoping regulators will appreciate the differences in types of private funds, with theirs typically being longer and less liquid, and less susceptible to money launderers than, say, hedge funds.

“I think regulators by and large recognize that those differences exist. We hope that's the balance that's struck at the end of the day,” said one industry official who asked not to be identified.

For offshore funds, “even if there are best practices now, I am not sure that is going on as well as it is supposed to be,” said Mr. Miller of Seward & Kissel. “It's common sense. Where is the money coming from? There's no doubt that there's a dramatic increase in the risk related to the movement of money.”

Noted Mr. Newman of Accuity: “Clearly there is the propensity for money laundering to happen, and getting SEC-registered asset managers involved is a good idea. After many, many years of complacent requirements for the banking world and even the broker-dealer world, it's kind of getting ahead of the curve. We think it will be a deterrent.” n

This article originally appeared in the September 7, 2015 print issue as, "Money laundering safeguards being extended to managers".