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Closing Regulatory Loopholes: Treasury Proposes AML Rules for Investment Advisers

13th February, 2024| By Business Desk
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Treasury Department Building | Credit: Wikimedia Commons
  • The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) proposed new regulations extending anti-money laundering (AML) rules to certain investment advisers registered with or reporting to the Securities Exchange Commission (SEC).
  • These regulations would mandate investment advisers to file Suspicious Activity Reports (SARs) to FinCEN and disclose additional client information under specific circumstances, addressing regulatory gaps exploited by illicit actors.
  • While the proposed rules do not currently require formal customer identification programs or reporting beneficial ownership information for legal entity clients, FinCEN plans to pursue these regulations in the near future.
  • Previous investigations by Treasury have revealed instances of money laundering, tax evasion, and other criminal activities utilizing U.S. investment advisers to access securities, real estate, and other assets, including cases involving China and Russia.
  • This marks the third attempt by FinCEN to extend Bank Secrecy Act provisions to cover investment advisers, highlighting a significant surge in illicit finance through this sector and the need for regulatory action to address these challenges.

The Biden administration, in its ongoing efforts to combat money laundering, illicit finance, and fraud within the American financial system, has introduced new recordkeeping regulations for U.S. investment advisers. These regulations, proposed by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), aim to enhance transparency and accountability within the investment advisory sector.

Under the proposed regulation, investment advisers would be required to establish anti-money laundering programs and report suspicious activities detected among their clients to the government. FinCEN Director Andrea Gacki emphasized the importance of these regulations in closing regulatory gaps that can be exploited for illicit financial activities. By implementing these measures, the administration seeks to level the regulatory playing field, protect national security, and safeguard American businesses from financial crimes.

This proposal aligns with recent initiatives by the Biden administration to address financial crimes effectively. Last week, the Treasury Department proposed a rule targeting real estate professionals, mandating the reporting of information on non-financed sales of residential real estate to legal entities, trusts, and shell companies. Additionally, a new database on small business ownership, known as the beneficial ownership registry, has been introduced to enhance transparency in business ownership information.

Treasury Secretary Janet Yellen highlighted the significance of these measures in prioritizing anti-corruption efforts and promoting financial transparency both domestically and internationally. A risk assessment conducted by the Treasury Department revealed instances where sanctioned individuals, tax evaders, and other criminal actors utilized investment advisers to invest in U.S. securities, real estate, and other assets. Furthermore, cases involving Chinese and Russian individuals using investment advisers to access sensitive information and emerging technology were identified.

The proposed regulations would extend key anti-money laundering provisions, applicable to banks, to certain investment advisers registered with or reporting to the Securities Exchange Commission (SEC). However, it excludes approximately 17,000 state-registered investment advisers. While the regulations do not currently mandate the adoption of formal customer identification programs or reporting of beneficial ownership information for legal entity clients, FinCEN intends to pursue these measures in the near future.

Investment advisers, responsible for managing substantial sums of capital, have been largely exempt from anti-money laundering regulations. This exemption has created regulatory gaps that facilitate illicit financial activities. Andrea Gacki emphasized the need to address these gaps, which allow illicit actors to exploit the system by choosing advisers not subject to rigorous scrutiny.

Previous attempts by FinCEN to expand Bank Secrecy Act provisions to cover investment advisers in 2003 and 2015 were unsuccessful. However, the current proposal marks the third attempt to address these regulatory gaps, prompted by a significant increase in the use of investment advisers for illicit finance. Instances of nation-state actors, such as Russia and China, utilizing U.S. investment advisers to conceal and move funds have underscored the urgency of implementing comprehensive regulatory measures.

Public comment on the proposed regulations will be open until April 15, allowing stakeholders to provide feedback on the potential impact and effectiveness of these measures in combating financial crimes and enhancing transparency within the financial system.