FinCEN AML Proposal: Impacts to Investment Advisor Resources  

Anti-Money Laundering Rules Will Impact Advisor Operations and Compliance Resources

By Bryan Jacobsen

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The landscape of financial regulation is set to change significantly. The Financial Crimes Enforcement Network’s (FinCEN) February 2024 proposed rule under the Bank Secrecy Act designates registered investment advisors (RIAs) and exempt reporting advisors (ERAs) as “financial institutions.” The proposed rule is designed to bring these firms into compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) requirements.

This pivot towards tightened regulation signals a robust enhancement in oversight that will encompass registered investment advisers, exempt reporting advisers, and specific non-U.S. entities advising non-U.S. clients. The proposed rule does not include state-registered investment advisors, and certain ERAs with specific fund advisories are designated as financial institutions for AML purposes.

FinCEN Rule Shifts Focus to Proactive Management

This proposal brings a palpable shift towards proactive risk management. The new rules, seeking to fortify the integrity of advisory relationships, mandate:

  • the establishment of a stringent AML program
  • a dedicated AML officer
  • independent testing
  • methodical procedures for ongoing client due diligence
  • filing of Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs)
  • recordkeeping
  • information sharing procedures
  • continuous training

As the industry prepares for the implementation of these new rules, firms should consider the timeline for compliance, with a 12-month period post-final rule effective date to establish the necessary AML/CFT frameworks.

Implications for Investment Advisers

The proposed rules significantly reshape the compliance landscape for investment advisers. The proposal’s intent is to integrate certain investment advisers into the regulatory framework of the Bank Secrecy Act (BSA), emphasizing the need for risk-based AML/CFT programs and vigilant reporting of suspicious activities.

Here are the key implications for the investment adviser industry:

Staffing and Resource Allocation

Development of AML Compliance Programs: Investment advisers must develop an AML program that includes the establishment of internal policies, procedures, and controls tailored to their specific risk profiles. Firms will need to allocate resources to establish comprehensive AML/CFT programs.

Dedicated Personnel: A designated Compliance Officer must be appointed to oversee the program’s effectiveness, necessitating investment in knowledgeable staff or additional training for existing employees.

Testing and Training: Regular, ongoing employee independent testing of the program and employee training are required to maintain compliance standards. A well-designed AML program will lay out clear and effective practices for monitoring suspicious activity, and clearly assign the responsibility for following up on flagged items and documenting those reviews.

Enhanced Due Diligence and Monitoring

Suspicious Transaction Reporting: Registered Investment Advisors and ERAs are to report suspicious activities to FinCEN, aligning with the practices of other financial institutions, such as banks and broker-dealers. The creation and implementation of a suspicious transaction monitoring program are crucial, with a requirement to report such transactions to FinCEN within 30 days of detection.

Risk-Based Customer Due Diligence: Advisers must conduct risk-based ongoing customer due diligence, adapting their monitoring programs to effectively manage their specific money laundering risk.

Regulatory Cooperation and Reporting

Compliance with the Recordkeeping and Travel Rules is essential, ensuring the necessary information accompanies fund transmittals.

Information Sharing: The proposed rule mandates information-sharing provisions, fostering collaboration between FinCEN, law enforcement, government agencies, and certain financial institutions to combat illicit finance threats. Advisers must adhere to special information-sharing procedures under Section 314 of the PATRIOT Act, facilitating cooperation in identifying potential threats.

Currency Transaction Reports (CTRs): Advisers will be responsible for filing CTRs for transactions involving payments or transfers of more than $10,000 in currency, aligning with the practices of banks and other financial institutions.

Recordkeeping: Records like the Customer Identification Program (CIP) must be maintained for all fund transmittals of $3,000 or more, ensuring transparency and traceability of transactions.

The AML Partner You Need

Oyster Consulting has the knowledge and experience to help you adhere to these new regulations. Our experienced compliance team has extensive expertise creating and testing AML programs.  Our AML experts can also serve as outsourced AML Compliance Officers.  

Part of successfully detecting and preventing money laundering and terrorist financing comes from having a modernized compliance program. The right compliance software ensures that your team consistently follows your firm’s procedures to AML risks. When you implement Oyster Solutions compliance software, you will know your policies and procedures are being followed and enforced through automated workflows. Oyster Solutions also provides a tailored risk assessment, so you know where your highest risks are and can prioritize where to focus your team.

About The Author
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Bryan Jacobsen

Bryan’s role as a CCO for dual registered broker-dealer / RIAs, clearing firms and crypto-based entities enables him to apply his FinTech, financial, crypto, blockchain, and regulatory knowledge when providing practical compliance solutions.