FinCEN Proposes Rule to Combat Illicit Finance and AML in Investment Adviser Sector

The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has unveiled a Notice of Proposed Rulemaking (NPRM) targeting the investment adviser sector. The proposed rule, specifically emphasizing Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) measures, aims to fortify the U.S. financial system against exploitation by criminals and foreign adversaries.

The new regulations, outlined in the NPRM, necessitate certain investment advisers to adhere to AML/CFT requirements under the Bank Secrecy Act (BSA). Key provisions include the implementation of risk-based AML/CFT programs, reporting suspicious activities to FinCEN, and complying with stringent recordkeeping obligations. These measures align with Treasury's broader strategy to mitigate the risks associated with anonymous companies and all-cash real estate transactions.

FinCEN Director Andrea Gacki stressed the importance of investment advisers as crucial gatekeepers to the American economy, overseeing trillions of dollars in investments. Gacki highlighted the existing regulatory gaps that criminals exploit, underscoring the need for a standardized approach to protect U.S. economic and national security.

"The current patchwork of AML/CFT requirements creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth, and compromise American innovation,” said FinCEN Director Andrea Gacki. “This proposed rule would level the regulatory playing field, protect U.S. economic and national security, and safeguard American businesses.”

The proposed rule would designate investment advisers as "financial institutions" under the BSA, requiring those registered with the Securities and Exchange Commission (SEC) and exempt reporting advisers to establish AML/CFT programs. They would also be obligated to file suspicious activity reports, adhere to specified recordkeeping requirements, and fulfill other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations.

Furthermore, the proposed rule introduces information-sharing provisions between FinCEN, law enforcement agencies, and certain financial institutions. It includes special measures under Section 311 of the USA PATRIOT Act and proposes delegating examination authority to the SEC, given their expertise in the regulation of investment advisers and experience in examining financial institutions regarding AML/CFT responsibilities.

The proposed rule builds on the 2021 U.S. Strategy on Countering Corruption, aligning with recommendations that Treasury assess the risks posed by the investment adviser industry. It revisits a 2015 NPRM, aligning with the broader goal of strengthening financial transparency while minimizing potential business burdens.

As the proposal undergoes review and public commentary, its potential adoption could mark a significant stride in fortifying the financial sector against illicit actors, promoting transparency, and safeguarding the integrity of the U.S. economy.

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