SEC, FinCEN Target Money Laundering With New Investor ID Rules for Advisers

U.S. regulators are cracking down on potential money laundering in the investment advisory industry with a proposed new rule requiring firms to implement robust customer identification programs.

The Securities and Exchange Commission and the Financial Crimes Enforcement Network (FinCEN) jointly issued the proposal, which would mandate that SEC-registered investment advisers and exempt reporting advisers establish written policies and procedures to verify the identities of their clients.

The move aims to close a regulatory gap that authorities say has allowed illicit actors to gain access to U.S. markets by obscuring their true identities when working with advisers. It comes as part of a broader initiative to strengthen anti-money laundering and counterterrorism financing (AML/CFT) compliance in the $100 trillion investment advisory sector.

"Criminal and corrupt actors have exploited the investment adviser sector to access the U.S. financial system and launder funds," said FinCEN Director Andrea Gacki. "This would help advisers better identify and prevent illicit actors from misusing their services."

The proposed customer identification program (CIP) requirements would mandate that advisers implement reasonable procedures to collect and record identifying information for each client in order to form a reasonable belief they know the true identity of who they are dealing with.

Firms would need to maintain auditable records on the verification methods used, consistent with CIP rules already in place for other financial institutions like broker-dealers.

SEC Chair Gary Gensler stated the rules "could reduce the risk of terrorists and other criminals accessing U.S. markets to launder money, finance terrorism, or move funds for illicit purposes."

The proposal complements a separate FinCEN plan issued earlier this year to formally designate advisers as "financial institutions" under the Bank Secrecy Act, subjecting them to AML program and suspicious activity reporting requirements.

Together, the new rules aim to bring heightened compliance standards to the advisory sector after a Treasury risk assessment identified it as a potential entry point for money launderers.

The public comment period on the CIP proposal will remain open for 60 days. The rules underscore regulators' intensifying scrutiny over lax AML practices in the multi-trillion dollar advisory industry.

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