Large financial institutions such as banks and brokerage firms have specific Anti-Money Laundering (AML) and Know Your Customer (KYC) rules that originated in the US Patriot Act. In the past, the US Treasury has attempted to include domestic hedge funds under these regulations, but the industry has effectively lobbied against such regulation. Offshore hedge funds, however, are subject to the AML requirements of the jurisdiction in which they are domiciled.
In 2015, the Financial Crimes Enforcement Network (FinCen) made proposals to include investment advisers, which could include hedge funds and PE funds, under existing AML regulations. The proposals were in line with the AML programs in place for banks and brokers.
While these actions never advanced past the proposal stage, five years later the FBI issued an intelligence bulletin asserting that certain hedge funds and private equity funds circumvented traditional AML programs. The concern of the FBI was the possibility of hedge funds receiving funds from entities domiciled in nations that allow the non-disclosure of the beneficial owners of such funds to the financial entity.
Currently, the only report dealing with these issues is Form PF, which is required to be filed by registered investment advisers and commodity pool operators who manage more than $150 million. This form only requires the filer to report the total amount of funds invested by non-US investors without disclosing beneficial owners. Without this knowledge, the FBI cannot accurately assess a fund’s risk for potential money laundering activities.
While the Biden Administration has not publicly announced an intention to revive the 2015 FinCen proposals, history tells us that rules regulating industries like the securities business are much more likely to increase rather than be eliminated. Therefore, investment advisers should prepare for the possibility of having to implement AML compliance procedures.
One of the most effective ways to approach this problem is designing an AML program that is modeled after the regulations promulgated by top-tier offshore regulatory bodies such as the Cayman Islands Monetary Authority (CIMA). Best practices for developing an AML program include:
- Formulation of a written set of organizational policies that are designed to comply with the current or anticipated AML regulations. All employees, staff and executives should be knowledgeable regarding these procedures.
- Maintain an ongoing training program for all employees who are involved with the fund’s financial matters. Changes in regulations must be regularly monitored and communicated to the staff.
- Appointment of an Anti-Money Laundering Compliance Officer (AMLCO). In order to ensure firmwide compliance with the program, there needs to be one senior management person appointed to be held accountable. This person needs to have the authority to implement the procures and see that they are carried out across the firm.
- The creation of a robust AML screening program making full use of the data available from government sources, offshore regulatory authorities and law enforcement. The goal is to screen for any individual with any possible connection to money laundering or terrorist financing activities. Combined with the use of enhanced due-diligence procedures for any Politically Exposed Person (PEP), this “risk-based approach” to AML monitoring involves determining the necessity for enhanced procedures in certain circumstances.
- Test your program for weakness. The AML process should be able to stand up to any and all regulatory scrutiny.
These are just a few of the key components of a successful AML program. If time constraints or lack of resources are keeping your fund from achieving effective AML compliance, consider outsourcing some or all of the process to Grassi’s Fund Administration professionals. Our advisors have the experience and expertise to help you develop a program with confidence.