U.S. investment advisers in FinCEN crosshairs with proposed AML and CIP requirements

06.24.2024 | Elizabeth Callan

What Your Firm Needs to Know and the Technology to Help You Prepare

The Financial Crimes Enforcement Network (FinCEN) recently proposed regulations aimed at expanding anti-money laundering (AML) and customer identification program (CIP) requirements to cover registered investment advisers and exempt reporting advisers (collectively IAs). This proposal is part of a broader effort to enhance the transparency of financial transactions and combat illicit financial activities. Investment advisers play a significant role in managing substantial amounts of client assets, yet they have previously operated outside the scope of certain AML regulations. FinCEN’s proposed rule aims to close this regulatory gap.

Traditionally, investment advisers have not been subject to the same stringent AML and CIP requirements as other financial institutions, such as banks and broker-dealers. This regulatory disparity has created vulnerabilities in the financial system that can be exploited by criminals seeking to launder money or finance terrorism. IAs manage client assets and provide advice on investments are therefore in a unique position to detect and prevent suspicious activities. By bringing them under the umbrella of AML and CIP regulations, FinCEN aims to leverage their position to strengthen the overall integrity of the financial system.

Key provisions of the proposed rule on IAs

  • AML Program Requirements: IAs would be required to establish and implement AML programs. These programs must include internal policies, procedures, and controls designed to prevent and detect money laundering activities. The AML program should be tailored to the investment adviser’s specific business model and client base, ensuring it is effective and relevant.
  • CIP: IAs would need to develop CIPs that are appropriate for their size and type of business. The CIP must include procedures for verifying the identity of clients, maintaining records of the information used to verify identities, and checking clients against lists of known or suspected terrorists or terrorist organizations.
  • Suspicious Activity Reporting (SAR): The proposal would require IAs to file SARs with FinCEN for transactions that they know, suspect, or have reason to suspect involve suspicious activities. This requirement would align IAs with other financial institutions that already have SAR obligations.
  • Designation of Compliance Officer: Investment advisers would be required to designate a compliance officer responsible for overseeing the AML program. This individual must have sufficient authority and resources to ensure the program’s effectiveness.
  • Employee Training and Independent Testing: The proposal mandates that IAs provide ongoing training for employees on AML requirements and conduct independent testing of their AML programs to assess their effectiveness and compliance.

Impact on investment advisers

The proposed regulations are expected to significantly impact the operations of investment advisers. Firms will need to invest in developing and maintaining comprehensive AML programs, including staff training and system upgrades to ensure compliance. The implementation of these requirements will likely involve initial and ongoing costs, but these are deemed necessary to protect the financial system from abuse.

FinCEN anticipates that these measures will improve the detection and reporting of suspicious activities, thereby deterring money laundering and terrorist financing. IAs will play a crucial role in identifying and mitigating risks within the financial system.

Industry response and concerns about FinCEN’s proposal

IAs and industry groups have expressed mixed reactions to FinCEN’s proposal. While many acknowledge the importance of combating financial crimes and support measures that enhance transparency and security, there are concerns about the regulatory burden and associated costs. Smaller advisory firms may face challenges in implementing the required AML programs due to limited resources.

Industry groups have called for FinCEN to consider a phased implementation approach and provide clear guidance to help firms comply with the new requirements. They also emphasize the need for coordination with existing regulations to avoid duplicative or conflicting obligations.

Technology requirements to fulfill AML regulations and CIP requirements

To comply with the proposed AML regulations and CIP requirements, investment advisers will need to implement a range of technologies. These technologies will help them develop robust AML programs, identify and verify client identities, monitor transactions, and ensure overall compliance with regulatory obligations.

The following are the key types of technology that IAs are likely to need:

1. Customer Identification & Verification Solutions

Investment advisers will need technology to identify and verify the identities of their clients, including documentary and non-documentary information.

2. Transaction Monitoring Systems

To detect suspicious activities, IAs will need advanced transaction monitoring systems. The unique nature of the funds these IAs advise, and the unique cycles and patterns of transactions, will require the use of advanced analytics, including entity resolution and graph analytics to enhance the ability to detect suspicious activity.

3. Screening Tools

Screening tools are necessary for checking clients and transactions against sanctions and other various watchlists and databases:

  • Sanctions and PEP Lists: Software that automatically screens clients and transactions against lists of sanctioned individuals, politically exposed persons (PEPs), and other high-risk categories.
  • Adverse Media Screening: Tools that search news sources and other media for negative information about clients that could indicate risk.
  • AI: Generative AI tools that can use unstructured text to better detect exposure to watch-listed entities and individuals

4. AML Compliance Management Systems

Comprehensive AML compliance management systems are essential for maintaining and demonstrating compliance:

  • Case Management Systems: Software that helps track and manage investigations stemming from transaction monitoring and screening, ensuring all steps are documented and timelines achieved.
  • Reporting Tools: Tools to generate and file suspicious activity reports (SARs) and other required documentation with regulatory bodies
  • Audit and Management: Systems that can generate detailed management reports and maintain an audit trail for regulatory inspections
  • AI Copilots: Generative AI assistants that automatically gather, synthesize, and analyze data and produce investigative summaries and SAR drafts

5. Training and E-Learning Platforms

To ensure employees are knowledgeable about AML requirements, investment advisers will need access to training and e-learning platforms:

  • Online Training Modules: Courses and certifications that keep employees up to date on AML regulations and best practices.
  • Compliance Tracking: Systems to track training completion and compliance among staff members.

FinCEN’s proposal to extend AML and CIP requirements to IAs represents a significant step in strengthening the financial system’s defenses against money laundering and terrorist financing that would close a critical gap and enhance the overall integrity and transparency of the U.S. financial system.

While the proposed regulations will impose new compliance obligations on IAs, they are a necessary measure to protect the financial system from illicit activities and meet global standards. The successful implementation of these requirements will depend on careful consideration of industry feedback and ongoing collaboration between regulators and the investment adviser community.

To learn more about solutions for transaction monitoring, sanctions screening, and customer due diligence, check out SymphonyAI financial services.

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