James H. Freis, Jr., Director of the Financial Crimes
Enforcement Network, let us know that his agency is working on anti-money
laundering requirements for investment advisers. At a November 15, 2011 speech
at the American Bankers Association/American Bar Association's Money Laundering
Enforcement Conference he highlighted many of the issues of money-laundering in
the various financial sectors. FinCEN's rules currently apply to broker-dealers
and to mutual funds, but not to investment advisers.
May 5, 2003, FinCEN published a notice of proposed rulemaking in the
Federal Register proposing that investment advisers establish anti-money
laundering programs. But it never went anywhere. On November 4, 2008,
FinCEN announced that it was withdrawing the proposed regulations and would
not proceed with regulations for these entities without publishing new
proposals and allowing for industry comments.
"FinCEN is currently revisiting the topic of investment
advisers, building on the changes to that industry pursuant to the Dodd-Frank
Act, the SEC rules implementing Dodd-Frank and other changes, and is working on
a regulatory proposal that would require investment advisers to establish AML
programs and report suspicious activity."
The investment adviser line of business has lots of
business models. Shortly, the ranks of investment advisers will be flooded with
private fund managers. Fries cites these statistics:
"According to the Investment Advisers Association, the number
of investment advisers registered with the SEC totaled 11,539 in 2011, and the
total assets under management reported by all investment advisers increased
13.7% to $43.8 trillion in 2011, from $38.6 trillion in 2010.28 According to
the SEC, there are more than 275,000 state-registered investment adviser
representatives and more than 15,000 state-registered investment advisers.29
Approximately 5% of SEC-registered investment advisers are also registered as
broker-dealers, and 22% have a related person that is a broker-dealer.
Additionally, approximately 88% of investment adviser representatives are also
registered representatives of broker-dealers."
Clearly, it's a big industry. Clearly, working with "bad
guys" on any of the blocked persons lists would be a big problem.
However, the private equity fund vehicle is an unlikely
choice for someone to launder money. The investment is highly illiquid, the
subscription commitment requires you to contribute money infrequently over a
long period of time, and the money is distributed back irregularly.
I welcome some clarity from FinCEN, but hope they are
realistic about the burdens they will impose in contrast to the risk.
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
For more information about LexisNexis
products and solutions connect with us through our corporate site.