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Anti-Money Laundering

Sunday, June 5, 2016

FINRA member broker-dealers and mutual fund/investment companies operate under extensive anti-money laundering (“AML”) rules and regulations. Although the regulations under which these firms operate can be quite burdensome, they are also, unfortunately, quite necessary. Without the many rules, reports, forms and extensive AML procedures in which these entities are required to follow, file, maintain and enforce, terrorist organizations, organized criminals, and other nefarious individuals would be left with an avenue to fund their illicit activities and perpetrate their criminal activities.

Registered investment advisers, whether it be with a state, multiple states, or the SEC, are not addressed within the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986 or the USA PATRIOT Act. Therefore, investment advisers are not technically required to maintain and enforce policies and procedures concerning AML, file reports or undergo any type of annual AML training. With this being said, however, many states, and the SEC, have adopted best practice recommendations requiring registered investment advisers to take minimal steps to ensure they are making some attempt to be a first line of defense in the AML process. Most states will require that an adviser, at a minimum, check the name of each client against the Sanctioned Designated Nationals (“SDN”) database found at https://sanctionssearch.ofac.treas.gov/ or https://sanctionssearch.ofac.treas.gov/ and print and maintain an electronic or hard copy printout of the results. In addition, some states, and the SEC, will expect you to maintain a photo copy of the client’s driver’s license or passport to evidence that the identity of the client has been verified.

Many registered investment advisers, especially those smaller, one man shops, are already inundated with so many compliance concerns that it has become increasing difficult to have the time to actually do what they spent so much time and money registering to do, which is to manage securities portfolios. Unfortunately, the regulators do not really care. In addition, being the bearer of bad new, there are a couple of issues out there that will dramatically affect the amount of work smaller investment advisers may and/or will have to do. The SEC has a no-action letter indicating that it is acceptable for the custodian to defer AML verification and monitoring to the investment adviser. A copy of the letter can be found here. In addition, as many may have noted with the US Department of Labor’s new Fiduciary Rule, the SEC and state securities regulatory bodies are not the only jurisdictions imposing rules on the industry. The US Financial Crimes Enforcement Network (“FinCEN”) is also wanting to get into the mix. FinCEN has proposed rules which could require investment advisers to follow similar AML regulation as a broker-dealer. Here is a link to a good article concerning the new regulation.

In summary, even though there are no formal, written requirements for registered investment advisers, it is important to implement, and abide by, your own policies and procedures concerning AML.

About Red Oak Compliance Solutions

Red Oak Compliance Solutions is a leading provider of intelligent compliance software, offering a range of AI-powered solutions designed to help firms of all sizes successfully navigate the increasingly complex regulatory landscape. Our suite of 17(a)-4/WORM compliant features offer risk minimization, cost reduction, and process optimization capabilities with features that are designed to evolve with our client’s needs. Our flagship advertising review software enables firms to deliver compliant content to the market with confidence, faster. Our Disclosure Management and Intelligence solution simplifies the management of disclosures, while our Registration Management solution automates and streamlines the licensing and registration process, further enhancing your internal processes. 

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