Anti-money laundering rule looms for advisors

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WASHINGTON — In the current deregulatory environment, investment advisors might expect a reprieve from new federal compliance rules. But one exception is the proposal for an anti-money-laundering regulation, which experts believe is likely to become the law of the land, bringing with it a significant new compliance responsibility.

A year and a half ago, the Treasury Department proposed extending the requirement to maintain a formal anti-money-laundering program under the Bank Secrecy Act to SEC-registered investment advisors.

That would require advisors to establish policies and procedures for identifying suspicious activity and designate a compliance officer to steer the program. Firms would also have to conduct employee training, commission an independent audit and develop a system for evaluating suspicious activity.

Much of the Trump administration’s early efforts have focused on rolling back regulations. Already he has issued executive orders calling for a temporary freeze on new regulations and directing agencies to eliminate two rules for every new rule they enact. President Trump has also directed agencies to undertake a review of their regulations on the books with an eye toward easing restraints on the private sector.

The SEC released a letter outlining where the most common deficiencies occur.
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But the regulatory freeze memo held out certain exceptions, including emergency situations and areas implicating national security or financial matters, which could leave Treasury’s Financial Crimes Enforcement Network free to move forward with the AML rule, according to Stephanie Brooker, a partner at the law firm Gibson, Dunn & Crutcher who previously served as the director of FinCEN’s Enforcement Division.

“I think the view of most people in the bank secrecy-AML community is that this area of the law is perhaps less likely to be subject to deregulation in the new administration, given that it does focus on money laundering and anti-terrorist financing,” Brooker says. “We continue to advise clients at my firm that having a good overall know-your-customer AML program ... is a good idea.”

A FinCEN spokesman, Steve Hudak, confirms that the agency is still “moving forward” with the rule and is evaluating the public comments that interested parties submitted, but declines to speculate on timing. “The next step is to draft a final rule and, beyond that, to work with OMB on how to proceed,” Hudak says.

This area of the law is perhaps less likely to be subject to deregulation in the new administration, given that it does focus on money laundering and anti-terrorist financing.

“It’s complex,” he adds. “It’s not that unusual for complicated rule-makings to take significant time. We’re serious when we say we’re evaluating comments and looking for the best way to address issues that arise.”

Eric Kringel, the Bank Secrecy Act specialist at the SEC’s Enforcement Division, shares the view that the rule is likely to materialize, in part because of the Trump administration’s emphasis on combating terrorism, but also because it appears to be nearing the end of a long development process.

“I think it would be different if this rule were in its early stages of development,” Kringel says. “At the same time we talk about the administration’s desire to reduce regulation, there’s also a heavy focus on accountability for illicit financial activity. There’s a heavy focus on fighting people who would fund terrorism. ... That doesn’t go away.”

Under FinCEN’s proposed rule, the SEC would assume responsibility for examining advisors’ AML programs, adding to an already crowded agenda at the commission’s Office of Compliance Inspections and Examinations.

Even ahead of the adoption of FinCEN’s rule, advisors have been feeling pressure to adopt baseline AML policies and procedures, owing in part to the trickle-down effect of regulations on entities with which they might do business.

Broker-dealers and banks have long been subject to AML regulations, and FinCEN has approved a rule on customer due diligence to enhance those requirements. That regulation carries a compliance date of May 2018, but already advisors are feeling the impact through their associations, according to Brooker.

“Because banks, in particular, are covered by the customer due diligence rule, there’s already in advance of the effective date a downstream impact that more and more is being asked in terms of beneficial ownership information, and obviously many advisors work within an enterprisewide approach. You’re working with custodians, banks and others — broker-dealers — so although you’re not formally covered by the rule, it will have an impact on what you’re being asked to collect on your customers,” Brooker says.

But if FinCEN puts forward the explicit AML rule for advisors, it will become a compliance issue, and some observers expect that a proposal for a formal customer-identification program, which was not included in the agency’s initial proposal, could soon follow.

At the SEC, officials are already weighing how the rule would be enforced, Kringel says, though he suggests that the commission is likely to extend something of a grace period to allow firms to develop their programs.

“On enforcement’s radar, we’re looking at this and trying to understand how we would address this down the road. When the broker-dealer rule was adopted, you didn’t see regular enforcement action right out of the gate. These things take time to implement,” he says. “If after a period of time things just aren’t coming together, then it may become an enforcement matter.”

Even ahead of the adoption of FinCEN’s prospective rule, advisers have been feeling pressure to adopt baseline AML policies and procedures.

After that acclimation period, what could trigger an enforcement action?

Kringel indicates that regulators won’t be looking to punish advisors for minor technical snags in their AML programs. Rather, he cautions that those programs must be tailored to address the specific risks associate with a firm and its clients. Just as in the broker space, he warns advisors that it’s not enough simply to have a program in place as a check-box compliance exercise.

“We’re not looking for highly detailed, complex mistakes,” Kringel says. “We’re looking for people who buy a program, put it on the shelf and do not actually implement the surveillance. What we want to do is prevent holes in the system that allow illicit actors to get in and take advantage of the operation.”

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AML Money laundering Compliance Law and regulation SEC FinCEN Treasury Department