WASHINGTON –If a federal rule under development becomes the law of the land, advisors will need to set up an anti-money laundering program, what for many will entail a major new compliance effort.

  • Many advisors already have an anti-money laundering program in place, either through on agreement with their broker-dealer or simply because they view it as a sound business practice.
    But soon they may not have a choice.

    As the Treasury Department develops a rule that would require SEC-registered advisors to establish an AML program, a commission official offered some guidance for what those programs should look like, along with a warning that money laundering is not an issue the agency takes lightly.

    "The examination program takes this very seriously and expects firms that have these obligations to comply with them," Eric Kringel, an attorney with the SEC's Division of Enforcement who specializes in the Bank Secrecy Act, said during a presentation at the Investment Adviser Association's annual compliance conference on Mar. 11.

    The SEC already evaluates AML policies and procedures at brokerage shops and other registered entities that are subject to the program requirement under the Financial Crimes Enforcement Network's definition of a financial institution.

    Later this year, FinCEN is expected to publish a regulation that would extend the AML rule to most advisors, but exempt smaller practices registered with the states.


    Kringel stressed the importance of tailoring an AML program to the contours of the firm's business and its client base. When commission officials have visited brokerage shops, too often they have discovered that the firm's AML program is a verbatim copy of the template that FINRA has developed, with no customization for the practice.

    "It's really important not just to take a model program or a draft program, put it on the shelf and try to implement it," Kringel said. "It tells us nobody's put any thought into what you need to do tailor this program.” Such tailoring is needed to address a firm’s specific business model, customers and business risks, he added. 

    If subject to an AML requirement, advisors would have to establish a formal program that would include policies and procedures to screen for and escalate suspicious activity, designate a compliance officer to oversee the program, conduct employee training, and engage in an independent audit. They would also be expected to file suspicious activity reports with government authorities.


    "This rule is significant because it's going to bring investment advisors into this Bank Secrecy Act umbrella," said Jonathan Lopez, a partner at the firm Orrick, Herrington & Sutcliffe. "It's a significant expansion."

    The rule that FinCEN proposed would not require advisors to maintain a formal customer identification program, or CIP, as other entities are required to. However, Kringel indicated that the SEC will expect advisors to be able to demonstrate that they have an understanding of their clients' typical behavior.

    "From where I stand, it's very difficult to assess transactions and customer activity without knowing about those customers. It's not unusual except as measured against what you know about them," Kringel said. "Even if a CIP program is not explicitly required, the program needs to address how you integrate your know-your-customer kind of practices and how you use that to assess the kind of activity" in which clients might engage.

    FinCEN has argued that extending AML requirements to advisors, as it had first proposed to do in 2003, would close a loophole that criminals and terrorist financers could exploit to move money through U.S. financial institutions. Even if advisors don't have custody of their clients' assets and work with partner firms that have AML programs in place under the Bank Secrecy Act, brokers or custodial banks might not know the identity of the client who is moving money, as the advisor would.

    "As long as investment advisers are not subject to AML program and suspicious activity reporting requirements, money launderers may see them as a low-risk way to enter the U.S. financial system," FinCEN explained in its rule proposal. "It is true that advisers work with financial institutions that are already subject to BSA requirements, such as when executing trades through broker-dealers to purchase or sell client securities, or when directing custodial banks to transfer assets. But such broker-dealers and banks may not have sufficient information to assess suspicious activity or money laundering risk."



    The Investment Adviser Association has urged FinCEN to make significant changes to its proposed rule, arguing that the agency should narrow the scope of the proposal to lessen the compliance burden on advisors.

    In a comment letter submitted late last year, the group acknowledged the importance of cutting off the flow of dirty money, but suggested that FinCEN could offer more flexibility to better match the diversity of the advisory sector.

    The group also took issue with FinCEN's characterization of advisors "as a low-risk way to enter the U.S. financial system."

    "We respectfully submit that this statement is simply not true and reflects a fundamental misunderstanding of the nature and scope of services provided by advisors," the IAA wrote. "Advisors do not provide any way — much less 'a low risk way' — for a client to bypass banks, broker-dealers, or other financial institutions covered by the BSA and enter the U.S. financial system."

    FinCEN proposed that advisors would have six months to comply with the AML rule following its final publication. Even if that grace period were extended, as some in the industry have urged, firms should begin laying the groundwork for how they would grapple with the new regulation, according to Lopez, the partner with Orrick, Herrington & Sutcliffe.

    "Start thinking about this now," he said, "so you're where you need to be when the rule comes out."

    Read  more:

  • Treasury Dept. Proposes AML Rule for Advisors
  • Advisors Urged to Consider Adopting AML Program 

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