Potential Anti-Money Laundering Regulation for U.S. Investment Advisors: Imminent?

In a significant move towards combating illicit financing, the ENABLERS Act has been included in the National Defense Authorization Act for fiscal year 2023. If signed into law, this act would require the US Treasury Secretary to establish rules for investment advisors, mandating them to report suspicious transactions, establish Anti-Money Laundering (AML) programs, identify and verify account holders, and establish due diligence programs.

The push for stricter AML regulations for investment advisors has been building for some time. In May 2022, the US Treasury Department issued its 2022 National Strategy for Combating Terrorist and Other Illicit Financing, which highlighted the need to assess further action on sectors not subject to comprehensive AML/CFT measures, including investment advisors.

Currently, there is no AML Program Rule for SEC Registered Investment Advisors (RIAs) or their administrators in the US. However, many investment advisors and asset managers have proactively designed and implemented AML compliance programs in the absence of a regulatory requirement.

As the US government moves towards implementing AML regulations specifically for investment advisers, RIAs should start planning now to ensure they are ready. This includes performing a risk assessment to identify areas of greatest AML risk, determining who their customers are and what parties they need to perform due diligence on, and analyzing the unique aspects of the RIA business to determine what patterns of unusual activity may require additional review for suspicious activity monitoring and reporting.

RIAs should also consider the risks relevant to their business, such as investments in areas subject to corruption, long or short-term strategies, lockups, and monitoring of investors that redeem despite such lockups and any associated penalties. All compliance programs should be tested periodically to determine if the controls are reasonably designed and appropriately implemented.

The ENABLERS Act, if passed, would bring investment advisors under the purview of the Bank Secrecy Act (BSA), similar to financial institutions. This means that RIAs would be required to have AML training, both general and tailored to specific roles and business lines as appropriate. Documentation of escalation paths and decision-making authorities, and updates to job descriptions and performance management processes for AML compliance roles, would also be necessary.

The push for stricter AML regulations for investment advisors is part of a broader effort to combat money laundering, terrorist financing, and other financial crimes. In February 2022, the Treasury Department published the US National Money Laundering Risk Assessment, which stated that the use of third-party custodians by RIAs can impede transparency, which is core to AML/CFT effectiveness.

The Financial Action Task Force (FATF), in a report published in December 2016, stated that investment advisors are not directly covered by Bank Secrecy Act obligations. However, the White House's "United States Strategy on Countering Corruption," issued in December 2021, states that lines of effort will be focused on prescribing minimum reporting standards for investment advisors and other types of equity funds.

The Panama Papers investigation in April 2016 highlighted the amount of wealth managed in offshore banking jurisdictions, and in October 2021, a bill titled the Establishing New Authorities for Business Laundering and Enabling Risks to Security (ENABLERS) Act was introduced, which broadens the definition of a "financial institution" under the BSA to include investment advisors.

In conclusion, the US is working on implementing AML program regulations specifically for investment advisers, aiming to enhance transparency and compliance. RIAs should prepare for these changes by conducting risk assessments, determining their customers and due diligence requirements, and ensuring they have appropriately risk-based AML programs in place.

Potential Anti-Money Laundering Regulation for U.S. Investment Advisors: Imminent?