Article
Navigating the new FinCEN final rule for investment advisers
Nov. 12, 2024 · Authored by Crystal Trout
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Article
Nov. 12, 2024 · Authored by Crystal Trout
The U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) recently issued a final rule to extend the effective date of its anti-money laundering (AML) final rule for investment advisers. Now extended to Jan. 1, 2028, this offers firms a valuable window to reassess compliance plans and operational readiness. Visit this webpage for more information on the FinCEN final rule.
Building a program and establishing the tech stack and human capital needs to implement and execute AML compliance takes time. While the extension provides temporary relief, regulatory momentum remains strong. The article below runs through important facts registered investment advisers (RIAs) should be aware of as they are preparing for the Jan. 1, 2028, deadline.
To learn more about our AML solutions, check out our webpage on the subject.
On Aug. 28, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a pivotal final rule aimed at fortifying the investment adviser sector against illicit finance activities. This rule, which integrates certain RIAs and exempt reporting advisers (ERAs) into the definition of “financial institution” under the Bank Secrecy Act (BSA), marks a significant shift in regulatory expectations. As a critical player in the financial services industry, it’s crucial to understand the implications of this rule for investment advisers and their compliance obligations.
The final rule mandates that RIAs and ERAs establish a robust anti-money laundering (AML) and countering the financing of terrorism (CFT) program. This requirement is a direct response to the documented risks highlighted in the U.S. Department of the Treasury’s February 2024 risk assessment, which identified numerous instances where criminals, corrupt officials, and foreign adversaries exploited the investment adviser industry to launder funds and access sensitive technologies.
The inclusion of investment advisers under the BSA’s regulatory framework is designed to close significant gaps in the financial system. By requiring these advisers to implement AML/CFT programs and report suspicious activities, FinCEN aims to mitigate the risks posed by illicit finance activities. This move aligns with the broader objectives of the Biden-Harris Administration’s 2021 U.S. Strategy on Countering Corruption.
Read Sanctions compliance isn’t just for banks: Why continuous monitoring is critical for a rundown on the importance of implementing perpetual KYC (pKYC) and complying with U.S. sanctions to avoid OFAC fines.
Read RIAs: Thinking the FinCEN AML final rule is no big deal? Think again for a full breakdown of steps you should be taking during every phase of the AML compliance process.
Read Navigating the new AML landscape: It’s much more than know your customer (KYC) for in-depth explanations of the BSA, AML, CFT and KYC.
Read The cost of AML compliance: Why outsourcing may be the smart solution for a helpful overview of the true cost to maintain an effective and compliance AML/CFT program, including the investments needed for personnel, policy development and technology.
Read The hidden costs of noncompliance: Why investing in AML/CFT is critical for an overall picture of the possible repercussions with a lack of AML compliance, financial and otherwise.
The rule expands the definition of “financial institution” to include RIAs and ERAs. Investment advisers generally must register with the U.S. Securities and Exchange Commission (SEC) if they manage over $110 million in assets. This inclusion ensures that a substantial portion of the industry falls under the new regulatory requirements.
FinCEN has finalized a revised definition of "investment adviser" that exempts certain registered investment advisers (RIAs) from compliance. Specifically, exemptions apply to:
The above RIAs are considered lower risk for misuse in illicit activities. In the final rule, the following example is cited: an RIA that (1) has an AUM of more than $110 million and registered as a “large advisory firm” on the Form ADV; and (2) is required to register with more than 15 states is not exempt.
State-registered advisors are also deemed lower risk and currently do not have to comply, but FinCEN will monitor them for future regulatory actions.
The definition includes exempt reporting advisers (ERAs), which pose higher risks due to their focus on private and venture capital funds, often located in jurisdictions with weaker anti-money laundering controls. FinCEN will coordinate with the SEC for ERA compliance examinations.
Lastly, the definition applies to foreign investment advisers with U.S. activities or clients, specifying that minimal ties to the U.S. do not automatically bring them under this rule.
RIAs and ERAs are now required to develop and implement an AML/CFT program. This program must include policies, procedures, and internal controls designed to detect and report suspicious activities. The rule also emphasizes the need for ongoing training and independent testing of these programs to ensure their effectiveness.
Investment advisers must report any suspicious transactions to FinCEN. This requirement is crucial for identifying and addressing potential money laundering and terrorist financing activities. The SAR filings will provide valuable intelligence to law enforcement agencies and help in the broader fight against financial crimes.
FinCEN’s final rule reflects extensive consultations with the SEC, other government agencies and industry representatives. The agency has made several adjustments based on public comments, demonstrating a commitment to balancing regulatory objectives with industry concerns.
For investment advisers, the new rule necessitates a comprehensive review and enhancement of existing compliance frameworks. Here are some key steps advisers should consider:
Conduct a thorough risk assessment to identify potential vulnerabilities in your operations. This assessment should inform the development of your AML/CFT program and ensure it is tailored to your specific risk profile. It should consider factors regarding customer base, services provided and geographies.
Develop detailed AML/CFT policies and procedures that align with FinCEN’s requirements. These policies should cover customer due diligence, transaction monitoring and reporting protocols.
Implement ongoing training programs for staff to ensure they are aware of their responsibilities under the new rule. Regular training will help maintain a high level of vigilance and compliance. Training should be job-specific and for those responsible for compliance include relevant trends, new or updated regulatory expectations, etc.
Establish a process for independent testing of your AML/CFT program. This testing should be conducted periodically by someone independent of the compliance function to identify any weaknesses and ensure the program’s effectiveness.
Maintain open lines of communication with regulators and industry peers. Staying informed about regulatory developments and best practices will help you navigate the evolving compliance landscape.
The FinCEN final rule represents a significant step forward in preventing financial institutions from being used as tools for money laundering, terrorism financing and other financial crimes. Building a robust compliance program that not only meets regulatory requirements but can protect your business, clients, and the integrity of the financial system.
Baker Tilly can help you gain compliance, whether you have existing procedures in place or need to start from scratch. With our flexible managed services approach, we can work with you to build a risk-based program that meets compliance expectations now and ensure flexibility to evolve with you. Reach out to our financial crimes specialists to discuss how the FinCEN final rule may affect your organization.
Baker Tilly can help you gain compliance, whether you have existing procedures in place or need to start from scratch. With our flexible managed services approach, we can work with you to build a risk-based program that meets compliance expectations now and ensure flexibility to evolve with you.
