Regulator seeks to enlist advisers in war on money laundering

Compliance could be costly, especially for small advisory firms

Aug 26, 2015 @ 1:12 pm

By Mark Schoeff Jr.

A proposed regulation that would enlist investment advisers in the battle to prevent terrorists, drug dealers and other criminals from laundering their money through the U.S. financial system could be a costly proposition for advisers.

On Tuesday, the Financial Crimes Enforcement Network, a unit of the Treasury Department, released a rule that would require investment advisers registered with the Securities and Exchange Commission to establish anti-money-laundering programs. They also would have to report suspicious activity to the government.

“This will be a fairly significant compliance burden on a lot of smaller advisers,” said Karen Barr, president and chief executive of the Investment Advisers Association. “We're going to look at whether the proposal strikes the right balance between benefits and costs.”

Under the rule, advisers would be defined as a “financial institution” under the Bank Secrecy Act. They would have to adhere to the same requirements as banks, such as filing currency transaction reports for a transfer involving more than $10,000 during a single business day.

The rule is risk-based rather than prescriptive, according to Alma Angotti, managing director of Navigant Consulting. That means advisers will have to analyze their customers and business to determine what kind of anti-money-laundering policies and procedures would fit them.

For instance, an adviser who works mostly with domestic, local clients would have a lower risk profile than one who does a lot of business with foreign clients and handles money from international sources.

But regardless, doing the risk assessment, customer due diligence and beefing up transaction monitoring could be costly.

“It's an expensive proposition; there's no doubt about it,” said Ms. Angotti, a former senior enforcement counsel at FinCEN. Advisers “will have to figure out how much [of an AML program] they need beyond what they're doing already.”

Broker-dealers and banks had to establish anti-money laundering policies more than a decade ago. The rule for investment advisers, which was first proposed in 2003, had been delayed until it was re-proposed this week.

In the meantime, some advisers voluntarily established anti-money laundering programs. But for many, the rule would require starting from scratch, a prospect that concerns the Investment Adviser Association.

Skeptics of the rule argue that an adviser's client transactions are handled by broker-dealers, who already must adhere to anti-money-laundering rules.

But Matthew L. Schwartz, a partner at Boies Schiller & Flexner, said an advantage of including advisers in the effort to stop money laundering is that they know their customers better than the broker processing the transaction does.

“You extend the rule to someone who knows a lot more about the people who are putting up the money,” said Mr. Schwartz, a former federal prosecutor in the Southern District of New York.

Law enforcement officials worry that the investment advisory business has become a conduit for dirty money. There are approximately 11,500 advisers with $67 trillion in assets under management registered with the SEC.

“There is a real concern that cartels are moving money through hedge funds,” Mr. Schwartz said.

But Ms. Barr argues that most investment advisers manage client assets on a long-term, discretionary basis. They're not likely to be portals of fast criminal traffic.

“The business model is not conducive to quick money in and out,” she said.

The rule will be subject to a 60-day comment period after it is published in the Federal Register.


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