Not only do financial advisors need to “know your customer,” but they had better know where their customer’s money comes from, too.
The Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, proposed a rule Tuesday that would prevent criminals and foreign enemies from abusing the U.S. financial system through investment advisors. According to FinCEN, the new rule would increase transparency, as well as help regulators identify illicit proceeds entering America’s economy.
In terms of requirements, the Treasury says the proposed rule would mean certain advisors must apply anti-money laundering and countering the financing of terrorism requirements, pursuant to the Bank Secrecy Act, including implementing risk-based programs, reporting suspicious activity to FinCEN, and fulfilling record-keeping requirements.
One of the wealth management industry’s biggest vulnerabilities, according to FinCEN, is the uneven application of AML and CFT requirements across the sector, which allows both legitimate and illicit investors to “shop around” for an advisor who doesn't inquire into their source of wealth.
“The current patchwork of AML/CFT requirements creates regulatory gaps that criminals and foreign adversaries exploit to launder money, hide illicit wealth, and compromise American innovation,” FinCEN director Andrea Gacki said in a statement. “This proposed rule would level the regulatory playing field, protect U.S. economic and national security, and safeguard American businesses.”
The proposed rule would also apply information-sharing provisions among FinCEN, law enforcement government agencies, and certain financial institutions. Finally, FinCEN says it intends to delegate examination authority for this proposed rule to the Securities and Exchange Commission, given the SEC’s role and expertise in the regulation of investment advisors.
Stacy Sizemore, chief compliance officer at tru Independence, welcomes the new rule, adding that she has always been surprised that investment advisors were not required to have an anti-money laundering program.
“We have generally relied on the custodian for the AML review but have provided training to advisors on red flags and when to speak up. If something seems off, it may just be off,” Sizemore said. “Although it may be a big lift for advisors to have an AML program, honestly, it is about time it is a requirement."
Jesse Brown, senior compliance manager at Petra Funds Group, is also intrigued by the proposed rule. Brown says it is generally not common knowledge that investment advisors are not within the definition of a ‘financial institution’ under the Bank Secrecy Act (BSA). Other rules may apply to them, however, such as regulations pertaining to dealing with sanctioned entities.
“Most advisors implement AML/KYC policies due to limited partner expectations and to the need to work with other financial entities that are required to have them under the BSA,” said Brown. “This leads to a lack of comprehensive procedures and ample confusion throughout the investment advisor space. Although the proposed rule would increase the expanding regulatory burden on investment advisers, I do believe many will welcome the regulatory clarity and consistency among their peers."
Robert Pearl, co-founder and wealth advisor at G&P Financial, says most advisors participate in AML training annually, and as a group have done a great job keeping illicit funds out of financial institutions.
“It is just one of the many ways that we give back to our society. Our primary tool to protect against money laundering is by asking great questions and pressing with follow-up questions when the math does not add up,” Pearl said.
He added that stopping or limiting money laundering is a noble goal, and creating better communication between government agencies and private sector institutions should help the industry to move closer to that goal.
“There is the issue of criminals shopping around to different advisors or institutions until they find an unsuspecting person who will take their ill-gotten funds,” Pearl said. “I would like to see a proposal that provides some incentives for advisors, and not just a punishment for not complying to the full extent of the rules.”
One idea Pearl suggested is a “cash prize” for catching the bad guys.
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