The US continues to move towards greater compliance with international AML/CFT regulatory standards with the issuance of a Final Rule aimed at combatting illicit finance and national security threats in the Investment Adviser sector on 28th August 2024.
The rule aims to address regulatory weaknesses documented within a recent US Department of the Treasury risk assessment which found that gaps and inconsistencies in terms of how the sector was regulated make investment advisers more vulnerable to AML/CFT threats.
In particular, the risk assessment highlighted how gaps in regulation create ‘arbitrage opportunities’ for bad actors by allowing them to access the US financial system via investment advisers with weaker client due diligence processes as well as information asymmetries where advisory business activities are segmented across intermediaries and / or national borders.
Once implemented, the rule will help to ‘level the regulatory playing field through a consistent application of risk-based AML/CFT requirements’. It will also bring the United States into greater compliance with international AML/CFT standards through addressing a ‘significant gap’ identified during its most recent Financial Action Task Force Mutual Evaluation in 2016.
Key requirements (as outlined within FinCEN’s Factsheet on the Final Rule)
Under the final rule RIAs and ERAs will be required to:
- Implement a risk-based and reasonably designed AML/CFT program;
- Apply a Suspicious Activity Report (SARs) policy and make disclosures with FinCEN where appropriate;
- Keep certain records, such as those relating to the transmittal of funds (i.e., comply with the Recordkeeping and Travel Rules); and
- Fulfil certain other obligations applicable to financial institutions subject to the BSA and FinCEN’s implementing regulations, such as special information sharing procedures.
Amendments and exclusions
The Final Rule takes into account comments received following an initial NPRM issued in February as reflected in modifications to a number of elements in relation to its scope and requirements. These include:
- The adoption of a narrower definition of ‘investment adviser’ than initially proposed;
- Changes to how the rule applies to advisers that have a principal office and place of business outside the US (‘foreign-located investment advisers’); and
- The removal of a provision requiring that the establishment, maintenance and enforcement of an investment adviser’s AML/CFT program must be the responsibility of, and performed by, persons in the United States who are accessible to, and subject to relevant US regulatory oversight.
The rule also includes several exclusions relating to mutual funds, bank and trust company sponsored collective investment funds and any other investment adviser subject to the rule that is advised by the investment adviser to avoid additional work arising from the duplication of existing AML/CFT measures.
Implementation
FinCEN has extended the date for compliance with the Rule to 1st January 2026.
Getting ready for compliance
To comply with the requirements of the Final rule and reduce AML/CFT related risks those advisers included within its scope should:
- Review their existing AML/CFT program, including their approach to risk assessment and management;
- Ensure they have appropriate suspicious activity monitoring and reporting procedures in place;
- Review their customer identification / CDD procedures, both in terms of how this data is gathered and verified in the first instance and how it is monitored and maintained on an ongoing basis.
How we can help
IDR can provide comprehensive support with investor KYC, approving your investors once to the highest international standards. We can also provide advice and support with respect to establishing and implementing effective risk-based AML/CFT programs.
More information
For more information reach out to Louis Dodd or visit our solutions page.
