Panama Papers Show Advisors Need Treasury’s AML Rule, Groups Argue

Groups including Americans for Financial Reform argue advisors ‘bring billions of dollars into the U.S. financial system’ and should be subject to AML rules

The much-publicized Panama Papers findings released Sunday alleging that politicians, criminals and even celebrities are hiding their wealth in offshore shell companies has prompted Americans for Financial Reform and nine other groups to pressure the U.S. Treasury Department to finalize its anti-money laundering rule for investment advisors.

The groups told Treasury Secretary Jack Lew and Office of Management and Budget Director Shaun Donovan in a letter sent Monday that Treasury’s Financial Crimes Enforcement Network should impose anti-money laundering and suspicious activity reporting requirements on RIAs managing $100 million or more in assets.

Such AML rules would require these RIAs to “know their customers, report suspect transactions to law enforcement, and contribute to the work of the U.S. financial community to protect the United States from money launderers, terrorists and other wrongdoers.”

Banks, securities firms, money service businesses, insurance firms, commodity brokers and other members of the U.S. financial industry are already held to AML laws.  

“Registered investment advisors that collectively bring billions of dollars into the U.S. financial system should be subject to the same obligations,” the groups wrote.

FinCEN issued the proposed AML and suspicious activity reporting rules for advisors last August.

But the Investment Adviser Association, RIAs' trade group, pointed out that the notion that advisors are an easy way for would-be money launderers to enter the U.S. financial system is simply not true. 

In the group's comment letter to FinCEN on the proposed AML rules last November, the IAA explained that “advisors do not provide any way – much less a ‘low risk way’ – for a client to bypass banks, broker-dealers or other financial institutions covered by [AML regulations] and enter the U.S. financial system.”

Bob Grohowski, IAA’s general counsel, also argued that AML risks in “pure asset management are very low,” adding that AML rules for advisors “has been a slow-moving train [because] it’s not the highest AML risk out there.”

Grohowski argued that “FinCEN’s expansive proposal is based on a fundamental misunderstanding of the nature and scope of the services advisors provide.”

IAA urged FinCEN in November to “carve back” the proposal to extend anti-money laundering regulations to all SEC-registered investment advisors, and asked for a range of exemptions for advisors and advisory services that the IAA says do not raise money-laundering risks.

Under the FinCEN proposal, advisors must also report suspicious activity to FinCEN pursuant to the Bank Secrecy Act, and FinCEN has also included investment advisors in the general definition of “financial institution,” which, among other things, would require them to file Currency Transaction Reports (CTRs) and keep records relating to money transfers.

The rule is still pending, says FinCEN spokeswoman Candice Basso. "As usual, FinCEN is considering public comments as it crafts the final rule," she told ThinkAdvisor.

The proposal would apply to those advisors registered with the Securities and Exchange Commission, including advisors to certain hedge funds, private equity funds and other private funds.

FinCEN says it would delegate its authority to examine advisors for compliance with these requirements to the SEC.

FinCEN argues the rules are necessary for advisors because “illicit actors seeking to access the financial system may attempt to gain such access through an investment advisor as a means to avoid detection of their activity which might otherwise occur in dealings with financial institutions that have AML programs and suspicious activity reporting requirements.”

--- Check out FINRA’s 5 Biggest Fine Categories in 2015 on ThinkAdvisor.

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