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September 24, 2002 at 08:00 PM
WASHINGTON (HedgeWorld.com)–The applicability of rules under the USA PATRIOT Act for hedge funds has now been more narrowly defined by the U.S. Treasury Department, with its issuance of a set of proposed rules yesterday.
Under these rules hedge funds are subject to the PATRIOT Act as a non-registered investment company and will be required to register with the Treasury department. The agency laid out essential elements that hedge funds would need to implement to meet anti-money laundering requirements.
The definition applies to hedge funds with more than US$1 million in assets and/or with lock-ups of two years or longer. The idea behind the lock-up requirement was that funds with longer lock-ups are less likely to be used in the “placement stage” of the money laundering process, according to the Treasury department.
“It’s a hidden risk, but at the end of the day can cause the collapse of the hedge fund,” James Harmon, founder of The Harmon Firm LLC, a company that performs due diligence, told hedge funds and institutional investors at an industry conference earlier this year. Hedge funds are an attractive refuge for money launderers since they are secretive, lightly regulated, have hefty minimums and are often offshore entities, Mr. Harmon said.
In its guidelines, the Treasury points out that a one-size-fits all approach to PATRIOT Act compliance won’t work for the industry.. Regardless, the Managed Funds Association released in April a set of generic guidelines for its hedge fund membership detailing “know-your-investor” guidelines and ways to set up an internal compliance program.
In setting up its guidelines, the Treasury worked closely with the staffs of the Securities and Exchange Commission and the Commodity Futures Trading Commission. The SEC reportedly has been investigating the hedge fund industry.
