It’s important to get one thing out of the way right off the bat: technically there is no requirement imposed upon investment advisors to maintain an anti-money laundering program pursuant to the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986 or the USA PATRIOT Act, as advisers are not considered to be “financial institutions” as currently defined therein.
If you’d like to recite this answer to SEC examiners when they ask about your AML program, be my guest…but don’t cite me or this article as your rationale. Such an approach fails to take into account other AML-related obligations imputed to advisers, and generally does not reflect industry best practice.
Unlike advisors, banks, broker-dealers and mutual funds are subject to AML program requirements as administered through the Financial Crimes Enforcement Network (“FinCEN”), a bureau of the Treasury Department. Such requirements include, among others:
- The development of internal policies, procedures, and controls
- The designation of an AML compliance officer
- An ongoing employee training program
- An independent audit function to test programs
- The establishment and implementation of a customer identification program and special due diligence program for foreign correspondent and private banking accounts
- Detection and reporting of suspicious activity.
For more than a decade, FinCEN has hemmed and hawed about including investment advisors within the definition of “financial institutions” and thus subjecting them to AML program requirements like those above.
To date, it has elected not to do so for one fairly logical reason: “Advisers must conduct financial transactions for their clients through other financial institutions that are subject to [AML] requirements [i.e. banks or broker-dealer custodians], and their clients’ assets must be carried at these other financial institutions.” In other words, it would be duplicative to impose AML program requirements at both the advisory firm and custodial firm level, e.g.
In reality, however, many banks, broker-dealers and mutual funds will only do business with advisors that have established an AML program and are willing to work together to detect and prevent money laundering.
This is a classic example of counterparty risk management, and such counterparties often delegate or rely on advisers to carry out AML program duties.