When the Financial Crimes Enforcement Network (FinCEN) recently announced proposed regulations that would require registered investment advisors (including hedge fund and other money managers) to adopt anti-money laundering (AML) procedures, two camps quickly formed.
On the one hand, there was the “So what?” camp, arguing that similar regulations have been discussed for so long (they first surfaced in 2003) that many funds already have procedures in place.
In the “Please, no more regulations!” camp, three main arguments arose:
1) cash and securities are held by banks or broker-dealers that already have AML checks in place
2) hedge funds are illiquid and a poor target for money launderers, and
3) the regulations could be burdensome and costly.
Regardless of the outcome of the proposed rules, hedge funds can play a critical role in the fight against money laundering.
No Suitcases Full of Cash
The defensive, knee-jerk reaction when thinking about AML for hedge funds goes something like this: Investors don’t usually walk up to a hedge fund manager with a suitcase full of cash; they typically send in a wire or write a check. That wire or check comes from a bank account in their name and goes into a bank account at the hedge fund. So aren’t both the sending and receiving banks performing sufficient AML procedures already?
While the above argument has some validity, there are some instances where fund managers and fund administrators may be better positioned to perform AML procedures on investors.
In most cases, the bank’s customer is the hedge fund, not necessarily each investor, which means that the bank may not have the same level of know-your-customer information about the investor as the hedge fund manager. The hedge fund generally could collect additional information on its investors through its own AML program.
Minding the Gap
Additionally, much can happen between the time an investor wires money into and subsequently redeems out of a fund. Let’s look at the Office of Foreign Assets Control (OFAC) and watch list checks that occur on money movements between banks, and, with some recurring frequency (daily, weekly, etc.), across all customers of banks.