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As Hate Groups Embrace Bitcoin, Advisors Warned to Check Out Clients

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Investment advisors may not be legally prohibited from investing hate groups’ money, but there are other reasons advisors may want to steer clear of these controversial organizations.

For instance, taking money from “hate” groups could damage a firm’s public image, and may run counter to internal ethics policies, according to several law professors.

They caution, too, that specific groups and individuals need to be screened for being on terrorism watch lists before firms accept them as customers.

“Legally speaking, neither banks, investment advisors, nor any other financial services firm is permitted to assist, in any way, persons or groups that have been designated terrorists or terrorist groups,” Robert C. Hockett, a professor at Cornell Law School, told ThinkAdvisor.

A way to check is to look at the watch lists released by the Department of Justice and the Treasury Department. The lists are updated regularly.

Beyond this, there is not a lot of regulatory or contract law governing investment advisors’ relations with extremists who have not been designated terrorists, Hockett said.

One exception he highlights is an investment advisor who may be required by a contract “to keep clients apprised of the existence of one another as clients of the same advisor,” Hockett said. “Were there any such case, then a failure to disclose would … be breach of contract and, thereby, a possible breach of the fiduciary requirements.”

An advisory firm also might get into trouble by holding itself as a “socially responsible” or “angel” advisor specializing in assisting clients to “do well by doing good” by assisting with investments in worthy causes, according to Hockett. “Under some circumstances, aiding extremists who push goals inimical to the advertised ‘worthy causes,’ could open the advisor to legally cognizable charges of fraud — either by the SEC, by private investors, or both.”

Also, there can be “adverse publicity” for the advisory firm, Hockett said, adding that in “extreme cases” it can be “nearly as harmful to the advisor as civil or criminal legal actions themselves.”  

Meanwhile, there is a concern about Bitcoin, too. Many hate groups, which have been banned by such organizations as Amazon Smile, PayPal and credit card processors, have opted to fund operations or accept donations in Bitcoin, according to the Southern Poverty Law Center. In response, some bitcoin wallet companies, like Coinbase, have chosen not to do business with extremists, the center said.

“Bitcoin does seem to be the preferred currency/investment of many groups, that seem to be anti-government, because of its promised anonymity and decentralization,” Mehrsa Baradaran, a law professor at the University of Georgia, told ThinkAdvisor. “The draw of bitcoin to these groups is that they do not need intermediaries — they can access the investments or currency without advisors.”

Overall, Hockett advises financial advisors to “steer very clear” of hate groups or extremists.  “These groups seem to be all about fomenting social and political unrest, which is antithetical to the long-term prosperity of investors and their advisors alike,” Hockett said. “If there is anything investors both need and crave, it is a stable investment environment — and extremists, by definition, are extreme, not stable.”

Moreover, in the short run, there are “significant risks of falling afoul either of the criminal law or of finance-regulatory law, particularly if the groups in question figure on the terror watch list or if the advisor’s contractual and regulatory obligations to existing clients are breached by cozying-up to extremist groups,” Hockett adds. 

Furthermore, Baradaran explained that financial advisors need to be “respected and trusted” by customers and the broader marketplace. “If they are seen enabling domestic terrorists, they will lose that public trust,” she said.

“I think it behooves all financial advisors to know their customers and use discretion. They should take seriously their role as fiduciaries — not just for each individual customer, but for the public at large. They wouldn’t want to be aiding and enabling groups that are harmful to the public. And … some of these extremist groups mean harm to their fellow citizens and they are not afraid to use violence,” Baradaran warned. “This is dirty money and I would hope that financial advisors would avoid dealing with them at all costs.”

Similarly, James Fanto, a professor at Brooklyn Law School, said that Financial Industry Regulatory Authority (FINRA) regulations and other rules require that financial advisors “know their customer” so they can “offer the customer suitable products, and so as not to run afoul of anti-money laundering restrictions.”

“This way, if their firm makes a determination not to deal with hate groups, they can put that policy in place in appropriate circumstances,” he explained. Also, he cautions that when enacting the policy, the firm “must be careful not itself to engage in prohibited discrimination against certain groups, if they fall into protected classes, and it must also be careful whom it labels as a ‘hate’ group [and] … not just use the identification made by a private, non-governmental organization.”

When asked for her comments, Heidi Beirich, director of the Intelligence Project at the Southern Poverty Law Center, said that from the center’s perspective, “we’d like companies to stop doing business with hate groups.”

“Investments would simply allow these groups to amass more capital, which would be used for their unsavory activities — such as producing ugly propaganda,” she adds. 


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