On May 5, 2003, FinCEN first proposed to amend Bank Secrecy Act rules and apply AML regulatory requirements, including the establishment of anti-money laundering programs, to investment advisers. The comment period for this proposed rulemaking closed on July 7, 2003. After receiving comments, FinCEN kept the matter open for more than five years, until, on November 4, 2008, it withdrew the 2003 notice of proposed rulemaking (NPRM).
On August 25, 2015, FinCEN issued another NPRM which would have applied BSA/AML regulations to Registered Investment Advisers. Under this second proposal, RIAs would have been required to establish AML programs, file suspicious activity reports, and implement customer identification programs. This proposal met significant pushback from the RIA industry, arguing that the regulations would impose excessive costs and administrative burdens without a clear, corresponding benefit in preventing money laundering.
In 2016, FinCEN issued its CDD rule. This rule applied to many types of financial institutions, but it specifically excluded RIAs. With the issuance of this rule, FinCEN acknowledged the concerns raised by the industry. It did not, however, withdraw the 2015 NPRM.
On February 13, 2024, FinCEN withdrew the 2015 NPRM and issued a new NPRM in which it again sought to subject RIAs to AML/CTF requirements. In conjunction with this new NPRM, the US Treasury Department also issued its 2024 Investment Adviser Risk Assessment.
In the 2024 Investment Adviser Risk Assessment, the Treasury Department clarified the ML/TF risks presented by investment advisory activities:
This assessment finds that the highest illicit finance risk in the investment adviser sector is among ERAs (who advise private funds exempt from SEC registration), followed by RIAs who advise private funds, and then RIAs who are not dually registered as, or affiliated with, a broker-dealer (or is, or affiliated with, a bank). The private funds advised by RIAs, such as hedge and private equity funds, as well as venture capital funds, held approximately $20 trillion in assets under management (AUM) as of Q4 2022, and have limited reporting obligations under the federal securities laws. Investment advisers managing these funds also may routinely invest assets from foreign legal entities that are generally not required to disclose their ultimate beneficial owners.
Building on these findings, in the 2024 NPRM, FinCEN stated: “The primary purpose of the proposed rule is to address identified illicit finance risks among investment advisers (i.e., RIAs and ERAs).” FinCEN then presented the three most significant illicit finance threats involving investment advisers:
a) Laundering of Illicit Proceeds through Investment Advisers and Private Funds
The mechanisms for laundering illicit proceeds through investment advisers and private funds vary, but generally consist of obscuring the illicit origins of funds and pooling them with legitimate funds to invest in U.S. securities, real estate, or other assets.
b) Russian Political and Economic Elites’ Access to U.S. Investments
Investment advisers and private funds they advise have served as an important entry point into the U.S. financial system for wealthy Russians seeking to obscure their ownership of U.S. assets.
c) Foreign State Actors Exploiting Investment Advisers to Threaten U.S. National Security
PRC. According to the Federal Bureau of Investigation (FBI), the PRC government routinely conceals its ownership or control of investment funds to disguise efforts to steal technology or knowledge and avoid notice to CFIUS. According to a report by the Office of the U.S. Trade Representative, State-guided PRC venture capital fund activity in the United States is motivated by the Made in China 2025 plan and the military-civil fusion strategy, directing investments towards developing technology with dual-use capabilities. In 2016, the PRC government explicitly endorsed the use of overseas venture capital funds to invest in “seed-based and start-up technology,” demonstrating the link between the funds and government priorities.
Russia. According to information available to the U.S. government, Russian elites and government entities are moving hundreds of millions of dollars annually through the U.S. financial system by using U.S. and foreign venture capital firms to invest in U.S. technology companies.
FinCEN further explained the benefit of applying AML/CFT regulatory requirements to investment advisory activities:
these obligations… would help identify, prevent, and deter bad actors from using investment advisers to further illicit financial activity, as investment advisers would be required to obtain information from customers to comply with these requirements.
In light of the identified threats, FinCEN presented the “general problem” faced by the investment advisory industry: “without an obligation to determine the source of wealth and purpose for a customer, an investment adviser may unwittingly permit illicit funds to enter the U.S. financial system.”
With this understanding, on August 28, 2024, FinCEN responded by approving the final rule.