The Financial Crimes Enforcement Network (“FinCEN”), recently proposed rules that would require certain investment advisers to establish anti-money laundering (“AML”) programs. FinCEN is a bureau of the U.S. Department of the Treasury charged with monitoring the financial system for illegal activity, money laundering, and national security threats. The stated reason is FinCEN’s concern that investment advisers are “at risk for attempts by money launderers or terrorist financers seeking access to the U.S. financial system through a financial institution type not required to maintain AML programs or file suspicious activity reports (“SARs”).” The proposed rules would set minimum standards requiring investment advisers to, among other things, report suspicious activity to FinCEN by filing SARs. The proposed rules would also expand the definition of a “financial institution” under the Bank Secrecy Act, first established with the Currency and Financial Transactions Reporting Act of 1970 and later amended by the USA PATRIOT Act of 2001 and other legislation, to include investment advisers that are registered or required to be registered with the SEC.
The impact of the proposed rulemaking would be to install several affirmative legal duties on registered investment advisers including the establishment of an AML program as well as various record-keeping and reporting duties. For example, the Bank Secrecy Act requires financial institutions to file Currency Transaction Reports, commonly known as “CTRs,” with FinCEN for any transaction involving more than $10,000 in currency. Under the Act, the CTR filing requirement applies where multiple transactions in one business day by a person exceed a total of $10,000 in currency even if no single transaction exceeds that amount.
While many hedge funds and investment advisers may already adopt various AML practices, the proposed rules would make compliance legally mandatory. The price for noncompliance can be steep, especially in egregious cases. The Bank Secrecy Act provides the federal government with extensive and broad authority to punish violations through fines, forfeiture of assets, and criminal penalties. The extreme example of these monetary penalties was on display in the 2012 settlement between HSBC Holdings Plc and federal and state authorities regarding alleged money laundering and economic sanction violations. In that case, in exchange for a deferred prosecution agreement, HSBC paid a $1.256 billion forfeiture and $665 million in civil fines. In addition to monetary penalties, any person conducting cash transactions could face criminal prosecution if, for the purpose of evading the CTR reporting requirement, they caused the failure to file a CTR when required, they caused a materially false CTR to be filed, or they structured or attempted to structure any transaction to avoid the reporting requirement. The maximum penalty for a structuring or CTR offense is five years in prison in the typical case, or ten years for aggravated cases.
Although the proposed rules would delegate compliance authority to the SEC, the Department of Justice exercises sole authority over when and if to prosecute alleged criminal violations of the Bank Secrecy Act. The Department of Justice does not frequently prosecute structuring cases without some evidence of underlying criminal activity, such as drug trafficking, financial fraud, public corruption, or tax evasion, however, the Bank Secrecy Act criminalizes any currency transactions committed with the intent to evade the reporting requirement. Thus, a person whose currency transactions involve “clean money” could face criminal charges, and have their money seized through civil asset forfeiture, if the government suspects that the transactions were committed with the intent to evade the CTR filing requirement. Both the Department of Justice and the Department of the Treasury, through the Internal Revenue Service, recently announced restrictions on the use of asset forfeiture in suspected structuring activity. Those policies reflect the exercise of prosecutorial discretion but do not alter the extensive regulatory regime that registered investment advisers would find themselves subject to if the proposed rules are adopted.
FinCEN described the procedure for interested parties to submit comments on the proposed rulemaking:
- Federal E-rulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments. Include 1506-AB10 in the submission. Refer to Docket Number FINCEN-2014-0003.
- Mail: FinCEN, P.O. Box 39, Vienna, VA 22183. Include 1506-AB10 in the body of the text. Please submit comments by one method only. All comments 1 Customer Due Diligence Requirements for Financial Institutions, 79 FR 45151 (Aug. 4, 2014). 2 Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”) (Pub. L. No. 107–56). 3 submitted in response to this NPRM will become a matter of public record. Therefore, you should submit only information that you wish to make publicly available.
- Inspection of comments: The public dockets for FinCEN can be found at Regulations.gov. Federal Register notices published by FinCEN are searchable by docket number, RIN, or document title, among other things, and the docket number, RIN, and title may be found at the beginning of the notice. FinCEN uses the electronic, Internet-accessible dockets at Regulations.gov as their complete, official-record docket; all hard copies of materials that should be in the docket, including public comments, are electronically scanned and placed in the docket. In general, FinCEN will make all comments publicly available by posting them on http://www.regulations.gov.