US: US Bids to Boost Hedge Funds’ Anti-Money Laundering Defenses

The US Treasury Department and the Securities and Exchange Commission proposed new rules that aim to keep investment funds from being used to launder money or fund terrorist activity. 

US authorities said on Monday that they’re concerned investment advisers could be used by people outside the country to funnel money into the American financial system. The joint proposal would apply to hedge funds, private equity, venture capital firms and other money managers.  

Under the plan, firms would be required to collect information on the identities of their investors, including their names, dates of birth or date of formation of an entity, as well as addresses, among other information. Regulators will take public comments on their new joint rule for at least 60 days and it’ll be months before the agencies could move to finalize the measure. 

The Treasury Department has previously identified investment advisers as a potential weak point for illicit actors to funnel money linked to tax evasion, terrorist financing, or corruption. They’ve also expressed concern about them being used as a conduit for money tied to Russian oligarchs or funding that enables Chinese authorities to access technology with national security implications. 

Although some money managers do collect customer ID information already, many aren’t able to confirm the origins of their clients’ money, Treasury said in a report it issued earlier this year. Under existing securities rules, the $20 trillion private funds industry has only limited anti-money laundering and counter-terrorist financing obligations, the agency said.

The new rules would fall under banking laws and follow on a related February measure from Treasury’s Financial Crime Enforcement Network to classify registered and exempt investment advisers as financial institutions. 

That measure has garnered push-back from the Managed Funds Association, a trade group for private equity and hedge funds, which said in an April comment letter that the FinCEN rule was based on “the flawed premise that investment managers receive and custody fund investor assets.”