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Anti-Money Laundering Programs for Investment Advisors

This is the second installment of our BCCP Summer Compliance Series.

Investment advisors do not fall under the government’s definition of ‘financial institution’ under the USA PATRIOT Act, and, therefore, have no regulatory obligations with respect to Anti-Money Laundering (“AML”). However, many advisors feel they have a moral obligation to make some efforts to aid in the protection of this country. Whatever your political persuasion, it is an ethical and business decision for you to make.

Several attempts have been made to apply AML regulations to investment advisors. While nothing has been finalized yet, advisors can expect AML requirements at some point in the future. It’s really a matter of when, and not if. Therefore, it behooves the prepared advisor to implement an AML program now, in anticipation of upcoming AML regulation.

If you choose not to make any efforts that is a completely acceptable decision. However, other institutions with whom you deal are probably already making an effort as required by the law.

If you choose to have an AML program, but seek to do a minimum of effort, you should consider at least doing the following:

  • Design and implement AML policies and procedures appropriate to your business

  • Support the efforts of your financial institutional partners

  • Note suspicious behavioral “red flags”

  • Be aware of how to report suspected money laundering activity to the regulators

  • Train your staff

Doing these minimum efforts will put you ahead of regulation in the event that the government decides to impose AML requirements on investment advisors. (This has been hinted at many times, but has not yet been implemented.) It may give you a sense of patriotic duty. Honestly, many examiners will assume you are doing something.

As an additional measure, you should take the time to check client names against the OFAC list and enroll in the FinCEN notification program.

AML Policies and Procedures

Given that advisors do not have any regulatory obligations with respect to AML, the policies and procedures can be (relatively) brief and cover only the salient points. Those points should include:

1. A definition of money laundering activity

2. Specific action steps to deal with suspected money laundering

3. A description of what money laundering may look like; in other words, “red flags”

4. A provision for ongoing staff training

Policies and procedures are great but are only half the battle. The other half is implementation. Without implementation, policies and procures are worthless.

Supporting Institutional Partners

Most of the institutional partners utilized by investment advisors will have AML obligations. One of the best things an advisor can do is to support institutional partners with their AML program.

Customer Identification and Verification

Advisors will generally have a personal relationship with their customers. Therefore, advisors are in the best position to collect the identification necessary for institutional partners to meet their AML obligations. Advisors are also in the best position to explain the AML regime in this country.

Checking customers against government lists would be helpful and would also provide an additional layer of security. However, institutional partners are already required to check government lists, so such efforts on the part of the advisor may be duplicative.

Customers Who Refuse to Provide Information

On occasion, advisors may find that customers will refuse to provide the necessary forms of identification. Again, the advisor is in the best position to explain AML requirements and the necessity of providing government-issued identification. Customers refusing to meet this most basic of requirements should be refused service by the advisor.

Red Flags

The behaviors and transactions that may indicate money laundering activity are known as red flags. An exhaustive list of every suspected behavior or transaction is well beyond the scope of this blog. However, we can define a few of the more common ones.

Red flags that signal possible money laundering activity include, but are not limited to:

  • Undue concern on the part of the customer with your compliance, AML policies, and government reporting requirements.

  • Reluctance to provide details regarding identity, type of business, and assets or business activities.

  • Providing unusual, incomplete, or fictitious identification or business documents.

  • Engaging in transactions that lack business sense, or are inconsistent with investment objectives or strategy.

  • Refusing to identify a legitimate source of funds or assets.

  • A customer with a questionable background, or a background that indicates criminal, civil, or regulatory violations.

  • A customer that shows no concern for risks, fees, or other transaction costs.

  • A customer that makes deposits of cash or cash equivalents, or foreign currency.

  • Frequent deposits and withdrawals of cash or securities.

  • Multiple accounts of the same or similar type for one person or entity.

  • Frequent transfers of cash or securities between accounts for the same customer.

  • Transactions originating from a country hostile to the United States or an offshore tax haven country.

It should be noted that these behaviors and transactions do not definitively indicate money laundering activity. Advisors should consider the totality of behaviors prior to making any sort of filing or notification.

Responding to Red Flags

If a staff member detects any of the above red flags, he/she should alert the Chief Compliance Officer immediately. Do not under any circumstances notify the client of your suspicions. The Chief Compliance Officer should investigate and arrive at his/her own conclusion.

Filing a Suspicious Activity Report

Suspected money laundering activity is reported to the United States government by filing a Suspicious Activity Report, or SAR. SARs are filed by way of the United States Department of Treasury’s website known as the Bank Secrecy Act E-Filing system. SARs filed by way of this e-file system ensures that SARs are sent securely and discreetly to the Financial Crimes Enforcement Network (also a government agency), known as FinCEN. Prior to filing a SAR by way of the e-filing system, a user must first register.

Advisors should not report violations of federal or state statutes and regulations by their employees to the BSA e-filing system. This system is only for reporting violations, or suspected violations, of money laundering laws.

Training Programs

Lastly, advisors are encouraged to develop and implement an AML training program for employees. For advisors, this can be a basic course on red flags. Advisors with enough revenue may want to engage a continuing education provider, many of which offer AML training. An annual training and acknowledgment requirement is best to ensure ongoing compliance with your firm's policies and procedures.

If you have any questions about your current AML program, if you would like to implement your own program, or if you would like AML training, please contact us for details.

Dane Grouell is a Senior Advisory Board Member at BCCP and a 25-year veteran of the financial services industry. He has worked in executive management and compliance roles at various broker-dealers and investment advisors. Dane has previously been the Chief Compliance Officer of a $19 billion investment advisor and private fund manager and $80 million independent investment advisor. He has been responsible for nationwide supervision of national broker-dealers. Dane has done onsite audits of broker-dealers and investment advisors, registered new entities with the SEC and states, and responded to regulatory inquiries from nearly every regulatory body in the United States. He has rendered advice to firms domiciled in the United States, Europe, and Asia. Dane currently holds the Series 65 license and is a former Series 7, 24, 9, 10, and 52 holder.


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