New Anti-Money Laundering Rules

The U.S. Treasury Department’s Financial Crimes Enforcement Network’s new customer due diligence rule requires covered financial institutions to collect information on the significant beneficial owners of customers that are legal entities.

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For a private fund manager, the rule is not explicitly applicable. The term ‘‘covered financial institution’’ refers to: (i) Banks; (ii) brokers or dealers in securities; (iii) mutual funds; and (iv) futures commission merchants and introducing brokers in commodities.

But I don’t think private fund managers should ignore the rule. FinCEN really wants to force investment advisers into an anti-money laundering regime. And it’s still illegal to do business with those people and companies on the blocked lists.

I look at the rule as a new standard or best practice.

The Final Rule requires each covered financial institution to verify the identity of each beneficial owner of an account using risk-based procedures to the extent reasonable and practicable.

There are two prongs to the definition of “beneficial ownership”:

Ownership: An individual who directly or indirectly owns 25% or more of the equity interests of a legal entity customer.
Control: An individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager or any other individual who regularly performs similar functions.

The first thing I noticed was the 25% threshold for ownership to trigger beneficial ownership. The release discusses this choice, noting that many comments proposed a 10% threshold. FinCEN notes that 25% is the FATF standard.

FinCEN continues to believe that a 25 percent threshold strikes the appropriate balance between the benefit of identifying key natural persons who have substantial ownership interests in the legal entity and the costs associated with implementing this information collection requirement.

The release makes it clear that you can set a lower threshold, but the 25% is the maximum baseline.

Investment advisers and private fund managers can continue to argue that the KYC rules should not apply to them. But FinCEN’s response will be that you are supporting terrorism and drug lords by not implementing a program.

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