This is one of those subjects that are difficult to imagine until it happens. Fortunately, to date, the regulators have not imposed onerous requirements on RIA firms, like they have with custodians and broker-dealers. AML for investment advisors is one of those regulatory topics that always seems to resurface and we believe that more formal AML procedures will be eventually be expected from RIAs. In the interim, we have produced some best practices so that your RIA firm is aware of the subject and is armed with the basics of identifying suspicious activities.
Anti-Money Laundering (AML) In a Nutshell
Money laundering is the process by which individuals or entities attempt to conceal the true origin and ownership of the proceeds of criminal activities, such as organized crime, drug trafficking or terrorism. Anti-money laundering (AML) is a general term that describes the controls used by financial institutions to prevent, detect and report money laundering activities. AML program requirements for financial institutions
are laid out in various laws including the Bank Secrecy Act of 1970, the Money Laundering Control Act of 1986, and the USA Patriot Act.
For a more digestible summary of all AML-related laws can be found here
Through the Regulator's Eyes
Registered investment advisors
do not fall under the definition of "financial institution", so (at this point) they are not subject to extensive anti-money laundering requirements. There have been many overtures by the U.S. Treasury Department's Financial Crimes Enforcement Network ("FINCEN") to bring RIAs under similar requirements. The director of FINCIN reignited these efforts by indicating that Treasury intends to revisit this topic and finalize rules for RIAs. By all indications, advisors will ultimately have increased AML rules at some point in the near future. For the time being, we recommend that RIAs adopt certain best practices related to AML.
CCO Best Practices
Perform due diligence on each new investor to ensure you can confirm their identity and that the individual or entity is not on the Office of Foreign Asset Control (OFAC) sanctioned list
. (This may be delegated to a third party like a custodian.)
Monitor client transactions for suspicious activity (e.g. reluctance to provide identifying information, frequent deposits of cash, cashier's checks or money orders, or wire transfers slightly under $10,000, or acting on behalf of an undisclosed person or entity.
Related: How Advisors Can Stay Compliant When Dealing with the Death of a Client