Anti-Money Laundering & Compliance Programs
Investment advisers must maintain robust compliance programs to prevent money laundering, terrorist financing, and other financial crimes. While investment advisers have historically had less stringent AML requirements than broker-dealers, new FinCEN rules are expanding these obligations.
Anti-Money Laundering (AML) Framework
Regulatory Structure
| Regulation | Purpose | Administrator |
|---|---|---|
| Bank Secrecy Act (BSA) | Foundation of U.S. AML law | FinCEN |
| USA PATRIOT Act | Enhanced AML requirements post-9/11 | FinCEN |
| FinCEN Rules | Detailed implementing regulations | FinCEN |
| OFAC Sanctions | Prohibited transactions with sanctioned parties | OFAC/Treasury |
FinCEN Investment Adviser Rule (2024-2026)
FinCEN has issued final rules requiring investment advisers to implement comprehensive AML/CFT programs. Key timeline:
| Event | Date |
|---|---|
| Final Rule Issued | 2024 |
| Original Effective Date | January 1, 2026 |
| Delayed Effective Date | January 1, 2028 (proposed delay) |
Who Is Covered
The rule applies to:
- SEC-registered investment advisers (RIAs)
- Exempt Reporting Advisers (ERAs)
- Approximately 20,800 advisers total
Customer Identification Program (CIP)
Required Information
For all new accounts, advisers must collect and verify:
| Element | Details |
|---|---|
| Name | Full legal name |
| Date of Birth | For individuals |
| Address | Residential or business address |
| Identification Number | SSN (U.S. persons) or TIN/passport (non-U.S.) |
| Verification | Documentary or non-documentary methods |
Identity Verification
- Must verify identity within reasonable time
- Documentary: Government ID, passport, driver's license
- Non-documentary: Credit reports, public databases, references
- Must have procedures for unverified customers
Suspicious Activity Reporting (SAR)
When Required
A SAR must be filed when:
| Threshold | Requirement |
|---|---|
| Amount | Transaction involves $5,000 or more in funds or assets |
| Suspicion | Reasonable suspicion of illegal activity |
| Types | Money laundering, terrorist financing, fraud, other crimes |
| Timeline | Filed within 30 days of detection (may extend to 60 days) |
SAR Confidentiality
Critical Rule: SARs are confidential
- Cannot disclose SAR filing to the subject
- Cannot disclose to anyone outside firm (except regulators, law enforcement)
- "Safe harbor" protection for good-faith filings
- No liability for filing SAR in good faith
Currency Transaction Reports (CTRs)
| Element | Requirement |
|---|---|
| Threshold | Cash transactions exceeding $10,000 |
| Filing | Must file CTR with FinCEN |
| Aggregation | Multiple transactions by same person aggregated |
| Structuring | Breaking up transactions to avoid reporting is illegal |
AML Red Flags
Transaction Red Flags
| Category | Examples |
|---|---|
| Unusual Transactions | Large cash deposits, frequent wire transfers to high-risk jurisdictions |
| Structuring | Transactions just under $10,000 to avoid CTR |
| Rapid Movement | Funds moved quickly through multiple accounts |
| Inconsistent Activity | Transactions inconsistent with client's business or stated purpose |
| Third-Party Involvement | Payments from/to unrelated third parties |
Customer Red Flags
| Category | Examples |
|---|---|
| Reluctance | Unwilling to provide information or provide incomplete information |
| Complex Structures | Shell companies, multiple layers with no apparent purpose |
| High-Risk Connections | Ties to sanctioned countries or persons |
| PEP Status | Politically Exposed Persons (government officials, family members) |
Investment Adviser Compliance Programs
SEC Rule 206(4)-7 Requirements
Every SEC-registered investment adviser must:
| Element | Description |
|---|---|
| Written Policies | Adopt written compliance policies and procedures |
| Chief Compliance Officer | Designate a CCO to administer the compliance program |
| Annual Review | Conduct annual review of compliance program effectiveness |
Compliance Program Elements
| Component | Purpose |
|---|---|
| Written Policies | Reasonably designed to prevent violations |
| Risk Assessment | Identify and address specific risks |
| CCO Designation | Qualified person with authority and resources |
| Annual Review | Assess effectiveness and remediate deficiencies |
| Training | Regular training for advisory personnel |
| Recordkeeping | Maintain required compliance records |
Annual Review Requirements
The annual review must assess:
- Adequacy of policies and procedures
- Effectiveness of implementation
- Material compliance issues and responses
- Changes in business or regulations requiring updates
- Training effectiveness
Code of Ethics Requirements
SEC Rule 204A-1
All investment advisers must adopt a code of ethics containing:
| Requirement | Description |
|---|---|
| Standard of Conduct | Reflect fiduciary obligations |
| Compliance with Laws | Require compliance with securities laws |
| Personal Trading | Address personal securities transactions |
| Reporting Violations | Procedures for reporting violations promptly |
| Distribution | Provide to all supervised persons; obtain acknowledgments |
Personal Trading Rules
| Category | Requirement |
|---|---|
| Access Persons | Those with access to nonpublic information about clients |
| Initial Holdings Report | Within 10 days of becoming access person |
| Annual Holdings Report | Current within 45 days of year-end |
| Quarterly Transaction Reports | Within 30 days of quarter-end |
| Pre-Clearance | May be required for certain securities |
Access Persons Defined
An "access person" includes:
- Any supervised person with access to nonpublic information regarding client transactions
- Any supervised person with access to nonpublic information regarding portfolio holdings
- Directors, officers, and partners of the adviser (presumed access persons)
Recordkeeping for Compliance
Required Records
| Record Type | Retention Period |
|---|---|
| Compliance policies and procedures | 5 years |
| Code of ethics and acknowledgments | 5 years |
| Annual review documentation | 5 years |
| Personal trading reports | 5 years |
| Training records | 5 years |
| Complaint files | 5 years |
| AML/CIP records | 5 years after account closes |
On the Exam: Know the SAR threshold ($5,000+ with suspicion of illegal activity) and the CTR threshold ($10,000+ cash). Remember that SARs are confidential—you cannot disclose the filing to the client. All advisers must have written compliance policies, a designated CCO, and conduct an annual review.
Key Takeaways
- SAR required for $5,000+ with suspected criminal activity
- CTR required for cash transactions exceeding $10,000
- SARs are confidential—cannot be disclosed to client
- All advisers must have written policies, CCO, and annual review
- Code of ethics with personal trading rules required
- Access persons must report holdings and transactions
Test Your Knowledge
A Suspicious Activity Report (SAR) must be filed with FinCEN when:
A
B
C
D
Test Your Knowledge
An investment adviser's compliance program must include:
A
B
C
D
Test Your Knowledge
Regarding SAR filings, an investment adviser:
A
B
C
D
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