Hedge funds could be hit by new US AML requirements later this year

10 Jan, 2013

Proposals by the Financial Crimes Enforcement Network (FinCEN), a US Treasury department, to force investment advisors, which include hedge funds, to supply suspicious activity reports, are likely to be put forward later this year.

This Suspicious Reporting requirement will require investment advisors to submit details on suspicious transactions, which could potentially include insider trading or money laundering. It is likely to require hedge funds to report to the US authorities in a way not too dissimilar from banks, brokerages and mutual funds in regards to money laundering.

“Although the rules are not yet public, the main focus of the proposal is likely to be on money laundering. It will likely require investment advisors to focus on transactions conducted by investors to identify suspicious activity,” said Betty Santangelo, partner at Schulte Roth & Zabel in New York.

The rule will apply to any US investment advisor although it is not yet clear whether it will be extraterritorial and apply to non-US investors. Nonetheless, the latest requirements, if they come into being, could increase compliance and staff overheads at a time when operational and regulatory costs are rising rapidly.

There is also a risk that FinCEN’s money laundering proposals could result in managers replicating much of the work their fund administrators already do.

“The rules could lead to duplication. Fund administrators were historically not subject to AML rules but this has since changed. Currently, fund administrators in many jurisdictions are subject to these requirements. In past comment letters, the industry suggested that investment advisors be able to rely on third parties or otherwise delegate AML responsibilities to third parties such as administrators,” commented Santangelo.

The Managed Funds Association told Reuters that while it would not comment on the rules as they were still unpublished, the organisation welcomed any clampdowns on international money laundering.

FinCENUS TreasurySchulte Roth & Zabelanti money launderingManaged Funds Association