The Department of the Treasury, through its bureau the Financial Crimes Enforcement Network (collectively, "Treasury"), has withdrawn regulations it proposed several years ago under the "USA PATRIOT" Act (the "Act") which would have required certain unregistered investment companies (e.g., most hedge funds), commodity trading advisors, and investment advisers to establish anti-money laundering ("AML") programs. Treasury will continue to consider whether and to what extent it should impose AML program requirements, among other requirements, on these entities.
In April 2002, Treasury issued regulations requiring certain financial institutions, including banks, broker-dealers, and open-ended mutual funds, to adopt formal AML programs. Treasury also proposed regulations in 2002 and 2003 under which investment advisers, unregistered investment companies, and commodity trading advisors would have to adopt AML programs. As a result of these proposals, many advisers and hedge funds established a basic AML program without waiting for adoption of formal regulations. These regulations languished for many years, however, before being recently withdrawn.
Although the proposed regulations requiring the implementation of a formal AML program have been withdrawn, Foley Hoag advises investment advisers, unregistered investment companies, and commodity trading advisors to maintain their current AML program. First, as a result of the proposed regulations, the majority of the industry participants adopted formal AML programs and therefore such a program is now commonplace and consistent with best practices. The SEC in inspections has made it clear that it expects registered advisers to have an AML program as a matter of sound policy. Also, AML laws of offshore jurisdictions such as the British Virgin Islands and the Cayman Islands impose “know your client” obligations on funds organized under such jurisdictions and formal AML programs help to address such obligations. Finally, Treasury may propose new AML regulations in the future.
Treasury indicated that it will continue to consider the extent to which Bank Secrecy Act ("BSA") requirements, including AML program requirements, should be imposed on unregistered investment companies, commodity trading advisors, and investment advisers. The current proposed regulations for these entities were withdrawn as part of Treasury’s effort to ensure that BSA regulations are being applied efficiently and effectively. Given the amount of time since these regulations were first proposed, and therefore the possibly outdated comments to such proposal, Treasury determined it best not to proceed with BSA requirements for these entities without issuing a new proposed rule and allowing industry to again comment. Finally, Treasury noted that these entities’ and their clients’ financial transactions are often conducted through financial institutions that are currently subject to BSA requirements. Therefore, although these entities are not directly subject to BSA requirements at this time, they are not entirely outside the BSA regulatory regime.