04-21-25 FinCEN's Final AML-CFT Rules for Investment Advisers

Overview:

Under a new rule adopted by the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”), most investment advisers will become subject to anti-money laundering (“AML”) and counter-terrorism financing (“CFT”) requirements. As a result, these investment advisers must develop and implement an AML/CFT program that complies with these requirements on or before January 1, 2026.

Discussion:

Covered Investment Advisors

The new rule brings these investment advisers into the AML/CFT regime by adding the term “investment adviser” to the definition of “financial institution” under the implementing regulations of the Bank Secrecy Act (“BSA”). With certain exclusions noted below, this includes:

1. Those that are registered or required to register with the U.S. Securities and Exchange Commission (“SEC”) under section 203 of the Investment Advisers Act of 1940, as amended (the “Advisers Act”) (such advisers, “RIAs”); and
2. Those that are exempt from SEC registration under sections 203(l) or 203(m) of the Advisers Act (“ERAs” and, together with RIAs, “Covered IAs”), namely:
   1. Advisers solely to one or more venture capital funds; and
   2. Advisers solely to private funds with less than $150 million in assets under management in the U.S.

Specifically excluded from the definition of “investment adviser” are:

1. Mid-sized advisers, as set forth in Section 203A(a)(2)(B) of the Advisers Act;
2. Pension consultants, as defined under 17 CFR 275-203A-2(a);
3. Multi-state advisers, as defined under 17 CFR 275-203A-2(d); and
4. RIAs that do not report any assets under management, as defined under Section 203A(a)(3) of the Advisers Act, on its most recently filed initial Form ADV or annual updating amendment to Form ADV.

AML/CFT Requirements

Covered IA’s will be required to implement a written AML/CFT program that is risk-based and reasonably designed to prevent the Covered IA from being used for money laundering, terrorist financing, or other illicit finance activities and to comply with the BSA. The AML/CFT program must be approved in writing by the Covered IA’s board of directors or other persons having similar functions. An AML/CFT program is required, at a minimum, to:

1. Establish and implement policies, procedures, and internal controls reasonably designed to prevent the Covered IA from being used for money laundering, terrorist financing, or other illicit finance activities and to comply with the BSA. To identify the Covered IA’s vulnerabilities to money laundering, terrorist financing, and other illicit finance activities, it would be expected to review, among other things, the types of advisory services it provides, the nature of the customers it advises, the investment products offered, its customers’ geographic locations and sources of wealth, and its distribution channels and intermediaries that it may operate through.
2. Provide for independent testing for compliance to be conducted by the Covered IA’s personnel or by a qualified outside party. Employees of either the Covered IA, its affiliates, or unaffiliated service providers may conduct the independent testing, so long as those same employees are not involved in the operation and oversight of the program. The frequency of the independent testing would depend upon the money laundering, terrorist financing, and other illicit finance risks of the Covered IA and its overall risk management strategy.
3. Designate a person or persons responsible for implementing and monitoring the operations and internal controls of the program.
4. Provide ongoing training for appropriate persons. The nature, scope, and frequency of the Covered IA’s training program would be determined by the responsibilities of the employees and the extent to which their functions would bring them in contact with AML/CFT requirements or possible money laundering, terrorist financing, or other illicit finance activity.
5. Implement appropriate risk-based procedures for conducting ongoing customer due diligence, including, but not limited to:
   1. Understanding the nature and purpose of customer relationships to develop a customer risk profile; and
   2. Conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

Reporting Obligations

Covered IA’s will be required to file a currency transaction report with FinCEN for certain transactions in currency of more than $10,000. This requirement replaces the current requirement that Covered IAs report such transactions on Form 8300. Additionally, a Covered IA will be required to report on a Suspicious Activity Report (“SAR”) any suspicious transaction (or pattern of transactions) conducted or attempted by, at or through the Covered IA that involves or aggregates at least $5,000 in funds or other assets and that the Covered IA knows, suspects, or has reason to suspect:

1. Involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation;
2. Is designed, whether through structuring or other means, to evade BSA requirements;
3. Has no business or apparent lawful purpose, and the Covered IA knows of no reasonable explanation for the transaction after examining the available facts; or
4. Involves the use of the Covered IA to facilitate criminal activity.

A Covered IA needs to report the suspicious transaction by completing and filing a SAR with FinCEN within thirty (30) days of initial detection by the Covered IA of facts that may constitute a basis for filing a SAR. However, situations involving suspected terrorist financing or ongoing money laundering schemes require immediate notification by telephone to an appropriate law enforcement authority in addition to a SAR filing.

Other Obligations and Considerations

Covered IAs will be required to comply with the Recordkeeping and Travel Rules, which require Covered IAs to create and retain records for transmittals of funds and ensure that certain information pertaining to the transmittal of funds “travels” with the transmittal to the next financial institution in the payment chain. The Recordkeeping and Travel Rules apply to transmittals of funds that equal or exceed $3,000.

Additionally, the rule expressly subjects Covered IAs to (1) FinCEN’s rules implementing the special information-sharing procedures to detect money laundering or terrorist activity of sections 314(a) and 314(b) of the USA PATRIOT Act and (2) Section 311 of the USA PATRIOT Act, which requires U.S. financial institutions to implement certain “special measures” if the Secretary finds that reasonable grounds exist to conclude that a foreign jurisdiction, institution, class of transaction, or type of account is a “primary money laundering concern.”

Lastly, Covered IAs must adopt and maintain due diligence programs for “correspondent accounts” for foreign financial institutions and for private banking accounts that include policies, procedures and controls that are reasonably designed to detect and report any known or suspected money laundering or suspicious activity conducted through or involving any such accounts. As applied to Covered IAs, “correspondent account” means “any contractual or other business relationship established between a person and an investment adviser to provide advisory services.”

Who can I call with questions?

For more information, contact Gregory Gribben, Esq. at (585) 987-2875 or ggribben@woodsoviatt.com, Alexander Guarino, Esq. at (585) 987-2837 or aguarino@woodsoviatt.com, other member of our Investment Management and Financial Services practice groups or your Woods Oviatt Gilman LLP attorney.

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