Staying compliant with a changing regulatory landscape can be a challenge, and a new rule impacting investment advisers in the US has added to that challenge.
In September, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) published a Final Rule imposing Anti-Money Laundering (AML) and countering the financing of terrorism (CFT) requirements on investment advisers and exempt reporting advisers who are US Securities and Exchange Commission-registered.
This significant regulatory update was introduced to address increasing concerns regarding illicit finance activities to bolster financial transparency and strengthen safeguards.
We’ll outline the key highlights of this new rule, as well as how the rule will impact certain registered investment advisers (RIAs) and exempt reporting advisers (ERAs) in the US below.
What the 2024 AML Rule Includes
- Expanded BSA and AML Obligations: As part of the rule, the definition of “financial institution” under the Bank Secrecy Act (BSA) is expanded to include investment advisers registered with the Securities and Exchange Commission (SEC) and investment advisers that report to the SEC as exempt reporting advisers. That means most investment advisers will be within the scope of the BSA. As such, investment advisors are now explicitly required to develop and implement comprehensive AML programs. These programs must align with the standards previously applicable to other financial institutions, ensuring consistency across the financial services landscape.
- Risk-Based Approach: The rule mandates that investment advisors adopt a risk-based approach to AML compliance. This involves assessing their client base, investment strategies, and service offerings to identify areas with higher risks of money laundering or terrorism financing. By tailoring their AML protocols to these identified risks, firms can focus their efforts where vulnerabilities are most pronounced.
- Customer Due Diligence (CDD) Requirements: Investment advisors must now conduct thorough customer due diligence, which includes verifying the identities of beneficial owners and understanding the nature of customer relationships. This CDD process is aimed at maintaining robust client profiles and identifying red flags that could signal suspicious activity.
- Mandatory Reporting of Suspicious Activities: Similar to broker-dealers and banks, investment advisors must file Suspicious Activity Reports (SARs) with FinCEN when they detect potentially illicit activity. This change is a significant one, as it places investment advisors directly within the established framework for monitoring and reporting financial crimes.
- Enhanced Training and Monitoring: The new rule emphasizes ongoing staff training and monitoring of AML compliance programs. Investment advisors must ensure that employees are well-trained in identifying and reporting suspicious activity and that the firm’s AML policies are regularly reviewed and updated to reflect changing regulatory expectations and emerging threats.
- Examination Authority: As part of the new rule, the US Securities and Exchange Commission (SEC) will hold examination authority.
The Implications for Investment Advisors
The 2024 AML rule is a notable shift, as it aligns investment advisors with the AML practices observed in other financial sectors. Firms must now allocate resources to strengthen their compliance infrastructure, enhance staff expertise, and develop more detailed client risk assessments. While this may increase operational costs in the short term, adherence to the rule will ultimately enhance trust and stability within the financial system. The Final Rule may also avoid legal challenges. Those investment advisers covered by the Final Rule must comply with its requirements on or before January 1, 2026.
Strategic Steps for Next Steps and Compliance:
- Assess Current Compliance Frameworks: Evaluate existing AML policies and identify gaps relative to ensure compliance with the Final Rule.
- Develop or Update AML Programs: Whether AML policies exist or not, advisers should ensure that policies address all components mandated by the rule, including SAR filing procedures and customer due diligence.
- Invest in Training Programs: Enhance staff training to cover the expanded obligations.
- Leverage Technology: Utilize advanced compliance software to streamline client risk profiling and suspicious activity monitoring.
Leverage Identity Verification Technology to Stay Compliant With New AML Rules
The 2024 AML rule represents a comprehensive enhancement of regulatory expectations for investment advisors, aligning them with broader financial industry practices. Adapting to these changes will not only help firms remain compliant but also reinforce their role as stewards of financial integrity.
A key component of the new regulation is the implementation of robust identity verification processes to ensure clients are who they claim to be. Advanced identity verification solutions that can help investment advisers meet these requirements effectively.
How Identity Verification Can Support AML Compliance:
Enhanced Customer Due Diligence (CDD): Use AI-driven technology to verify identities in real time, ensuring compliance with CDD obligations by preventing fraudulent account openings.
KYC Integration: Your IDV solution should integrate with Know Your Customer (KYC) frameworks, streamlining the verification process and reducing manual errors.
Regulatory Reporting: Robust tools as part of a next-gen IDV platform can help advisers collect, store, and report necessary documentation in compliance with AML guidelines.
Fraud Detection and Prevention: Advanced features like biometric authentication and document validation offer added layers of security, reducing exposure to fraud risks.
For investment advisers, the benefits go beyond regulatory confidence. They can ensure no operational disruptions, efficient onboarding, and reduced risk.
Your Identity Verification Solution is Here With AuthenticID
Leveraging solutions from providers like AuthenticID ensures investment advisers can navigate the evolving regulatory landscape with confidence while safeguarding their reputation and operational integrity.
Contact us today for a demo and stay compliant.