In 2024, the Financial Crimes Enforcement Network, or FinCEN, proposed new anti-money laundering and counter-terrorism financing regulations. In just a year, this new rule will take effect. So, what does this mean for investment advisers and asset managers?
In this article, we’ll dive deep into the changes in these regulations and how they will impact you as a professional. We’ll also share practical strategies for remaining compliant, aligning your operations with the later AML requirements, and mitigating regulatory risks in the evolving financial landscape.
What Will Change in the New Anti-Money Laundering Regulations?
The Anti-Money Laundering Act was initially mandated for financial institutions. Perhaps the most substantial adjustment to the rule is defining registered investment advisers (RIAs) and exempt reporting advisers (ERAs) as financial institutions.
Under this change, RIAs and ERAs are officially classified as “financial institutions.” They must now follow the regulations governing anti-money laundering (AML) and countering the financing of terrorism (CFT).
By addressing national security concerns and aligning investment advisers with existing financial institution regulations. It also brings the US financial system further in line with global AML standards set by the Financial Action Task Force (FATF) to combat money laundering and terrorist financing.
AML/CFT Programs
Under the new rule, investment advisers must establish and maintain written AML and CFT programs approved by their governing bodies. It should include:
- Internal policies and procedures tailored to the firm’s risk profile.
- Designation of a dedicated compliance officer.
- Ongoing employee training.
- Independent testing of the program’s effectiveness.
- Comprehensive customer due diligence measures.
Suspicious Activity Reports
Investment advisers must file suspicious activity reports, or SARs, submitted to FinCEN for transactions that could potentially involve money laundering, fraud, or other financial crimes. This aims to improve transparency and oversight, leading to a more stable and secure financial system.
Recordkeeping and Reporting
Advisers must follow the Travel Rule, which ensures specific information accompanies certain transactions. Investment advisers must also keep all records of any transactions exceeding $10,000. Lastly, IAs should collaborate and share information with other institutions to enhance fraud detection.
Unfortunately, companies that don’t implement AML programs may struggle to comply with the new rules. Existing financial institutions must also know their customers well and conduct due diligence to better analyze customer behavior and detect fraudulent activities quickly.
Read more: Closing the Leadership Gap: Why Strong Risk Management Professionals Are Essential for Stability
How to Remain Compliant: 6 Tips for Investment Advisers
The new rule aims to combat money laundering and illicit financial activities. This is why non-compliance can result in hefty fines and damage your business reputation. In 2024, LPL Financial was charged with $18 million by the SEC.¹ This highlights the importance of the AML rule in reporting suspicious activities and preventing illicit activities in the industry.
Here’s how investment advisers can remain compliant with the new AML rule:
1. Establish a Comprehensive AML Program
Build strict AML policies and internal controls that specifically align with your client, business model, and risk exposure. Make sure to assign AML compliance officers who can oversee and manage compliance efforts. Additionally, your policies should adhere to FinCEN and SEC requirements.
Creating clear AML policies will help ensure the swift detection and reporting of suspicious transactions. Your AML Program should include:
- Written procedures
- Independent audits
- Ongoing employee training
Read more: Embracing Compliance: Empowering Businesses to Thrive Amidst Evolving Legal Standards
2. Conduct Thorough Risk Assessments
Assess your company’s exposure to any AML or CFT risks regularly. This includes monitoring customers, their activities, location, and transactional patterns. Once you flag a high-risk client, make sure to establish due diligence and monitor transactions closely. If you suspect an individual or group is conducting financial activities or money laundering efforts, submit a SAR to FinCEN.
Enhance Customer Due Diligence (CDD) and Know Your Customer (KYC) Procedures
Financial services handle multiple transactions and customers. It’s important to keep track of every individual to prevent crime and monitor possible fraudulent activities. This involves enhancing your CDD and KYC procedures to monitor clients, especially high-risk customers.
3. Strengthen Transaction Monitoring & Reporting Through Tech
Use automated monitoring systems to detect suspicious patterns or unusually large transactions. These systems can flag transactions in real-time, allowing you to act swiftly and accurately. Consider these AML tools:
- NICE Actimize
- SymphonyAI
- NapierAI
- ComplyAdvantage
4. Train Employees on AML Requirements
While the new Anti-Money Laundering rule only applies to investment advisers, it’s necessary to involve everyone in the team to remain compliant. Educate your teams about:
- Anti-money laundering, counter-terrorist financing, and other financial crimes
- How to identify suspicious transactions (e.g., unusually large transactions, unwillingness to provide documentation, use of complex corporate structures, or third-party payments)
- How to file SARs with FinCEN
- CDD and KYC procedures
- Emerging and existing money laundering and crime schemes
5. Conduct Independent Auditing and Reviews
Aside from regularly conducting customer assessments, maintain thorough internal documentation of customer due diligence (CDD) records, SAR filings, and internal monitoring reports. Even if you hire a third-party auditor, your firm remains responsible for retaining all necessary AML compliance records. Proper documentation can help prepare you for SEC examinations or regulatory inquiries, demonstrating your compliance with AML obligations.
6. Stay Updated on Regulatory Changes
Regulatory compliance continues to evolve. As technology and processes grow, so do the methods used for illicit activities. FinCEN, SEC, and other regulatory bodies will align new policies with the evolving AML requirements. Make sure that your policies are always up to date and apply the changes to remain compliant.
Read more: The Future of Finance: How to Remain Agile Amidst Changing Market Conditions
Emerging AML Risks Affecting the Financial Industry
As financial criminals adopt new tactics, investment advisers must be aware of these evolving threats. Here’s a list of emerging anti-money laundering risks that you need to be mindful of:
1. Cryptocurrency and Decentralized Finance
Cryptocurrencies may have revolutionized the financial landscape, offering faster transactions between individuals or companies, lower fees, and enhanced security, making deals and transfers more efficient. However, the decentralized nature of cryptocurrencies makes it harder for regulators to track illegal activities.
Cryptocurrencies offer anonymity features, and criminals can exploit them to mask their movement. A few of the methods they use, coin mixing and chain-hopping, allow them to manipulate the system.
Furthermore, many cryptocurrencies run on decentralized finance platforms. Due to the lack of central authority and limited AML governance, criminal activities are common in digital assets.
Read more: The High Stakes of Digital Transformation: Recruiting Leaders Who Can Navigate Change
2. AI-Powered Money Laundering
Criminals are now exploiting AI for money laundering as well. This allows them to create fake investment accounts and automate microtransactions, effectively masking their activities through complex digital pathways.2
Investment firms must adopt AI-based AML systems to enhance detection systems and flag suspicious patterns. Regulatory bodies must also adapt regulatory frameworks to address the unique challenges created by AI.
Related article: The Workforce of Tomorrow: How AI is Redefining Skills and Creating New Career Paths
3. Money Laundering Through Online Gaming and Virtual Assets
Another way criminals launder money is through games and virtual assets or non-fungible tokens (NFTs). They purchase various items online using illicit funds, transfer them across multiple accounts, and sell them, effectively laundering the money.
Since online games have become popular these days through various skins, weapons, and other in-game items, criminals can easily buy and sell these items. Games today lack robust AML regulations, which makes tracking difficult.
The Future of Finance Security and the Power of Investment Advisers
As regulatory bodies work to combat illicit activities like money laundering, investment advisers play a crucial role in this effort. Your responsibility extends beyond compliance – you must actively detect and prevent illegal activities before they occur.
With the new AML rule, investment advisers have become key guardians of the financial system. By staying informed about emerging threats and regulatory updates, you help protect the integrity of financial markets. As economic activities evolve, so must your prevention strategies – placing you at the forefront of this important work.
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References
- “SEC Charges LPL Financial with Anti-Money Laundering Violations.” US Securities and Exchange Commission, 17 Jan. 2025, https://www.sec.gov/newsroom/press-releases/2025-17
- “How Generative Artificial Intelligence Launders Money.” 16 Sep. 2024, https://www.sanctionscanner.com/blog/ais-dark-side-how-generative-artificial-intelligence-launders-money-863
