‘Panama Papers’ spur calls for U.S. adviser rule on money-laundering controls

April 20, 2016

In the wake of revelations outlining how a Panamanian law firm helped the wealthy stash wealth offshore, 11 financial transparency advocacy groups on Monday urged the U.S. Treasury Department’s anti-money laundering unit to issue a final rule requiring investment advisers to help combat financial crime. An adviser trade group disputed the accuracy of the group’s criticisms, and the Treasury unit developing the rule says it is still weighing public comments.

“Finalizing this rule would ensure that these advisers, each of which manages $100 million or more in assets, know their customers, report suspect transactions to law enforcement, and contribute to the work of the U.S. financial community to protect the United States from money launderers, terrorists, and other wrongdoers,” the advocacy groups wrote in a letter to the Treasury Department.

Completing the rule will close a loophole that allows hedge funds and other entities to “facilitate the transfer of offshore funds into the United States without determining their source, and to witness troubling transactions with no legal obligation to report them,” the letter states.

The groups’ letter, however, “has the same fundamental misunderstanding of what an investment adviser is and what they do that we saw in the (Treasury) proposal,” said Robert Grohowski, general counsel for the Investment Adviser Association (IAA), a trade group. Specifically, he said the IAA disagrees with the letter’s claim that investment advisers are “a low risk way for would-be money launderers to enter the U.S. financial system.”

“There is no way for an adviser to take money and open an account, bypassing banks and broker-dealers. It’s just not the way it works, we’re not an entry point to the system,” he said in an interview.

The U.S. Treasury has held off on issuing AML rules for advisers since the USA PATRIOT Act of 2001 authorized it to require such entities to help the government spot dirty money. In contrast, banks have been required to report suspicious activity for two decades and broker-dealers were assigned the obligation in 2002 as a result of the Patriot Act.

FinCEN issued a proposed rule for advisers in the early 2000s but later withdrew it. One argument that swayed FinCEN at the time was the fact advisers transacted through banks and broker-dealers, which already had legal reporting obligations. However, in recent years there has been a push toward greater transparency in the U.S. financial system and a growing view that services professionals with the most customer knowledge must be policing transactions.

Leaked documents from the Panamanian law firm Mossack Fonseca – commonly known as the “Panama Papers” – have shed light on how the world’s rich and powerful used secretive offshore company structures to stash their wealth.

Those documents, and their revelations regarding the use and abuse of shell companies to shield identities, “underscore the urgency” of an anti-money laundering rule for advisers, Americans for Financial Reform, one of the transparency advocacy groups that signed the letter, said.

Treasury’s Financial Crimes Enforcement Network (FinCEN), which is responsible for writing AML rules, is weighing public responses to the proposed rule for advisers that was issued in August and is “continuing to work toward a final rulemaking,” a FinCEN spokesman told Thomson Reuters Regulatory Intelligence on Tuesday. When asked about any potential FinCEN response to the Panama Papers, he declined comment.

The rule would apply to investment advisers that must register with the U.S. Securities and Exchange Commission (SEC) — more than 11,000 in number with $62 trillion in assets, according to 2014 figures. Registered advisers provide services such as portfolio management and pension consulting to hedge funds, private equity funds, and other private funds, as well as corporations, individuals and institutions. The SEC would have examination authority.

The IAA is not opposed to an AML rule for advisers, but has asked Treasury to provide exemptions for some, including “advisers who do not manage any client assets, or those that just do sub-advisery work,” Grohowski said.

“In those cases, the adviser has no real client-facing experience where they would see anything suspicious,” he said.

(This article was produced by Thomson Reuters Regulatory Intelligence and initially posted on Apr. 6. Regulatory Intelligence provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 400 regulators and exchanges. Follow Regulatory Intelligence compliance news on Twitter: @thomsonreuters)

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