Customer Identification Proposal Serves National Security, Law Enforcement Purpose and is Consistent with Requirements for Other Capital Market Actors
WASHINGTON, DC – This week, the Financial Accountability and Corporate Transparency (FACT) Coalition submitted formal public comments in support of a proposed rule to require members of the $130 trillion investment advisory industry to collect and record basic details about their clients as a means to prevent, detect, and flag money laundering and terror financing risks. The proposed rule is a joint effort by the Securities and Exchange Commission (SEC) and the Financial Crimes Enforcement Network (FinCEN).
“This proposal brings the U.S. one crucial step closer toward closing loopholes that have for decades allowed U.S. adversaries and criminal networks to launder money through the massive and opaque U.S. private investment sector,” said Ian Gary, executive director of the FACT Coalition. “By standing up strong anti-money laundering safeguards, our nation’s financial crime fighters are responding to real threats and protecting our markets from further criminal exploitation. However, as a next step, FinCEN must ensure that investment advisers are also responsible for knowing their client – not just the business itself, but the person that runs the show behind the scenes. Other comparable financial institutions already take this step. There’s no reason to require any less of investment advisers.”
According to Treasury’s 2024 Investment Adviser Risk Assessment, some of the biggest anti-money laundering (AML) dangers in the investment advisory industry include extensive money laundering schemes by drug cartels and efforts by state-owned Russian and Chinese firms to gain access to sensitive U.S. military technologies. To address these risks, in February, FinCEN proposed a rule that would require investment advisers to both understand the nature and purpose of customer relationships, and conduct ongoing account monitoring to assess money laundering risks. A final rule is expected to be released in August.
The joint SEC-FinCEN proposal, released in May, takes the next step by requiring investment advisers to identify their individual and legal entity clients. For legal entity customers, investment advisers must identify the name of the business, the date of entity formation, its address, and a unique identifier, such as a taxpayer identification number.
“The massive and opaque investment advisory industry has gotten a decades-long hall pass to keep its eyes shut to potential money laundering risks,” said Michael Hornsby of the Anti-Corruption Data Collective (ACDC), a FACT-member that also commented on the proposal. “It’s high time that this sector be required to ask the most basic questions about their clients. Bringing private investment funds – venture capital, private equity, hedge funds and similar vehicles – in line with other financial institutions will help banks and broker-dealers fulfill their own AML obligations and begin to address a major structural flaw in the system.”
There remains a fourth and final component of customer due diligence so far left unaddressed: the requirement to know the client entity’s true, “beneficial” owners. The accurate reporting of beneficial ownership information for legal entity clients is key to ensuring that law enforcement officials are able to “follow the money” in a given money laundering case, and to more broadly understand money laundering risk in the sector. In comments, the FACT Coalition and its members, ACDC and Transparency International U.S. each encouraged FinCEN to complement the proposed CIP rule with requirements to collect and verify beneficial ownership information for AML purposes.
Notes to the Editor:
- Click here to read FACT’s full comment on FinCEN and the SEC’s proposed rule for customer identification programs for investment advisers. The full NPRM can be found here.
- FACT members Transparency International U.S. and Anti-Corruption Data Collective also submitted comments on the proposal.
- For more information on FinCEN’s previous proposal on investment advisers, see FACT’s press release from April.
- The FACT Coalition, along with its members Transparency International U.S. and Global Financial Integrity, also released a 2021 report, “Private Investments, Public Harm,” which laid out case studies and analysis of regulatory deficiencies in curbing money laundering risks within the private investment sector.