How Far Should AML Laws Go?
For “financial institutions” (banks, mutual funds and broker-dealers), AML compliance requirements are established by statutes and regulations implemented by the Department of Treasury. These entities are required to adopt a written AML program that includes policies and procedures reasonably designed to detect and cause the reporting of suspicious transactions, designation of an AML compliance officer, regular and independent auditing/testing of the AML program; and a written customer identification program.
Private equity funds and hedge funds are not required to implement AML programs. While the law may not require them to do so, market force realities require them to address the issue. Investors and counterparties demand that such firms impose AML compliance regimes.
This situation may soon change. Senator Levin, who has been conducting vigilant oversight of financial institutions for years, introduced the Stop Tax Haven Abuse Act. Section 203 of that bill would require the Department of Treasury to require hedge funds and private equity funds to establish anti-money laundering programs and submit suspicious activity reports.
Before everyone rushes to support Senator Levin’s proposal, it is important to consider whether there is a real need to treat hedge funds and private equity companies the same. Private equity funds are not safe havens for money launderers. In the typical scenario, private equity investors do not engage in multiple cash transactions — participants invest money and, if successful, receive payments for investments that are profitable. This can take time.
Money launderers who want to disguise and conceal money also want to be able to move money through the financial vehicle. They do not want to wait to gain access to their money.
More importantly, private equity fund managers do not want money from any investor. They want solid and reliable investors to establish a long-term financial relationship. Of course, they are subject to OFAC laws and regulations for dealing with prohibited persons. For this reason, most private equity funds have their own set of screening practices, many of which are thorough and reliable.
Before imposing a set of laws and regulations which were designed for financial institutions, Congress and the Treasury Department need to take a closer look at the practical implications of Senator Levin’s proposal.