MFA supports FinCEN’s AML/CFT efforts, but re-proposal is needed to clarify private fund requirements
Washington, DC — MFA urged FinCEN to repropose its rule on anti-money laundering/countering the financing of terrorism (AML/CFT) in a comment letter today. The re-proposal is needed to right-size the rule to more appropriately apply AML/CFT requirements to private funds and to seek further comments on those revised requirements.
MFA supports FinCEN’s goal of combatting money laundering, terrorist financing, and other illicit financial activity. Sophisticated investors in private funds are screened and subject to Bank Holding Company AML/CFT requirements. However, the AML/CFT proposal is predicated on the flawed premise that investment managers receive and custody fund investor assets. In fact, fund investor capital flows between administrators, custodians, banks, and dealers – not private fund managers.
Predicating the proposal on a flawed premise resulted in it:
- Inaccurately assessing the AML/CFT risks in private funds, particularly given that private funds typically do not accept investments in cash
- Failing to account for the strong, well-established AML/CFT controls of the sophisticated financial institutions engaged by private funds
- Leaving private fund managers uncertain of the requirements to meet their AML/CFT responsibilities
“MFA supports FinCEN’s anti-money laundering efforts,” said Bryan Corbett, MFA president and CEO. “However, FinCEN’s proposal is based on incorrect assumptions about how private funds operate. FinCEN should repropose a rule that accurately reflects the private funds business model and recalibrates investment adviser responsibilities to reflect realities.”
MFA’s letter highlights that FinCEN’s proposal is duplicative of current AML controls because private fund managers rely on market participants who are subject to the Bank Secrecy Act’s (BSA) AML/CFT requirements to handle the flow of capital:
[A]s a necessity for conducting their regular business, many Covered IAs (investment advisers) rely heavily on banks, broker-dealers, custodians, and other highly regulated financial institutions that have long been subject to the BSA’s AML/CFT requirements. For example, investor monies are typically custodied at banks, and funds transmitted by investors will come through banks subject to the BSA’s requirements. As such, many limited partner investors in Funds are already subject to AML/CFT scrutiny of the same kind FinCEN seeks to impose via the Proposed Rule, creating duplicative AML/CFT monitoring obligations on Covered IAs.
MFA explains that private funds’ long lock up periods makes them unattractive for money laundering:
[I]nvestors in hedge funds—a type of private fund—are permitted to redeem their ownership interest (in whole or in part) only at specified intervals, which vary by hedge fund (e.g., quarterly or annually), subject to a minimum notice period generally ranging from 30 to 90 days. Investors also may be subject to an initial “lock up” period (e.g., one or two years), during which they are not permitted to withdraw any portion of their investment… Investments made into some private equity and/or private credit funds are typically long-term, often with lock-up periods of seven to ten years (or more), which hinders access to and movement of capital for the investor and makes them particularly unattractive vehicles for money laundering.
The letter encourages FinCEN to make clear which parts of AML/CFT compliance can be delegated to third parties:
Despite FinCEN’s acknowledgement that Covered IAs regularly delegate compliance and other activities to third parties, the Proposed Rule is not clear on which AML/CFT program elements may be delegated to a third party… MFA recommends that FinCEN revise the rule text to expressly permit delegation (i.e., not just in the preamble) to third parties and/or affiliates, so Covered IAs know what is required when functions are delegated.
Read the full comment letter here.
About the global alternative asset management industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $5.5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About MFA
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 member fund managers, including traditional hedge funds, credit funds, and crossover funds, that collectively manage over $3.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
