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It has been several years already that private equity and venture capital firms have been under the close attention of regulators seeking to heighten AML oversight in the private fund sector.
Although historically private funds have not faced AML and KYC compliance requirements, the latest risk assessments by the US Treasury have clearly demonstrated that the lack of comprehensive due diligence on investors can lead to the risk of abuse of these investment vehicles by bad actors.
These initiatives address long-held concerns by the US Treasury over the lack of regulatory oversight for investment advisers and other private equity funds. The regulator has also underscored that the size of the industry, overseeing tens of trillions of dollars, calls for comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) measures.
These proposals for imposing stricter AML/KYC requirements on private funds present novel challenges to PE and VC firms, which will be expected to implement extensive policies and procedures to conduct comprehensive due diligence on investors.
This article rounds up the latest proposal by FinCEN on the AML/CFT framework for investment advisors, including private equity and venture capital firms, outlines the forthcoming regulatory trends and offers practical strategies to ensure compliance.
In its new proposal published in February 2024, FinCEN requires “certain investment advisers” to implement risk-based AML/CFT programs, report suspicious activities to FinCEN and conduct record-keeping according to the Bank Secrecy Act. The rule extends to investment advisers registered with the SEC as well as investment advisers that report to the SEC as exempt reporting advisers, encompassing both PE and VC firms.
The rule sets several requirements for private equity and venture capital funds, which include:
The regulator explains the importance of the new rule by the need for additional safeguards to protect the US financial system against money laundering and illicit transactions.
It is also deemed to help the US government identify attempts by geopolitical adversaries to gain access to sensitive technologies by investing in early-stage companies through private funds.
Protect your investors and your firm's future by implementing best-in-class AML/KYC measures Learn more here.
At this moment, the new proposal on expanding AML/CFT obligations to private equity and venture capital firms does not include customer identification programs. However, in the text of its proposal, the FinCEN makes it clear that it plans to address these requirements at a later stage during future joint rulemaking with the SEC.
Similarly, FinCEN does not propose to identify beneficial ownership information for legal entities at this time. It plans to address this requirement in subsequent proposals, which sets a clear trajectory for expected rulemaking.
It should be noted that FinCEN has already made several attempts to push similar rules related to private equity and venture capital firms in the past. However, the existing stage of rulemaking with regard to AML and KYC compliance and geopolitical context creates new momentum for the current proposal.
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Whether FinCEN succeeds in pushing live its new proposal or not at this stage, it is already clear that private equity and venture capital firms need greater AML scrutiny to avoid doing business with bad actors and risky clients and avert violating the sanctions regime.
Meanwhile, implementing a comprehensive AML and KYC program can help identify sources of wealth of investors, limit risk exposure and ensure compliance with existing and future regulations.
Instead of limiting themselves to basic level KYC, private funds need to prepare themselves for comprehensive investor due diligence, which could include:
While the new rule for AML and KYC checks by investment advisors is still in the making, private equity and venture capital firms aiming to stay ahead of the regulatory curve would benefit from pre-emptive action and introducing more robust investor due diligence.
By implementing AML and KYC frameworks, PE and VC firms will be able to monitor investors for potential sanction concerns, avoid potential issues related to their investments and ensure compliance.
The Athennian team helps private equity and venture capital firms bring their investor due diligence to a new level by offering a comprehensive investor relations platform.
Working with Athennian, private funds can implement due diligence automation and streamline their cap table management for multi-jurisdictional compliance.
For more information, please do not hesitate to contact the Athennian team for consultation or schedule a free demo to explore our platform.
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