Suspicious Activity Reports and Private Funds

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Over the years, the Financial Crimes Enforcement Network (FinCEN) has required banks, brokers, and other financial entities to officially report suspicious activities of its customers. Investment advisers and private fund managers have managed to sty outside the requirements. In large part, that’s because a fund’s custodial accounts are already subject to the self-policing. since the account is with a broker subject to the FinCEN requirements.

But changes are coming. James H. Freis, Jr., Director of the FinCEN, let us know that his agency is working on anti-money laundering requirements for investment advisers. At a November 15, 2011 speech at the American Bankers Association/American Bar Association’s Money Laundering Enforcement Conference he raised the issue and mentioned that a new rule is in the works.

Reuters is reporting that a proposed rule is likely to come out in the first half of 2013. The rule would likely address anti-money laundering concerns. Although that may be an issue for some types of funds, it’s not a concern for most private funds. Once you limit redemption rights, you make the investment very unpalatable for drug kingpins and other bad guys trying to hide their money. They are not typically patient investors looking for long term returns.

Hedge funds were thrown into the bucket of “shadow banking” and private equity firms were labeled as “vulture funds” during Romney’s presidential campaign. It looks like the federal government will continue to pile regulatory requirements on private fund managers for the foreseeable future.