On August 28, 2024, in a two-pronged effort to close the gap in market entry points for illicit finance, the U.S. Department of the Treasury’s (“Treasury”) Financial Crimes Enforcement Network (FinCEN) issued the following final rules:
These rules aim to help safeguard the investment adviser and real estate sectors from criminal activity. Risks affecting the investment adviser sector were documented by Treasury in a February 2024 Investment Adviser Risk Assessment, which emphasized that private funds are “an attractive entry point for illicit proceeds” and noted the risks posed by the patchwork inclusion of investment advisers in the AML/CFT regulatory regime. The IA Rule aims to mitigate these risks and deliver on a key finding of the 2021 U.S. Strategy on Countering Corruption (the “Strategy”), which found that lack of regulatory oversight facilitates illicit activity through investment advisers. We covered the proposed IA Rule back in February in this Client Alert.
In the residential real estate sector, FinCEN has found that bad actors often exploit non-financed transfers of residential real estate to avoid scrutiny from financial institutions with AML/CFT compliance obligations. Further, the Strategy contends that these nefarious activities can negatively impact U.S. citizens by contributing to rising home prices. For more information on the proposed rule, please see our prior Client Alert.
The rule adds “investment adviser” to the definition of “financial institution” under the BSA, and, subject to exclusions, defines the term as the following:
The following are excluded from the “investment adviser” definition:
Regulations for RIAs or ERAs with a principal office and place of business outside of the United States (defined as “foreign-located investment advisers”) are limited to advisory activities that: (1) take place within the United States, including through the involvement of U.S. personnel of the investment adviser; or (2) are provided to a U.S. person or a foreign-located private fund with an investor that is a U.S. person.
The final rule does not apply to state-registered investment advisers, foreign private advisers, or family offices (each as defined in SEC regulations).
At a high level, the rule requires covered RIAs and ERAs to do the following:
To minimize potentially duplicative AML/CFT requirements, the IA Rule permits an investment adviser to exclude from its AML/CFT program: (i) any mutual fund[3] advised by the investment adviser; (ii) bank- and trust company-sponsored collective investment funds; and (iii) any other investment adviser subject to the rule that is advised by the investment adviser.
While the rule does not directly address whether broker-dealers can rely on an RIA to perform some or all of its obligations under the customer identification program (CIP) rule or the CDD rule, the rule does state that the Securities Industry and Financial Markets Association (SIFMA) No-Action Letter under which the SEC staff permitted this reliance remains effective.
Note, FinCEN and SEC separately proposed a rule that would impose CIP requirements on covered investment advisers, as discussed in our prior Client Alert. In the IA Rule, FinCEN recognizes that co-dependencies of CIP and CDD requirements and notes that a future CIP final rule will have the same compliance date as the revised CDD Rule, which is expected pursuant to the Anti-Money Laundering Act of 2020.
FinCEN is delegating its examination authority for the requirements of this rule to the SEC.
The RE Rule requires certain individuals involved in real estate transactions to report “non-financed transfers” of ownership interests in “residential real property” to legal entities or trusts. A “non-financed transfer” is a real estate transfer that does not involve an extension of credit that is: (1) secured by the property; and (2) extended by a financial institution subject to AML requirements. “Residential real property” is property located in the United States that consists of any of the following:
Notably, a transfer involving multiple buyers would be considered a non-financed transfer if any single buyer’s purchase is non-financed. Further, even if the property includes a commercial element, the RE Rule would still be triggered; for example, the transfer of a single-family residence that is located above a commercial enterprise would be reportable. Additionally, the RE Rule does not take into account the property’s value or purchase price, so gift transfers are reportable if the rule’s other conditions are met.
The RE Rule is subject to a few exceptions for transfers that FinCEN perceives as lower risk for abuse by illicit actors, including transfers:
The rule requires “reporting persons” to file a report with FinCEN that provides specific information about the parties to the transfer and the property itself. A reporting person can be designated in one of two ways. The default “cascade reporting method” provides a list of seven functions involved in the sale or transfer of residential real estate property and applies the reporting obligation to the person[4] performing the function appearing highest on the list. At the top of this list is the agent on the closing or settlement statement.[5] The alternative method allows the person performing the activities on the cascade list to enter into a written agreement designating a professional to file the report. FinCEN expects the reporting obligation would commonly fall on settlement agents, title insurance agents, escrow agents, and/or attorneys.
At a high level, the reporting person must:
When reporting information or making a determination necessary to comply with the RE Rule, a reporting person is entitled to reasonably rely on information provided to them—so long as the reporting person does not have any reason to doubt the reliability of the information provided. While the RE Rule does not require reporting persons to maintain separate AML programs, the preamble suggests that FinCEN does expect reporting persons to conduct compliance training.
With the passage of the Anti-Money Laundering Act of 2020, FinCEN continues to further its efforts to combat illicit financial activity. The final adoption of both rules further expands the U.S. AML/CFT regulatory regime. Compliance with the IA Rule may be a heavy lift for some investment advisers, especially if they have outsourced AML functions for their funds to professional administrators. In the real estate sector, covered reporting persons will need to familiarize themselves with the new reporting and recordkeeping requirements and implement suitable compliance training programs. FinCEN will publish a notice regarding the form of the required real estate report at a later date. Covered investment advisers and reporting persons should begin planning for the relevant effective dates in advance of the implementation of the new rules.
[1] Investment advisers generally must register with the SEC if they have over $100 million in assets under management (AUM).
[2] ERAs that file with the SEC are investment advisers that: (i) advise only private funds and have between $100 million and $150 million in AUM in the United States; or (ii) advise only venture capital funds. ERAs are exempt from SEC registration but, pursuant to existing SEC regulations, must still file certain information with the SEC.
[3] Mutual funds are currently classified as financial institutions under the BSA and thus are already subject to BSA requirements.
[4] If an employee, agent, or partner acting within the scope of such individual's employment, agency, or partnership would be the reporting person, then that individual's employer, principal, or partnership is the reporting person.
[5] The proposed “cascade” of reporting persons, in order, is: (i) the closing or settlement agent for the transfer listed on the closing or settlement statement; (ii) the person that prepares the closing or settlement statement for the transfer; (iii) the person that files the deed for recording; (iv) the person that underwrites the owner’s title insurance policy; (v) the person that disburses the greatest amount of funds in connection with the transfer (including from an escrow account, trust account, or lawyers’ trust account); (vi) the person that provides an evaluation of the status of the title; or (vii) the person that prepares the deed or other instrument of conveyance.
[6] The report must include: