Dominion In the News
Hedge Funds Still Free of AML Regulation
By Matt Squire , Money Laundering AlertMore than five years after regulators proposed AML regulations for hedge funds, compliance experts in Washington, D.C., say the initiative will continue to gather dust as regulators shift their priorities toward the capital crisis and other regulatory issues.
The Financial Crimes Enforcement Network (FinCEN) in September 2002 proposed a requirement that unregistered investment companies, including hedge funds, maintain anti-money laundering programs.
But with FinCEN focusing on other initiatives, no action is likely until a case of money laundering surfaces in the hedge fund industry.
“If there is a huge money laundering case that involves an unregistered fund, there will be pressure from Congress, [to finalize the rule],” said Andras Teleki, an associate with law firm K&L Gates in Washington D.C.
“FinCEN’s focus is on the initiatives that [Treasury] Secretary [Henry] Paulson announced in June,” agency spokesman Steve Hudak said in an interview. But, he added, the agency continues to study the “very complicated” hedge fund industry.
During a June 22 visit to FinCEN headquarters, Paulson disclosed initiatives to limit the types of money services businesses that must comply with AML regulations and improve risk-based exam procedures for institutions.
Treasury officials have said that a cost-benefit analysis must be conducted before any hedge fund AML rules can be adopted – and that does not bode well for the future of the proposal, said Ross Delston, founder of Washington, D.C.- based consulting firm GlobalAML.com.
FinCEN might have planned to issue its rule in tandem with hedge fund rules from the Securities and Exchange Commission. The commission, seeking to extend its oversight to the hedge fund industry, issued a rule in December 2004 requiring fund managers responsible for at least $30 million in assets to register with it. However, the U.S. Court of Appeals for the Washington, D.C. circuit struck the SEC’s rule down in June 2006.
“There’s nothing pending before the commission [with regards to hedge funds],” said SEC spokesman John Heine.
Changes on Capitol Hill
The attention of U.S. lawmakers also has drifted from hedge funds, as Congress wrestles with higher priorities, such as housing foreclosures and mortgage lending. This year the House Committee on Financial Services held two hearings on the potential for systemic market risk in the hedge fund industry, but committee chairman, Representative Barney Frank, characterized the hearings as “ongoing studies.”
The hedge fund industry has been effective in Washington in keeping regulators off their backs, said David Caruso, chief executive officer of Washington, D.C.-based Dominion Advisory Group. But more important, he said, is the lack of documented cases of money laundering through hedge funds.
“Obviously, you want to get ahead of the ball and not behind it, but it’s hard to drum up support for increased regulation when it’s difficult to point to instances of what could be construed as failures,” said Caruso.
Ultimately, FinCEN will move its proposal forward, either due to pressure to conform with international standards or in reaction to a money laundering investigation involving a hedge fund, said Delston.
“It would have to be reactive,” said Caruso. “That’s the way Washington works.”
The Financial Crimes Enforcement Network (FinCEN) in September 2002 proposed a requirement that unregistered investment companies, including hedge funds, maintain anti-money laundering programs.
But with FinCEN focusing on other initiatives, no action is likely until a case of money laundering surfaces in the hedge fund industry.
“If there is a huge money laundering case that involves an unregistered fund, there will be pressure from Congress, [to finalize the rule],” said Andras Teleki, an associate with law firm K&L Gates in Washington D.C.
“FinCEN’s focus is on the initiatives that [Treasury] Secretary [Henry] Paulson announced in June,” agency spokesman Steve Hudak said in an interview. But, he added, the agency continues to study the “very complicated” hedge fund industry.
During a June 22 visit to FinCEN headquarters, Paulson disclosed initiatives to limit the types of money services businesses that must comply with AML regulations and improve risk-based exam procedures for institutions.
Treasury officials have said that a cost-benefit analysis must be conducted before any hedge fund AML rules can be adopted – and that does not bode well for the future of the proposal, said Ross Delston, founder of Washington, D.C.- based consulting firm GlobalAML.com.
FinCEN might have planned to issue its rule in tandem with hedge fund rules from the Securities and Exchange Commission. The commission, seeking to extend its oversight to the hedge fund industry, issued a rule in December 2004 requiring fund managers responsible for at least $30 million in assets to register with it. However, the U.S. Court of Appeals for the Washington, D.C. circuit struck the SEC’s rule down in June 2006.
“There’s nothing pending before the commission [with regards to hedge funds],” said SEC spokesman John Heine.
Changes on Capitol Hill
The attention of U.S. lawmakers also has drifted from hedge funds, as Congress wrestles with higher priorities, such as housing foreclosures and mortgage lending. This year the House Committee on Financial Services held two hearings on the potential for systemic market risk in the hedge fund industry, but committee chairman, Representative Barney Frank, characterized the hearings as “ongoing studies.”
The hedge fund industry has been effective in Washington in keeping regulators off their backs, said David Caruso, chief executive officer of Washington, D.C.-based Dominion Advisory Group. But more important, he said, is the lack of documented cases of money laundering through hedge funds.
“Obviously, you want to get ahead of the ball and not behind it, but it’s hard to drum up support for increased regulation when it’s difficult to point to instances of what could be construed as failures,” said Caruso.
Ultimately, FinCEN will move its proposal forward, either due to pressure to conform with international standards or in reaction to a money laundering investigation involving a hedge fund, said Delston.
“It would have to be reactive,” said Caruso. “That’s the way Washington works.”