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SEC and FinCEN delivering one-two punch to private equity

Starting in January, it was widely reported that the SEC had upped its FCPA scrutiny of private equity funds required to register as investment advisers under Dodd-Frank, with requests for information being issued to a number of funds in connection with their courting of sovereign wealth funds

For many newly-regulated funds, this was likely viewed as just one more of the many burdens and anxiety drivers they are feeling as SEC registrants, along with the specter of presence exams, or another reason for a visit from the Office of Compliance Inspections and Examinations (OCIE) or the new Private Funds Unit (PFU).

If worries about the adequacy of their FCPA compliance efforts were not enough to get these funds’ attention, the Financial Crimes Enforcement Network (FinCEN) has decided to pile on with a new registration door-prize: anti-money laundering (AML) compliance.

On August 25, FinCEN proposed rules that would require SEC-registered investment advisers to implement AML compliance programs, including:

  • Filing of suspicious activity reports (SARs)
  • Filing of currency transaction reports (CTRs), and
  • Vigilance against insider trading, tax evasion and other schemes. 

Under the proposed rule, the SEC would act as examiner of investment advisers for AML compliance.  The new proposal is part of a growing trend by FinCEN to broaden the definition of “financial institution” subject to its regulation, which in recent months has included increased efforts by FinCEN to vigorously regulate casinos, including through a significant enforcement action against the Trump Taj Mahal and a $75 million penalty (fourth largest in FinCEN history) imposed against an obscure casino in the equally-obscure Northern Marianas Islands.

For affected private equity funds, now is the time to plan for what appears to be inevitable: increasingly rigorous compliance expectations from numerous federal regulators, across a variety of interrelated topic areas. For many larger and better-established private equity funds, new AML obligations will likely be redundant to compliance systems and controls they had already implemented as a voluntary governance and risk mitigation strategy. 

For other shops — particularly those just crossing registration thresholds or whose portfolio companies are just beginning to give them exposure to the risks associated with international operations or activities — the combination of FCPA and AML compliance obligations could prove to be a knockout combination.

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Alex Brackett is a partner in the government investigations and white collar litigation practice of McGuireWoods LLP. He is co-leader of the firm’s strategic risk and compliance team and advises corporate and individual clients on white-collar criminal defense, internal investigations and compliance program development and maintenance. Based in the Richmond, Virginia office, he has a particular focus on anticorruption laws such as the FCPA, as well as export controls, sanctions and other trade restrictions.

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