Hedge Funds: A Primer on Money Laundering Vulnerabilities

Elizabeth A. Bethoney, CAMS-FCI

The regulatory climate for U.S.-based investment advisers is poised to undergo significant change in the coming years. The Financial Crimes Enforcement Network (FinCEN) in August 2015 proposed to define investment advisers as “financial institutions” and require them to establish anti-money laundering (AML) programs. In addition, regulators have begun to turn their attention to securities firms with respect to AML efforts.

Despite money launderers utilizing more sophisticated schemes involving securities, they seem to go largely unidentified. Hedge fund launches since 2001 have more than tripled, and investments from risky high-net- worth individuals have surpassed those of institutional investors. Yet, since 2012, only 156 suspicious activity reports on hedge funds have been filed and Investment advisers will need to understand business-specific money laundering (ML) risks and be able to identify red flags signaling possible suspicious activity. Fund managers should conduct thorough AML risk assessments, develop robust know your customer programs, and employ a two-pronged approach to investigations—targeted and holistic. Targeted investigations can identify anomalies at the client- or account-level, highlighting red flags, while holistic investigations allow for the identification of systemic issues and key ML risks across clients and products.

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