The Impact of Anti-Money Laundering Laws on Private Equity Investments

Over the years, the rapid expansion of private equity, real estate, hedge funds, and venture capital in conjunction with inconsistent Anti-Money Laundering (AML) and Know Your Customer (KYC) policies, and criminal activity exploiting investment adviser firms, has led to serious concerns about the illicit finance risks investment advisers pose for investors. 

These concerns motivated regulators to repeatedly propose imposing AML requirements on investment advisers. 

But those original proposals were not implemented, and Anti-Money Laundering and Know Your Customer programs remained voluntary for investment advisers*.

Until now.

In August of 2024, the Financial Crimes Enforcement Network (FinCEN) issued a final rule designed to combat the illicit finance risks in the investment adviser arena of the United States. The rule, which we reported on when it was first proposed, becomes effective January 1, 2026. This means that all necessary programs must be in place and all investment advisers subject to the rule must begin making required reports by this date.

The new rule adds certain registered investment advisers (“RIAs”) and exempt reporting advisers (“ERAs”) to the definition of “financial institutions” under the Bank Secrecy Act (BSA). In doing so, the rule makes RIAs and ERAs subject to the federal Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) requirements and sets minimum standards for them to meet.  

As a side note, for the most part, the final rule does not vary significantly from the proposed rule. However, the final rule does narrow the definition of “investment adviser” to exclude RIAs that register with the Securities and Exchange Commission (SEC) solely because they are:

• mid-sized advisers, 

• multi-state advisers, 

• pension consultants, or

• RIAs that do not report any assets under management (AUM) on Form ADV. 

It also clearly excludes investment advisers (“foreign-located investment advisers”) whose principal place of business is outside the United States, except to the extent their advisory activities take place within the U.S. or involve advisory services to a U.S. person or a foreign-located private fund with an investor that is a U.S. person. It further clarifies that it does not apply to State-registered advisers, foreign advisers, or family offices — as all these are defined by the SEC regulations.

Unlike broker-dealers, RIAs and ERAs have not historically been subject to the AML/CFT requirements. Thus, this new rule means that investment adviser firms that currently do not have AML/CFT compliance programs in place will need to design and implement AML/CFT programs. And as to those firms that do have AML/CFT voluntary programs already, they will need to review their programs and adjust them as necessary to fully comply with the new law’s requirements. 

(*Congress’ preferred spelling is “adviser” not “advisor.”) 

The New Anti-Money Laundering (AML) Requirements

Among other things, the final rule requires RIAs and ERAs to: 

• develop and put in place written, risk-based, and reasonably designed AML/CFT programs tailored to the investment adviser’s business, 

• file certain reports with FinCEN, including Suspicious Activity Reports (SARs) (see below), 

• keep comprehensive records concerning the transmittal of funds, including documentation confirming that all relevant information travels with those funds, and  

• fulfill certain other obligations that the BSA and FinCEN regulations require of financial institutions, such as responding to law enforcement requests concerning suspected money laundering and/or terrorist transactions.

In addition to being written, AML/CFT programs under the new rule must:

• have a designated compliance officer, 

• include internal policies, 

• provide for employee training,

• provide for independent testing, and 

• have customer due diligence (CDD) policies.

In an effort to prevent overburdening investment advisers who already have AML/CFT programs in place by duplicating their efforts unnecessarily, the final rule provides for some exemptions from the AML/CFT requirements. 

In addition, the rule does not apply to certain Mutual Funds, 1940 Act-registered exchange-traded funds, or collective investment funds sponsored by banks and trusts because these funds are already subject to AML requirements. Investment advisers should have licensed counsel closely analyze the final rule to determine whether any additional exclusions may be applicable in any particular case. 

Importantly, the final rule does not include Customer Identification Program (CIP) or Beneficial Ownership Information (BOI) requirements. FinCEN intends to address these requirements in separate rulemaking with the SEC.

Further, the AML program will not have to be applied to non-advisory services, such as managerial/operational decisions made about the activities of portfolio companies. 

Finally, the SEC, which currently enforces rules regarding investor verification, will also be in charge of enforcing the AML/CFT requirements for investment advisers. This means that in addition to the SEC’s responsibilities for ensuring accredited investor status for private equity opportunities utilizing Rule 506(c) — making it advisable for investors to obtain accredited investor certificates and issuers to participate in an investor accreditation program to avoid compliance issues — the SEC will also be closely monitoring investment advisers for compliance with the new AML/CFT requirements. 

Suspicious Activity Reports (SARs) Filing Requirements

The final rule also requires that investment advisers file Suspicious Activity Reports (SARs) with FinCEN as well as Currency Transaction Reports (CTRs). The law mandates that investment advisers comply with all Recordkeeping and Travel Rules, as well as with other general recordkeeping requirements.

The SARs reporting requirements, in particular, are intended to assist federal law enforcement in identifying, detecting, and prosecuting money laundering activities.

The SARs requirement is not intended to make investment advisers to collect information beyond that which they would normally have in their business. However, neither can investment advisers simply “ignore” suspicious transactions simply because they involve portfolio companies or funds the adviser does not advise on. Investment advisers will be subject to the same SARs filing requirements that currently apply to other individuals and entities meeting the “financial institution” definition, (including,  but not limited to, banks, mutual funds, and securities broker-dealers), and will be required to report suspicious activity where the adviser “knows, suspects, or has reason to suspect a possible violation of law or regulation.”  

What Investment Advisers Need to Do Now.

This new rule is going to significantly change the way investment advisers and firms currently operate. 

In light of the fact that the compliance deadline of January 1, 2026, is not that far away, investment advisers would do well to act now to put compliant AML/CFT programs in place or adjust their current programs to fully comply with the new law. Among other things, this means that investment advisers must ensure that they have written policies that meet the new requirements and that all required policies are in place and operating before the deadline. Senior officers and board members must be involved in this process.

Investment advisers should not underestimate the time it will take to implement compliant AML/CFT programs. Nor should they simply assume that their current voluntary AML/CFT programs and policies will be sufficient to meet the law’s new requirements. This new rule imposes requirements that go beyond what most voluntary programs include. Plus, full compliance will be closely monitored, and violations strictly enforced. 

Investment advisers and firms can expect closer scrutiny from the SEC and robust enforcement of the new law in the years ahead. It is therefore critical that all investment advisers consult with professionals to ensure that their programs and policies are in place and fully compliant with the new rule before January 1, 2026.

Whether it is verifying accredited investors, obtaining an accredited investor certificate, participating in a complete investor accreditation program, or developing AML/CFT policies and programs, compliance with the securities laws is critical for investors, issuers, broker-dealers, and now, investment advisers. The securities laws touch on a vast number of financial and investment issues of importance to investors and issuers alike. VerifyInvestor.com makes verifying accredited investors easy, cost-effective, secure, and reliable. Our services, (which also include qualified purchaser and qualified client verification), are always code-compliant and confidential. We help companies fully and easily comply with their legal obligations to verify accredited investors.