Impact of New Money Laundering Rules Is Uncertain

New rules applying anti-money laundering requirements to investment advisers will impose additional compliance costs on hedge funds and other money managers, but the level of cost is uncertain because the reach and rigor of the new rules isn’t yet clear.

The WSJ reported Friday that a draft of the rules was approved by the White House Office of Management and Budget, extending the kinds of anti-money laundering controls now required of other financial institutions to money managers with $150 million or more in assets. These requirements would include measures to detect money laundering and filing “suspicious activity reports” to the U.S. government, the Journal reported.

Experts differ on the impact of the rules. Keith Diamond, a director and AML compliance officer at Kaufman Rossin Fund Services, which provides administrative services to money managers, said that though the “devil’s in the details,” the effect on the hedge fund industry will be limited by “how prepared the industry has been for some time.” Rules to apply AML requirements to investment advisers were proposed in 2002, then withdrawn. Many funds have administrators that perform compliance for them, including due diligence on investors, said Mr. Diamond, though he said smaller firms with more-limited resources are likely to find the rules more costly.

Ed Wilson, a partner at law firm Venable, said the risk is that the rules could “hit a lot of entities that are pretty independent right now.” Suspicious activity reports could be a pain point for firms that haven’t had to file them before, especially as regulators seem to want higher-quality reporting, he said. He pointed to a February speech by Andrew Ceresney, chief of the enforcement division of the Securities and Exchange Commission, in which he said some suspicious activity reports are “great, but many are not.”