Regulators See AML Risks in Funding Portal Plan

The U.S. Treasury Department could soon recommend tweaks to a Bank Secrecy Act regulatory proposal that’s expected to foster the creation of dozens of equity‐based funding companies.

The proposal—a Securities and Exchange Commission (SEC) response to the 2012 JOBS Act—would permit the formation of so‐called funding portals, a new type of business that would function as an intermediary in small equity offerings to nonaccredited investors. To deter criminal abuse, the agency said it would impose anti‐money laundering (AML) rules on the firms.

The U.S. Financial Crimes Enforcement Network (FinCEN) is weighing a separate proposal that would expand the definition of broker and dealers in securities to bring the firms under the Bank Secrecy Act, according to 2014 document published on the Office of Management and Budget’s Web site.

“If you have concerns that money laundering can occur though a funding portal, you need to find a mechanism to make them meet the definition of a financial institution [under the Bank Secrecy Act],” said Emily Gordy, a former official with the Financial Industry Regulatory Authority (Finra), a self‐regulatory organization that works with the SEC.

At the moment, however, no operational funding portals exist because the SEC has yet to finalize the rule, she said.

The SEC expects some 50 entities to register as funding portals once the rule is implemented, the agency said in 2013.

A related business model—crowdfunding platforms—has helped users collectively raise billions of dollars through Kickstarter, GoFundMe and other companies. Unlike funding portals, such companies can facilitate donations and rewards‐based programs but not help clients sell private equity.

“The funding portal is made for small startups or projects looking for some initial capital and then enter the capital markets in a traditional manner once they get some bigger interest in their companies,” said Bao Nguyen, director of risk advisory services with Kaufman Rossin in Boca Raton, FL.

The initiative is intended to minimize capital costs for companies, said Alma Angotti, a director at Navigant, a consultancy.

“They’re saying if you’re really just eBay for securities, and you’re not giving advice or holding securities or holding assets, we’re not going to make you register as a broker‐dealer,” she said of the SEC proposal.

Once finalized, the companies will have to “know their customer—the person investing, the beneficiary of the investments—and they’ll have suspicious activity reporting obligations,” said Nguyen.

A FinCEN spokesman declined to comment on the potential rule.

____

Bao Q. Nguyen, MBA, CAMS, is a risk advisory services director in Kaufman Rossin’s Boca Raton, Florida, office and a former FINRA examiner. Kaufman Rossin is one of the top CPA firms in the U.S. and provides compliance, consulting, tax, and audit services to the investments and financial services industries. Bao can be reached at bnguyen@kaufmanrossin.com.


Bao Nguyen, CAMS, CFE, CRCP, is a Risk Advisory Services Broker-Dealer and Investment Adviser Services at Kaufman Rossin, one of the Top 100 CPA and advisory firms in the U.S.