Hedge Fund Anti-Money Laundering Obligations
In response to the 9/11 attack, the Patriot Act was adopted which amended the Bank Secrecy Act. This means that certain establishments are now subject to the requirements of the anti money laundering legislation including hedge funds.
In essence, this Act requires financial institutions to adopt procedures from the AML. This requirement, however, does not cover domestic hedge funds which are hedge funds organized within the United States. Offshore hedge funds, on the other hand, are governed by the AML of the local area or country where the investment is located.
The United States Treasury Department’s OFAC (Office of Foreign Assets Control), however, does maintain a list of groups, countries and individuals where hedge funds are restricted to do business with to further implement the AML compliance. Any hedge fund managers or advisers should check any potential investors with OFAC’s SDN List. Non-compliance often results in severe penalties.
Part of the obligations under the AML guidelines, based on the amendments in the Patriot Act, is that hedge fund companies are obligated to assist government agencies in preventing and detecting any money laundering activities.
Overall, though, hedge funds are not required to totally adopt AML regulations. However, broker dealers and banks are obligated to adopt AML procedures and they, in turn, may require their clients to implement AML policies. This means that hedge funds may be requested to adopt anti-money laundering policies if their bank or broker asks them to.