A Guide to AML for Hedge Funds

Page content

There are certain compliances in AML for hedge funds that should be followed. These obligations are often not clear. However, to be able to understand what these obligations are it is first important to understand what AML and hedge funds are.

Anti-Money Laundering and Hedge Funds

Anti-money laundering is a term often used in both the legal and financial sectors describing the regulations or policies that require financial institutions and other establishments to report or prevent any money laundering activities. In essence, money laundering is the activity to hide the source or identity of money that were obtained illegally. One of the main thrusts of the AML law or policy is to prevent any activities that concern the coming and going of illegal money in a country.

The anti money laundering procedures were already in existence for quite some time but it was internationally recognized and further enhanced after the September 11 attack in New York with the premise that anti-money laundering can help decrease terrorism by cutting of the financial support for these activities but do not confuse AML with ATF or the Anti-Terrorist Financing.

Hedge Funds, on the other hand, are investment funds that are open or set up for a certain number of investors that take a larger investment opportunity. Simply put, it is like pooling a group of investors to invest in something bigger.

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.