Senate Bill Would Require Hedge Funds to Set Up Anti-Money Laundering Programs

A Senate bill would require hedge funds to know their offshore clients by requiring them to establish anti-money laundering programs like other U.S. financial institutions, under regulations to be issued by the Treasury Department. S. 681 is a bi-partisan measure sponsored by Senator Carl Levin, Chair of the Subcommittee on Investigations. The primary focus of the Stop Tax Haven Abuse Act is to restrict the use of offshore tax havens and abusive tax shelters.

Currently, unregistered investment companies, such as hedge funds and private equity funds, are the only class of financial institutions under the Bank Secrecy Act that transmit substantial offshore funds into the United States, yet are not required by law to have anti-money laundering programs, including know your customer, due diligence procedures. Sen. Levin is concerned that this growing sector of the financial services industry is serving as a gateway into the U.S. financial system for monies of unknown origin

Although Treasury proposed anti-money laundering regulations for these groups in 2002, it has not yet finalized them. The bill would require Treasury to issue final regulations within 180 days of the enactment of the bill. Treasury would be free to work from its existing proposal, but the bill would also require the final regulations to direct hedge funds and private equity funds to exercise due diligence before accepting offshore funds and to comply with the same procedures as other financial institutions if asked by federal regulators to produce records kept offshore.

The Senate expects that, as in the case of all other entities covered by the Bank Secrecy Act, the regulations issued in response to the bill would instruct hedge funds and private equity funds to adopt risk-based procedures that would concentrate their due diligence efforts on clients that pose the highest risk of money laundering.

According to Sen. Levin, a subcommittee investigation showed that persons have used hedge funds and private equity funds they controlled to funnel millions of untaxed offshore dollars into U.S. investments. Because hedge funds, private equity funds, and company formation agents are as vulnerable as other financial institutions to money launderers seeking entry into the U.S. financial system, the bill is aimed at ensuring that these groups know their clients and do not accept or transmit suspect funds into the U.S. financial system.