USA PATRIOT ACT COMPLIANCE PROPOSED TREASURY
REGULATIONS HEDGE FUNDS EXECUTIVE SUMMARY

Money Laundering Risk

Treasury has concluded that the primary risk of money laundering comes from launderers, for example, who would use hedge fund accounts to “layer” their funds by sending and receiving money and wiring it quickly through several accounts and multiple institutions, or by redeeming an interest in one hedge fund originally purchased with illegal proceeds, and then reinvesting the proceeds received in another hedge fund. Layering could also involve investing in the name of a dummy corporation or other front entity designed to conceal the true owners.

Covered Businesses

In general, Treasury is proposing to impose anti-money laundering regulation on those unregistered investment companies which are not subject to SEC regulation, including hedge funds, private equity funds, venture capital funds, commodity pools and real estate investment trusts (REITs).

The regulation would reach only a hedge fund that:

(1) is organized in the United States, sells ownership interests to a “U.S. person”, or is organized, operated, or sponsored by a U.S. person;

(2) gives an investor the right of redemption within two years of investment; and

(3) has assets under management totaling $1,000,000 or more.

Elements of an Anti-Money Laundering Program

The proposed anti-money laundering programs must include at a minimum:

(1) the development of internal policies, procedures, and controls;

(2) the designation of a compliance officer;

(3) an ongoing employee training program; and

(4) an independent audit function to test programs.

Because offshore operations may produce a lack of transparency regarding the entities that invest in a hedge fund, Treasury would require that the hedge fund conduct

some due diligence regarding an investor, by using a risk-based evaluation and analysis of unspecified relevant factors.

Registration

Treasury also proposes that hedge funds file a notice with Treasury containing the following information:

a) the name, address, e-mail address and telephone number of hedge fund;

b) the name, address, e-mail address, telephone number and registration number of any investment adviser, commodity trading advisor, commodity pool operator, organizer or sponsor of hedge fund;

c) the name, e-mail address and telephone number of the designated anti-money laundering program compliance officer;

d) the dollar amount of assets under management held by the hedge fund; and

e) the number of participants, interest holders or security holders in the hedge fund.

The registration would have to be amended within thirty days of any changes, other than a change in the amount of assets under management and the number of investors.

Timing

Hedge funds would be required to have anti-money laundering programs in place within 90 days of Treasury’s adoption of a final regulation.

Other Anti-Money Laundering Measures

Although not addressed in the current proposal, Treasury is likely to expect that other anti-money laundering measures will be integrated into a hedge fund’s anti-money laundering program including:

 Click here for the Proposed Treasury Regulations.