ICI Files Comment Letter on FinCEN Proposal to Modernize AML/CFT Program Requirements for Mutual Funds and Other Financial Institutions

[35814]

September 03, 2024

TO: ICI Members
AML Compliance Working Group SUBJECTS: Anti-Money Laundering
Compliance
Intermediary Oversight
Operations
Risk Oversight
Transfer Agency RE: ICI Files Comment Letter on FinCEN Proposal to Modernize AML/CFT Program Requirements for Mutual Funds and Other Financial Institutions

 

On June 28, the Financial Crimes Enforcement Network (FinCEN) proposed amendments (Proposal) that would enhance anti-money laundering/countering the financing of terrorism (AML/CFT) program requirements for financial institutions already subject to AML/CFT requirements, including mutual funds.[1] The Proposal is intended to implement changes to the Bank Secrecy Act (BSA) as enacted by the Anti-Money Laundering Act of 2020 (AML Act).[2]  The NPRM states that the Proposal "seeks to promote effectiveness, efficiency, innovation, and flexibility with respect to AML/CFT programs; support the establishment, implementation, and maintenance of risk-based AML/CFT programs; and strengthen the cooperation between financial institutions and the government."[3]

The Proposal would impact AML/CFT program requirements applicable to a variety of financial institutions.[4] ICI's comment letter focused on key aspects of the Proposal that would impact mutual funds, a term defined by FinCEN (and used herein) to include open-end exchange-traded funds.

The Proposal and ICI's comment letter are summarized below.

Background

The Proposal, if adopted, would require financial institutions to establish, implement and maintain effective, risk-based, and reasonably designed AML/CFT programs. An AML/CFT program would need to include certain minimum components, which are discussed below.

• Risk Assessment Process: FinCEN proposed to require a risk assessment process that would serve as the basis of a financial institution's AML/CFT program. The Proposal would require financial institutions to update their risk assessment on a periodic basis, including, at a minimum, when there are material changes to a financial institution's risk profile.
• Internal Policies, Procedures and Controls: The Proposal would require AML/CFT programs to "reasonably manage and mitigate [money laundering/terrorist financing] risks through internal policies, procedures, and controls that are commensurate with those risks and ensure ongoing compliance with the [BSA] and its implementing regulations."[5]  
• AML/CFT Officer: The Proposal includes technical changes to clarify existing AML officer requirements.
• Training: The Proposal would amend existing training requirements to provide that an AML/CFT program must include an ongoing employee training program that is also risk-based and that is focused on areas of risk as identified by the risk assessment process.
• Independent Testing: The Proposal would modify existing independent testing requirements to specify that AML/CFT programs must include "independent, periodic AML/CFT program testing . . . conducted by qualified personnel of the financial institution or by a qualified outside party."[6]  
• Board Approval and Oversight: The Proposal would require that a financial institution's board of directors (or equivalent governing body) approve and oversee each component of the financial institution's AML/CFT program. The proposed changes make board approval and oversight requirements consistent across the various existing AML program rules and make clear that board approval alone is not sufficient.
• Duty to Establish, Maintain, Enforce and Perform the AML/CFT Program: The Proposal would require that "the duty to establish, maintain, and enforce the AML/CFT program must remain the responsibility of, and be performed by, persons in the United States."

ICI Comment Letter

ICI filed a comment letter on September 3, commenting on several aspects of the Proposal.

• We argue that financial institutions' AML/CFT programs are often global and that FinCEN should not require that all elements of an AML/CFT program be "performed by" persons in the United States. We explain that, in practice, global financial institutions often delegate the administration of the day-to-day aspects of an AM/CFT program to experienced compliance staff that may be located in non-U.S. jurisdictions. We argue that the proposed change would disrupt existing AML/CFT programs, and it would be extremely burdensome and costly, as many financial institutions would be forced to significantly change the way their AML/CFT programs are currently administered.
• We request that FinCEN clarify what constitutes "material changes" that trigger a requirement to update a financial institution's risk assessment. We agree with FinCEN's proposed approach, which does not mandate a financial institution to update its risk assessment at set intervals, but we request that FinCEN provide examples of when a change to the financial institution's business would, or would not, be considered "material."
• We request that FinCEN acknowledge the unique role of mutual fund boards and tailor any board approval and oversight requirements accordingly. We explain the unique structure of mutual funds and role of mutual fund boards, and we discuss relevant existing SEC requirements under Rule 38a-1 under the Investment Company Act of 1940. We argue that Rule 38a-1 already accomplishes the goals set forth in the NPRM in a way that takes into account the unique structure of mutual funds and the rule of fund boards. Accordingly, we request that FinCEN confirm that the proposed board approval and oversight requirements for mutual funds would be satisfied by a fund's compliance with the requirements of Rule 38a-1.
• We stress that FinCEN should provide at least 18 months to comply with any final rule. We argue that, given the large volume of recently proposed and adopted AML/CFT-related rules, FinCEN should provide financial institutions additional time to develop and implement the requirements of the NPRM and other rules. We also argue that, given the interrelated nature of recent rulemakings, FinCEN should sequence the compliance dates for any additional final rules appropriately.

 

Erica Evans
Assistant General Counsel

Kelly O'Donnell
Director, Transfer Agency and Operations
 

Notes

[1] Anti-Money Laundering and Countering the Financing of Terrorism Programs, Financial Crimes Enforcement Network, Department of Treasury, 89 Fed. Reg. 55428 (July 3, 2024) ("NPRM"), available at https://www.govinfo.gov/content/pkg/FR-2024-07-03/pdf/2024-14414.pdf.

[2] The AML Act was enacted on January 1, 2021 as part of the National Defense Authorization Act for Fiscal Year 2021 and makes certain changes to the BSA AML/CFT program requirements.

[3] NPRM at 55430.

[4] These financial institutions include banks, casinos and card clubs, money services businesses, brokers or dealers in securities, or broker dealers, mutual funds, insurance companies, futures commission merchants and introducing brokers in commodities, dealers in precious metals, precious stones, or jewels, operators of credit card systems, loan or finance companies and housing government sponsored enterprises.

[5] Id. at 55440.

[6] Id. at 55443. The NPRM states that "FinCEN considers these changes to be consistent with long-standing requirements for independent testing and not substantive."