K&LNG
MAY 2006
Alert
Anti-Money Laundering
FinCEN Publishes Final Rule Requiring Mutual
Funds to File Suspicious Activity Reports
On Thursday, May 4, 2006, the Financial Crimes
Enforcement Network (“FinCEN”) published final
regulations (“Final Rule”) in the Federal Register
requiring mutual funds1 to file suspicious activity
reports (“SARs”) with FinCEN on certain
transactions occurring after October 31, 2006. The
Final Rule generally tracks the SAR regulations
applicable to broker-dealers and is substantially the
same as the proposed rule published January 21,
2003. The adopting release for the Final Rule
(“Adopting Release”) provides useful guidance,
described below, for mutual funds filing joint SARs
with service providers and sharing information in
preparing and filing joint SARs.
STANDARDS FOR REPORTING
SUSPICIOUS TRANSACTIONS
Under the Final Rule, a transaction must be reported
if it is conducted or attempted by, at, or through a
mutual fund, it involves or aggregates funds or other
assets of at least $5,000,2 and the mutual fund knows,
suspects, or has reason to suspect that the transaction
(or a pattern of transactions of which the transaction
is a part):
■
1
2
Involves funds derived from illegal activity or is
intended or conducted in order to hide or
disguise funds or assets derived from illegal
activity (including, without limitation, the
ownership, nature, source, location, or control of
such funds or assets) as part of a plan to violate
or evade any Federal law or regulation or to
avoid any transaction reporting requirement
under Federal law or regulation;
■
Is designed, whether through structuring or other
means, to evade any requirements of the Final
Rule or any other regulations promulgated under
the Bank Secrecy Act (“BSA”);
■
Has no business or apparent lawful purpose or is
not the sort in which the particular customer
would normally be expected to engage, and the
mutual fund knows of no reasonable explanation
for the transaction after examining the available
facts, including the background and possible
purpose of the transaction; or
■
Involves the use of the mutual fund to facilitate
criminal activity (collectively, “SAR Triggers”).
The SAR Triggers for mutual funds are the same as
the ones for broker-dealers, and, like a broker-dealer,
a mutual fund may voluntarily report a suspicious
transaction that it believes is relevant to a possible
violation of any law or regulation but whose
reporting is not required by the Final Rule. Mutual
funds’ SAR filings are made on Form SAR-SF, the
same form used by broker-dealers.
Identifying Suspicious Activity. The Adopting
Release for the Final Rule acknowledges that the
SAR Triggers are largely subjective and states that a
mutual fund must base its determination as to
whether a SAR is required on “all of the facts and
circumstances relating to the transaction and the
customer in question.” The Adopting Release goes
on to state that “different fact patterns will require
different types of judgments,” and that in some
situations, “determining whether a transaction is
Closed-end funds, separate accounts registered as unit investment trusts, and unregistered investment companies fall outside the
scope of the Final Rule.
The obligation to report a transaction under the Final Rule applies whether or not the transaction involves currency. FinCEN is
aware that the use of currency in mutual fund transactions is rare.
Kirkpatrick & Lockhart Nicholson Graham LLP |
MAY 2006
suspicious within the meaning of the rule may require
more involved judgment.” Thus, the determination
of whether a SAR filing is required is not a
“mechanical” process and will need to take into
account the mutual fund’s knowledge of its customer
and whether there is a reasonable explanation for the
transaction that removes it from the suspicious
category.
Examples of Suspicious Activity. The Adopting
Release sets forth a number of examples of activities
that likely are, or may be indicative of, suspicious
activity warranting a SAR filing. For example, a SAR
is likely warranted when a mutual fund customer:
■
refuses to provide information necessary for the
mutual fund to verify the customer’s identity, to
make reports (e.g., a cash transaction report on
IRS/FinCEN Form 8300), or to keep records
required under applicable BSA regulations;
■
provides information that the mutual fund
determines to be false; or
■
seeks to change or cancel a transaction after
being informed of information verification or
recordkeeping requirements relevant to the
transactions.
In addition, the following are examples of customer
activity that warrants further investigation to
determine whether a SAR must be filed:
■
transmission or receipt of funds transfers without
normal identifying information, or in a manner
that may indicate an attempt to disguise or hide
the country of origin or destination, or the
identity of the customer sending the funds, or the
beneficiary to which the funds are sent; or
■
repeated use of a mutual fund as a temporary
resting place for funds from multiple sources
without a clear business (including investment)
purpose.
Role of Service Providers. The Final Rule requires
reporting by mutual funds but not by affiliated
persons of the mutual funds. The Adopting Release
acknowledges that mutual funds typically conduct
operations through affiliated and unaffiliated third
parties (“service providers”) and permits mutual
funds to delegate contractually performance of their
SAR obligations to service providers. In cases of
such delegation, the mutual fund would remain
responsible for compliance with the Final Rule. The
2
Adopting Release also states that the fund “should
take steps to assure that the service provider has
implemented effective compliance policies and
procedures administered by competent personnel, and
should maintain an active working relationship with
the service provider’s compliance personnel” and
reminds mutual funds of their general oversight
responsibilities with respect to delegated anti-money
laundering responsibilities.
JOINT SARS AND INFORMATION SHARING
The Final Rule recognizes that other financial
institutions, such as broker-dealers and banks, may
have separate obligations to report the same
suspicious activity under other BSA regulations. As
described in the Adopting Release, the Final Rule
permits persons obligated to file SARs to coordinate
so that only one SAR is filed with respect to a given
transaction, provided that the report contains all
relevant facts. Because Form SAR-SF permits only
one of the filing institutions to be identified as the
“filer,” the narrative section of Form SAR-SF must
include the words “joint filing” and must identify the
other mutual funds or other financial institutions on
whose behalf the report is being filed. If a separate
entity that is not a financial institution files a Form
SAR-SF as agent for a mutual fund, that entity should
designate the mutual fund as the reporting financial
institution on Form SAR-SF.
As set forth in the Adopting Release, a mutual fund
may “share information pertaining to a suspicious
transaction with any other financial institution or
service provider involved in the transaction, provided
that such financial institution or service provider will
not be the subject of the report.” Such disclosure
does not violate the non-disclosure provisions of the
Final Rule. The Adopting Release also clarifies that
if a service provider is performing the reporting
obligations of one or more mutual funds under
contract with the funds, the service provider may
similarly share the information as an agent of the
mutual funds.
TIMING, RECORDKEEPING, CONFIDENTIALITY,
AND EXAMINATION
When to File. A SAR must be filed within
30 calendar days after the date of initial detection of
facts that may constitute a basis for filing a SAR. If
no suspect is identified on the date of the initial
detection, the mutual fund has 60 calendar days from
the date of initial detection to file a SAR. In addition
Kirkpatrick & Lockhart Nicholson Graham
LLP
|
MAY 2006
to filing a SAR, the mutual fund must notify
appropriate law enforcement authorities by telephone
if the suspicious activity involves terrorist financing
or ongoing money laundering. A mutual fund may
also, but is not required to, contact the Securities and
Exchange Commission (“Commission”) in such
situations.3
Retention of Records. Mutual funds must keep the
original (or business record equivalent) and a copy of
any SAR that it files or is filed on its behalf
(including joint reports) and copies of any supporting
documentation, for five years from the date of filing.
Confidentiality of Reports. A mutual fund,
including its directors, officers, employees, and
agents, may not disclose a SAR except to FinCEN,
the Commission, appropriate law enforcement or
regulatory agencies, or self-regulatory organizations
such as NASD. It should be noted that a mutual fund
may not disclose a SAR in response to a subpoena.
Limitation of Liability. Mutual funds and their
directors, trustees, officers, employees, agents, and
service providers are not liable to any person under
any Federal law or regulation for any disclosure
contained in, or for failure to disclose the existence
of, a SAR (including joint reports) filed with
FinCEN, whether the SAR is required by the Final
Rule or is filed voluntarily.
3
3
Examination and Enforcement. The Commission, as
FinCEN’s delegate, will examine for compliance
with the Final Rule. If there has been a failure to file
a SAR as required, the Adopting Release states that
FinCEN and the Commission may take into account
the relationship between the particular failure to
report and the adequacy of the implementation and
operation of a mutual fund’s compliance procedures.
This would include the mutual fund’s oversight of
procedures maintained by others on its behalf.
Diane E. Ambler
dambler@klng.com
202.778.9886
András P. Teleki
ateleki@klng.com
202.778.9477
Michell G. Fishman
mfishman@klng.com
202.778.9215
The Adopting Release indicates that a mutual fund choosing to contact the Commission should contact its Office of Compliance
Inspections and Examinations (OCIE).
Kirkpatrick & Lockhart Nicholson Graham
LLP
|
MAY 2006
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