Kirkpatrick & Lockhart LLP
ANTI-MONEY LAUNDERING
January 2003
FinCEN Publishes Proposed Rule Requiring
Mutual Funds to File Suspicious Activity Reports
On Wednesday, January 15, 2003, Treasury’s
Financial Crimes Enforcement Network (“FinCEN”)
submitted for publication in the Federal Register a
proposed rule (“Proposed Rule”) that would require
mutual funds to file suspicious activity reports
(“SARs”) with FinCEN. The Proposed Rule generally
tracks the SAR regulations for broker-dealers.
The following is a brief overview of the Proposed
Rule.
disguise funds or assets derived from 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;
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Coverage and Timing
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Coverage. The Proposed Rule applies to
registered open-end investment companies
(“mutual funds”). Closed-end funds and
unregistered investment companies (e.g.,
hedge funds, private equity and venture capital
funds, and REITs) fall outside of the scope of
the Proposed Rule.
Timing. The Proposed Rule would be effective
180 days after the final regulation is published
in the Federal Register. Comments on the
Proposed Rule must be received within 60 days
from the date the Proposed Rule is published in
the Federal Register.
Standard for Reporting Suspicious Transactions
The reporting standard tracks the standard for
broker-dealers. Under the Proposed Rule, a
transaction requires reporting 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, 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):
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Involves funds derived from illegal activity or
is intended or conducted in order to hide or
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Is designed, whether through structuring or
other means, to evade any requirements of this
part or any other regulations promulgated
under the 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.
The release for the Proposed Rule states that a
mutual fund must base its determination as to
whether a SAR is required on “all the facts and
circumstances relating to the transaction and the
customer of the mutual fund in question.” The
release also acknowledges that, in the case of a
transaction conducted through an omnibus account
maintained by an intermediary (e.g., a broker-dealer),
a mutual fund may not know, suspect or have reason
to suspect that the transaction is one for which
reporting would be required, because the fund
typically has little or no information about individual
customers represented in an omnibus account. The
release reiterates that the omnibus account holder is
itself a customer for purposes of the Proposed Rule.
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ANTI-MONEY LAUNDERING
The Proposed Rule places the obligation to file SARs
with the mutual funds involved in the transaction.
The Proposed Rule also states that no more than one
report is required with respect to a suspicious
transaction to which several financial institutions
with SAR obligations (e.g., broker-dealers and
banks) are parties, so long as the report contains all
of the relevant facts. Thus the Proposed Rule
permits persons obligated to file SARs to coordinate
so that only one SAR is filed with respect to a given
transaction. According to the release, a mutual fund
may discuss transactions, for these purposes, with
another mutual fund or with service providers that
are involved in the transaction (e.g., investment
advisers, transfer agents, broker-dealers, principal
underwriters, and broker-dealers). Treasury has not
clarified how the information sharing provisions of
the USA PATRIOT Act would apply in these
circumstances.
The Role of Service Providers
The release for the Proposed Rule acknowledges that
mutual funds typically conduct operations through
affiliated and unaffiliated third parties (“service
providers”) and permits mutual funds to
contractually delegate performance of their SAR
obligations to service providers. In cases of such
delegation, the mutual fund would remain
responsible for compliance with the Proposed Rule
and would be required to actively monitor the
procedures for reporting suspicious transactions.
Mechanics of the Proposed Rules
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The Form for Filing SARs. Mutual funds
must make SAR filings via Form SAR-SF, the
same form used by broker-dealers.
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. The Proposed Rule encourages
mutual funds to notify appropriate law
enforcement authorities by telephone in
addition to filing a SAR in situations involving
terrorist financing or ongoing money
laundering.
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Retention of Records. Mutual funds must keep
a copy of any SAR filed, including any
supporting documentation, for five years from
the date of filing. These records must be made
available to FinCEN, any other appropriate law
enforcement agencies, or federal and state
securities regulators upon request.
Confidentiality of Reports. A mutual fund,
including its directors, officers, employees, and
agents, may not disclose a SAR except to law
enforcement and regulatory agencies, and for
the purpose of coordinating a SAR filing with
respect to transactions where multiple parties
have SAR obligations.
Limitation of Liability. Mutual funds and their
directors, trustees, officers, employees and
agents are not liable to any person under any
law or regulations of the United States for any
disclosure contained in, or for failure to
disclose the fact of, a SAR filed with FinCEN.
Examination and Enforcement. Treasury,
through FinCEN or its delegees (such as the
SEC), will examine compliance with the
Proposed Rule. If there has been a failure to
file a SAR as required, the release suggests
that FinCEN and the SEC 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. Presumably
this would include the mutual fund’s oversight
of procedures maintained by others on its
behalf.
Please contact Diane E. Ambler (202.778.9886,
dambler@kl.com) or András Teleki (202.778.9477,
ateleki@kl.com) if you have any questions or would
like further information.
Kirkpatrick & Lockhart LLP
2
ANTI-MONEY LAUNDERING
Kirkpatrick & Lockhart LLP offers diverse experience in issues relating to money laundering. We can help
banking and diversified financial services clients assess their risk, establish and review compliance practices,
investigate potential weaknesses, perform internal investigations, and respond to regulatory inquiries and
enforcement actions while being sensitive to the privacy of each client and their customers through an
effective attorney-client privilege relationship.
In addition, we have established a website dedicated to issues relating to anti-money laundering regulatory
and legislative developments. The website is located at www.kl.com/aml/amlwrc. In addition to outlining
K&L’s enterprise-wide approach to assisting clients with money laundering compliance issues, the website
contains a resource center with over 100 carefully selected links to various informational resources on money
laundering. The resource center also includes a library of prior K&L publications on money laundering.
We invite you to contact one of the members of our cross-disciplinary anti-money laundering practice team
for additional assistance. You may also send general inquiries to antimoney@kl.com.
BOSTON
Michael S. Caccese
D. Lloyd Macdonald
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David Mishel
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LOS ANGELES
William J. Bernfeld
David P. Schack
William P. Wade
NEWARK
Anthony P. La Rocco
NEW YORK
Beth R. Kramer
Richard D. Marshall
Loren Schechter
Diane E. Ambler
Benjamin J. Haskin
Ronald A. Holinsky
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Henry L. Judy
Ivan B. Knauer
Rebecca H. Laird
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