Four key changes to anti-money laundering regulation for private markets

The U.S. is applying its Anti-Money Laundering (AML) and Know Your Customer (KYC) regulations to large parts of private capital in a bid to enhance financial transparency. The investment adviser rule takes effect in January 2026.

The U.S. Department of the Treasure’s Financial Crimes Enforcement Network (FinCEN) issued its final rule for private fund managers at the end of last year.

It will require most private fund managers to adopt and operate a risk-based program requiring AML measures and countering financing of terrorism (CFT) measures, as well as reporting suspicious activity to FinCEN.

The growth in private equity, venture capital, and hedge funds and the possibility for higher returns in alternatives raised FinCEN’s concerns that they may be ‘particularly attractive to those seeking to obscure the origin of illicit funds’, according to law firm Norton Rose Fulbright.

Despite the longer lock-up periods or limited opportunities to make withdrawals that characterize many private capital funds, FinCEN notes that illicit actors with a medium- to long-term investment horizon may not be deterred by this.

The definition of ‘investment advisers’ is broad and includes registered investment advisers (RIAs) and exempt reporting advisers (ERAs), as well as private funds that aren’t based in the U.S., but have advisory activities taking place in the U.S., including through U.S. staff or by advising U.S. persons.

Financial institutions are now required to incorporate FinCEN's AML/CFT priorities into their risk-based compliance programs. These priorities, which include areas such as corruption, cybercrime, and terrorist financing, will require updates to risk assessments, designating a compliance officer, ongoing internal training, and independent auditing.

Private markets advisors that fall under the new rules will have to make several changes, including:

1.       Designating an anti-money laundering compliance officer (AMLCO)

2.       Developing and implementing a system of internal controls

3.       Annual anti-financial crime training among staff

4.       Arrange independent assessment of the AML and CFT program

These regulatory changes underscore a comprehensive effort to modernize the U.S. financial system's defenses against money laundering and related crimes, reflecting a commitment to adapt to evolving financial technologies and threats.

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