Reported by Robert Johnston Jr., Jimmy Kang, Paula Ladd, Scott Moss, and Samantha Sigelakis-Minski of Lowenstein Sandler LLP

U.S. hedge funds, private equity funds, and venture capital funds (collectively, the Private Funds)² and their U.S. general partners, sponsors, and managers (Advisers) are not directly subject to the Bank Secrecy Act of 1970 and its amendments (BSA), as previously discussed in Lowenstein Sandler’s client alert, “Anti-Money Laundering Best Practices for Private Fund Managers: The Prudence of Establishing an AML Compliance Program,” dated February 17, 2023. Advisers are encouraged to implement a risk-based anti-money laundering (AML) compliance program similar to those implemented by financial institutions and with whom the Advisers and Private Funds engage with on a regular basis for multiple transactions (e.g., custody, loan, trading, banking, and other activities). An Adviser’s implementation of a risk-based AML compliance program is considered a good business practice and aligns with standard industry practices.

Red flags may be discovered during an initial investor onboarding, or from ongoing due diligence reviews that occur after the investor has been accepted as a Private Fund investor. Red flags also may be discovered through regular transaction monitoring and periodic or event-driven know-your-customer (KYC) reviews. Where a red flag remains unresolved after investigation, the Adviser will have the option of redeeming the investor’s interests and off-boarding the investor. Reporting red flags to appropriate law enforcement or regulatory authorities may be required or recommended in certain situations. All red flag reviews should be undertaken in accordance with the Adviser’s AML compliance policies and procedures.

Set forth below are examples of transactional red flags that may be encountered during the life of a Private Fund:

1. Investor’s account has money coming from or going to any third parties.
2. Investor requests to engage in investments inconsistent with their stated strategy or with prior investments.
3. Investor funds are coming from or going to banks in U.S. or foreign jurisdictions or regions which the investor has no legitimate business or personal ties.
4. Investor requests the transfer of funds into or out of their accounts to accounts in U.S. or foreign jurisdictions or regions far removed from their stated place of business or domicile.
5. Investor requests unusual payment arrangements (e.g., payments to unrelated third parties, cash only payments, splitting payments between multiple accounts).
6. Investor insists on liquidating its entire investment for unusual or unreasonable reasons/circumstances without regard for substantial losses.
7. Investor provides funds solely via cash payments, which should always be rejected.
8. Investor requests that transactions be processed in a manner that would avoid the Private Fund’s documentation procedures.
9. Investor requests economically irrational transfers, e.g., substantial investments that are followed up with redemption requests outside of the normal period with no concern for the penalty incurred and no legitimate explanation for the request.

Any transaction should be considered a red flag if it has no business or apparent lawful purpose or is not the type of transaction in which an investor would normally be expected to engage.

Read full report: https://www.jdsupra.com/legalnews/aml-best-practices-for-private-funds-6787649/