Treasury Considering New Rules on VC AML Programs

In May, the Department of the Treasury published a new proposal under its USA PATRIOT Act’s anti-money laundering (“AML”) authority on the obligations of investment advisers to develop anti-money laundering programs and register with a federal AML regulator. This “Advisers Rule,” as proposed, would have the effect of requiring many NVCA member firms to have AML programs in place and to register as firms subject to the rule.

The Advisers Rule is a separate proposal from the proposed AML program compliance rule on unregistered investment companies, the “Fund Rule,” which was issued in September, 2002. The comment period on the Fund Rule ended last Fall and the final rule has not yet been released. Indeed, it may not be finalized until Treasury has concluded consideration of the proper scope of the Advisers Rule.

As described in NVCA’s Member Alert of October 25, 2002, the proposed Fund Rule concludes that private equity funds, which do not permit investors to redeem investments within two years of their purchase, should not be required to comply with the USA PATRIOT Act’s AML program obligations. While the proposed Fund Rule does not provide guidance as to the meaning of the terms “permit” or “redeem” in that context, NVCA and others filed comments with recommendations for ways to clarify those terms in a way that accommodates the needs of venture capital investors for withdrawal under circumstances that certainly do not constitute redemption in a typical sense. We remain hopeful that Treasury will make the liquidity-based exemption as practical and meaningful as possible under the Fund Rule, once it is finalized.

Similarly, NVCA will work with federal officials on the Advisers Rule. We plan to file a formal comment and have met with Treasury Department officials and representatives of other agencies to discuss an amendment of the proposed Advisers Rule that reflects the same policy choice as the Fund Rule’s liquidity-based exception. For NVCA member funds that do not permit investors to redeem shares within two years, the AML risk for the typical VC firm “adviser” is identical to the risk for the fund it manages. On this basis, we will urge the Treasury to exempt those firms from the Advisers Rule for the same reasons that illiquid funds are exempted in the proposed Fund Rule.

NVCA members are once again reminded that, notwithstanding the scope of either proposed rule, member firms are subject to federal money laundering law obligations. Therefore, venture funds, which Treasury considers “investment companies” for these purposes must continue to satisfy statutory and regulatory obligations (e.g., recordkeeping requirements for currency transactions, etc.). Existing anti-money laundering requirements include:

Venture capital firms are required to comply with the economic sanctions imposed by the U.S. against hostile entities. These sanctions come from the Office of Foreign Assets Control (“OFAC”), which uses a variety of methods to impose sanctions (e.g., blocking and freezing assets under U.S. jurisdiction, prohibiting or limiting financial transactions with a designated country and its citizens or a designated organization and its members). Venture capital firms should consult the OFAC list of U.S. economic sanctions to ensure that funds are not accepted from or paid to any geographic region, person or entity subject to U.S. sanction.

Venture capital firms must also file Currency Transaction Reports with the Department of Treasury for any currency transaction or groupings of transactions in excess of $10,000, as well as any transactions that appear to be structured to circumvent this reporting requirement.

Furthermore, there may be additional provisions applicable to a particular firm, depending on the nature of that firm’s business and the scope of forthcoming Treasury regulations.

NVCA remains committed to the idea that the industry will do its part to prevent the laundering of terrorist money and other forms of illegitimate funds. We will continue our dialogue with federal officials and advise members as the situation develops.

If you have any questions or comments or would like further information, please contact Jennifer Connell Dowling at (703) 524-2549.