Expanding Oversight: Private Investment and the Bank Secrecy Act

Photo Illustration: David Evans/Bloomberg Law; Photo: Getty Images

Introduction

The United States is the single largest recipient of foreign investment worldwide due to its diverse industries and business-friendly climate. These same qualities pose challenges for regulators, specifically in tracking sources of private capital. While most foreign investments are legitimate, current gaps in transparency present opportunities for exploitation. In August 2024, the Financial Crimes Enforcement Network (FinCEN) imposed new anti-money laundering (AML) program requirements on registered investment advisors and exempt reporting advisors. These new requirements were initially scheduled to take effect on January 1, 2026. FinCEN cites three primary policy justifications for this expanded regulatory regime in its final rule. First, the investment advisory industry lacks a comprehensive set of obligations designed to address illicit finance risks. Second, investment advisors and pre-defined financial institutions engage in substantively similar activities. Third, illicit actors regularly exploit the private funds sector. While the final rule addresses the investment advisor industry as a whole, the new requirements under the Bank Secrecy Act expand the umbrella definition of a “financial institution” to include most private equity (PE) fund managers and venture capital (VC) firms, thereby subjecting two major sources of capital for emerging growth companies to certain regulatory constraints.

What Is FinCEN and the BSA? 

FinCEN is a bureau of the United States Department of Treasury and reports to the Treasury Under Secretary for Terrorism and Financial Intelligence. FinCEN’s mission is to safeguard national security by protecting the financial system from dangerous and illicit activities, like money laundering, that help fund terrorism. The Bank Secrecy Act (BSA) was enacted in 1970 and authorizes FinCEN—through the Department of Treasury—to impose reporting requirements on financial institutions to help prevent such activities. Key provisions of the BSA mandate the filing of Currency Transaction Report (CTR) for any daily cash transactions aggregating to more than $10,000 and the filing a Suspicious Activity Report (SAR) for any illicit activity. Collectively, these requirements are referred to as the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) program.

Combatting Illicit Financial Risk

By designating investment advisers as financial institutions, FinCEN wants to curb illicit activities within private investment firms. According to the Treasury Department, these funds have facilitated the movement of money linked to corruption, tax evasion, and fraud into the U.S. financial system. Additionally, private funds—especially venture capital funds—have been used by foreign governments to gain access to sensitive U.S. technology and services which implicate national security. 

For example, a risk assessment found instances of capital from China and Russia flowing into U.S. startups through VC firms. In one case, sanctioned Russian businessman, Viktor Vekselberg, invested in U.S. companies through the private investment firm Columbus Nova. His company, Renova, was Columbus Nova’s largest client. In another case, Altpoint Capital, the private equity firm of Russian billionaire Vladimir Potanin, purchased a company that services the contract to store Maryland’s statewide list of eligible voters. Maryland’s governor, for their part, said that the state was unaware of the connection. Meanwhile, Altpoint Capital’s portfolio companies have also secured contracts with the Department of Defense, Department of Labor, and Department of Energy. 

Impact On Private Equity And Venture Capital

Historically, PE and VC firms have operated relatively unburdened from strict regulatory oversight. Reporting requirements set forth by the Securities Exchange Commission (SEC), for example, are limited and not particularly onerous. Under SEC rules, fund managers are not required to report or maintain records of the fund’s beneficial owners; fund managers must only report the percentage of foreign investors to the SEC. Such reporting does not require the disclosure of investor names or nationalities. Additionally, SEC rules do not require funds to disclose their privately held investments. Instead, the SEC only mandates the disclosure of positions in publicly traded stock. Lastly, funds are not required to maintain an AML compliance program nor file suspicious reports under SEC rules.

Meanwhile, the BSA/AML program establishes comprehensive requirements. PE and VC firms will have to adhere to the Customer Identification Program (CIP) and Know Your Customer (KYC) requirements to comply with BSA/AML requirements. These programs, generally, require institutions to verify the customer’s identity, to assess, and to monitor risks over the life of the account.  

Still, however, there is skepticism regarding the new rule among industry members. Some believe that expanding the definition of financial institution to include PE and VC firms will apply redundant and unnecessary AML requirements. Venture capital firms do not directly deal with cash as these are deposited into financial institutions. Institutions that process cash transactions are already subject to AML requirements and skeptics believe this is just duplicating efforts. FinCEN, however, justifies the expanded rule and contends that there is ample evidence that investment advisors engage in activities similar to financial institutions, particularly when directing broker-dealers to execute securities transactions on behalf of clients. These transactions are withdrawn from the firm’s bank accounts in blocks, and as such, transactions for individual investors are not visible to the bank. These transactions are, however, visible to the investment advisers, and FinCEN is claiming that applying expanded AML rules to investment advisers will promote needed transparency.

Originally slated to become effective January 1, 2026, FinCEN has delayed the effective date to January 1, 2028. The delay gives FinCEN time to ensure that the rule is effectively tailored to diverse investment models and risk profiles. FinCEN estimates that delaying the implementation, and giving investment advisers a two year head-start, will result in aggregate pro forma savings of $1.45B over the period. 

To ensure compliance with the effective date of the rule, firms should start bolstering their compliance programs now. Due to a preexisting need to comply with requirements of their banks and investors, many VC and PE firms already have one or more of the core elements needed for an effective BSA/AML program. It is recommended that firms get their programs reviewed by an independent adviser to identify any potential gaps. Chief Compliance Officers, or the independent advisers of firms, should also start a process for ongoing due diligence of investors as this will be a critical part of staying compliant with the new rules.

Conclusion

These regulatory changes represent a major shift for the VC and PE sector. The new directives by FinCEN and the Treasury Department hope to close a loophole that has existed where foreign investors have the opportunity to engage in malicious activities and introduce illicit funds to the US economy. Enhanced due diligence, transparency, and formal compliance measures are no longer optional; they are becoming standard. Firms that begin preparing now will be far better positioned to navigate the transition and maintain compliance in a more regulated future.

*The views expressed in this article do not represent the views of Santa Clara University.