Details Of MFA Money-Laundering Guidance For Hedge Funds

by Carla Johnson, Investors Offshore, London

10 April 2002

Further details are now available of the "Preliminary Guidance for Hedge Funds and Hedge Fund Managers on Developing Anti-Money Laundering Programs" issued yesterday by the US Managed Funds Association (MFA).

"The USA PATRIOT Act requires all "financial institutions", including investment companies, CPOs and CTAs, to establish an anti-money laundering program by April 24, 2002," said John G. Gaine, President of the Association. "MFA and its member firms have long been strong supporters of the industry's anti-money laundering efforts, and the MFA-sponsored Guidance is written to help its members implement or enhance anti-money laundering policies and procedures in a timely manner."

Mr. Gaine cautioned that anti-money laundering compliance would undergo great change as regulations implementing the USA PATRIOT Act are promulgated and as industry practice develops. The preliminary MFA Guidance is designed to help member firms develop or enhance their anti-money laundering programs and comply with industry standards, and MFA may update the Guidance in the future as appropriate, he said.

Title III of the USA PATRIOT Act, entitled the "International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001", and in particular Section 352, states that each financial institution must establish an anti-money laundering program that includes at a minimum: o the development of internal policies, procedures and controls; o the designation of a compliance officer; o an ongoing employee training program; and o an independent staff audit function to test programs.

The MFA Guidance identifies the fundamental elements of anti-money laundering programs for hedge funds and hedge fund managers.

Part I of the Guidance addresses the adoption of a broad policy statement against money laundering; the role of senior management; the designation of an anti-money laundering compliance officer; establishment of ongoing employee training programs; and the independent audit function.

The MFA Guidance addresses the development of investor identification policies and procedures in Part II. MFA's Guidance regarding investor identification procedures, in particular, is highly detailed and of the utmost importance. MFA says the hedge fund manager's investor identification procedures should be based on the premise that the hedge fund manager should accept an investment from a new investor only after:

• the hedge fund manager has confirmed the identify of the investor and that the investor is investing as principal and not for the benefit of any third party;
• if the investor is investing on behalf of other underlying investors, the hedge fund manager has confirmed the identities of the investor and the underlying investors; or
• the hedge fund manager has determined that it is acceptable to rely on the investor due diligence performed by a third party, such as a fund administrator or an investor intermediary, with regard to the investor (and underlying investors, if applicable).

Reliance upon investor identification procedures performed by a third party is addressed in Part III, including the determination of circumstances where reliance may generally be appropriate and the allocation of responsibilities between the parties.

In addition, the MFA Guidance provides definitions of industry terminology; a proposed template for anti-money laundering policies and procedures; sample provisions for fund administrators; investor intermediaries and subscription documents; sample board resolutions; effective dates of certain key anti-money laundering provisions of the USA PATRIOT Act; a list of members of the Financial Action Task Force ("FATF") on money laundering; a list of FATF non-cooperative countries and territories; lists maintained by the Office of Foreign Asset Control; and money laundering advisories issued by the Financial Crimes Enforcement Network.

MFA says the Guidance is intended primarily for U.S.-based hedge funds and hedge fund managers. MFA also believes that the Guidance may be applicable to offshore hedge funds and hedge fund managers to the extent that they utilize U.S.-based prime brokers, since, in order to comply with the requirements of the USA PATRIOT Act and implementing regulations, these prime brokers may require comfort regarding their fund clients' anti-money laundering policies, procedures and controls.

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