Hedge Funds Face More Bureaucracy Under US KYC Legislation

by Carla Johnson, Investors Offshore, London

15 February 2002

Hedge funds which fall under money laundering legislation recently passed by the US Congress will face additional administrative burdens and higher costs, says Patrick McCarty, general counsel at the Managed Funds Association, a hedge fund industry association. Hedge funds that fall under the legislation will be required to have a money laundering programme, a compliance officer, an annual audit and training.

US hedge funds will have to adopt stricter know-your-customer rules, although if a client is in a well-regulated jurisdiction the additional work may be quite trivial. "Any money that comes in from a reputable bank located in England will probably require very little change," said Mr McCarty, explaining that the burdens could be higher for less well known banks in less developed countries.

"The worst is going to be the non co-operative countries," said Mr McCarty, referring to the FATF's list of 19 'non co-operative' countries which includes Israel, Russia, Ukraine, Hungary, Egypt, Indonesia and Nigeria, as well as a number of smaller offshore jurisdictions.

In fact, many questions remain about the practical effects of the legislation. Betty Santangelo, a partner at the law firm Schulte Roth & Zabel, told the Financial Times that there is still uncertainty whether offshore hedge funds will be covered by the new rules, although both she and Mr McCarty agreed that the rules clearly apply to the prime brokerage operations of US banks and securities firms, and will therefore affect to some extent offshore funds.

Ms Santangelo also says it is unclear whether hedge funds will be able to rely on representations made by private banks about their clients' respectability. "I think it is reasonable to rely on a registered entity in a FATF-(compliant) country," said Ms Santangelo. But in the non co-operative countries it seems clear that funds will need more than a private bank's word. "They will have to have some additional comfort," Ms Santangelo said.

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