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Venture Capital Funds Need to Focus on Anti-Money Laundering Issues

 
By Perpetua B. Tranlong and T. Hale Boggs of Manatt, Phelps & Phillips, LLP

Last October, President Bush signed the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001," better known as the USA Patriot Act.

Section 352(a) of the USA Patriot Act requires the U.S. Department of Treasury to direct every "financial institution" to establish an anti-money laundering (AML) program. At this time, Treasury has not yet imposed AML regulations on venture capital, private equity and hedge funds, but has indicated it will review and likely impose AML regulations on the venture capital industry by the end of October. To do so, Treasury may seek to expand the definition of "financial institutions" to include venture capital funds.

Venture capital funds have operating needs far different from other financial institutions. They should provide comment to Treasury soon if they wish to have the industry's viewpoint considered as the regulations are formulated.

When and if regulations are imposed, a venture capital fund will need to consider the following AML issues. The key element of an AML program is that it be "reasonably designed to prevent the system from being used to launder money or to finance terrorist activities." The program must be in writing, approved by senior management and meet the following requirements:

i. Internal policies, procedures and controls must ensure the fund is not being used to facilitate money laundering. A fund should know the identity of its investors and the sources of the funds, i.e., get verification of its investors' identities and take affirmative steps to check investors against known lists of suspect entities, such as the SEC Control List, the Foreign Assets Control List, the United Nations List and the FBI Most Wanted List. For nominees, intermediaries or fund-of-funds investors, funds may need other procedures to obtain information about ultimate beneficial ownership or to safeguard against investments by suspect entities.

ii. A designated compliance officer needs to make sure the program is implemented effectively; that appropriate checks are completed on existing and potential investors; that the program is updated as necessary as the AML rules and regulations evolve; and that appropriate personnel are trained in accordance with the rules.

iii. An employee-training program must be developed to educate employees with AML responsibilities. The nature, scope and frequency of the training will depend on the functions performed, but it is expected there will be periodic updates and refreshers.

iv. Periodic independent audits must be conducted to ensure the program complies with Treasury requirements and that the program functions as designed.





© 2002  Manatt, Phelps & Phillips, LLP
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