As FinCEN Announces Delay on Revolutionary AML Rule, Questions Follow
Last week, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) announced a major shake-up in the implementation of a long-awaited and groundbreaking piece of AML legislation. On July 21st, FinCEN announced a significant delay for the application of its final anti-money laundering (AML) rule for investment advisers, pushing the effective date of implementation from January 1, 2026 to January 1, 2028 amid a significant degree of pushback following the original announcement of the measures in 2024. Following this announcement, FinCEN – the agency tasked with collecting and analyzing a wealth of information regarding financial transactions to combat domestic and international money laundering, terror financing and additional crimes – also revealed its plans to revisit the rule’s wide-ranging scope while hinting that further modifications could be on the way ahead of the 2028 deadline.
The influx of foreign investment into the United States commercial and residential property markets has remained at the forefront of the discussion with respect to the ongoing battle against illicit finance both domestically and abroad. With the U.S. real estate and private investment markets continuing to be used as tools for laundering ill-gotten funds from a number of avenues, the prevalence of destabilizing activities such as drug and human trafficking exploits, organized crime, and white-collar crime developing as a result continues to rise across the globe. In years past FinCEN has highlighted notable criminal trends including sanctions evasion and the laundering of funds through the misuse of shell companies and high-value real estate purchases, with the U.S. government responding to these threats by implementing new legislation in the form of the Corporate Transparency Act (CTA) which required certain companies to report information about those comprising their beneficial ownership structure to the federal government, making this information accessible to law enforcement and other authorized agencies for further investigation, with the goal of preventing additional illegal activities from occurring.
While groundbreaking in its own right, the CTA failed to address another major loophole in domestic AML defenses, that being the abuse of financial advisers for purposes of money laundering and tax evasion. These professionals, who by their standard of conduct are bound to keep information about current, former and even prospective clients confidential unless directly tied to illicit activity, have historically been targeted by criminals for purposes of gaining access to various U.S. markets. Prior to these legislative developments, investment advisers had not been subject to any of the comprehensive anti-money laundering and counter terrorism financing (CFT) requirements imposed on their counterparts at regulated financial institutions. The AML rule, originally enacted in August 2024, set out to change this. The measure aimed to classify certain investment advisers as “financial institutions” under the Bank Secrecy Act (BSA). As such, this designation would have required these entities to establish comprehensive AML and counter-terrorism financing programs, protocols that would ensure the appropriate risk-based policies and procedures are in place. The rule would also force these covered entities to appoint a designated compliance officer, implement ongoing employee training, and establish independent internal reviews to keep their programs up-to-date with current industry standards. Additionally, the rule included customer due diligence (CDD) requirements, which were to be shaped by a joint FinCEN-Securities and Exchange Commission (SEC) proposal introduced in May 2024.
However, the fact that the CDD rule remained unfinalized, coupled with staunch industry backlash received from those affected by the rule change, contributed to major concerns as the original deadline for implementation grew closer. Covered investment advisers lobbied against the measure, viewing the potential changes as excessive and stifling in nature, while claiming they would cause more harm than good to the future of their industry, resulting in expensive and duplicative regulation with no material benefit to law enforcement, nor reduction in the risk of illicit financial activity.
Following the initial announcement last August, the Treasury moved to exempt several types of advisers, including midsize and family advisers as well as pension consultants, from the anti-money laundering requirements altogether due to lack of relevance. The agency also dropped a requirement that the individual maintaining an investment adviser’s anti-money-laundering program be located in the U.S. and subject to oversight by the Treasury and any other appropriate federal regulator. Foreign advisers would have only fallen under these requirements to the extent that a U.S. adviser is involved, or if their services were provided to a U.S.-based person. In spite of these alterations, the Treasury had planned to continue towards its original implementation deadline until these latest concerns emerged, granting investment advisers a reprieve from potentially complex and costly compliance obligations as FinCEN works to improve regulatory clarity over the new measure.
FinCEN’s decision to delay the rule reflects its intent to re-assess its substance, potentially refining its scope to better align with industry realities while maintaining robust anti-money laundering protections should the rule ultimately survive until 2028. For now, investment advisers can breathe easier and pause more hasty preparations for the AML rule’s immediate implementation without fear of repercussions for potential non-compliance. However, the Treasury has suggested that these covered entities remain vigilant in their monitoring of updates from both FinCEN and the SEC as the agencies work to refine these regulations. The extended timeline also offers an opportunity for stakeholders to engage with regulators and prepare for eventual compliance, ensuring their programs meet the evolving American standards of financial oversight should the rule ultimately come to fruition.