On July 21, the U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) announced that it was postponing and reevaluating the anti-money laundering (AML) rule for investment advisers (Adviser AML Rule), which was due to become effective on Jan. 1, 2026. It has been delayed until 2028. FinCEN stated that it intends to use this extended period to revisit the scope and substance of the rule through a future rulemaking process, aiming to tailor it more effectively to the diverse business models and risk profiles within the investment adviser industry. FinCEN also plans to reexamine the proposed rule for customer identification program (CIP) requirements for investment advisers.
The AML Adviser Rule, which was adopted on Sept. 4, 2024, would have required SEC-registered investment advisers and exempt reporting advisers to develop and implement written AML programs that take into account the advisers’ particular business risks. Although the rule contained several exceptions and exclusions, advisers to private funds and venture capital funds fell within its scope.
Due Diligence Remains Critical
While this delay offers immediate relief from pending compliance burdens, advisers to private funds and venture capital funds would still be well-advised to consider including due diligence and risk-reducing measures in light of FinCEN’sstatements in the Adviser AML Rule preamble and the AML risk assessment for advisers that was published concurrently with the rule.
As explained in those releases, private funds and venture capital funds often have complex ownership structures and diverse investor bases, including high-net-worth individuals, family offices and institutional investors from various jurisdictions. This makes know-your-customer (KYC) and beneficial ownership diligence an essential best practice regardless of the formal Adviser AML Rule's effective date. The adopting release also highlighted that the lack of comprehensive AML regulations for investment advisers meant they were not uniformly required to understand customers' ultimate sources of wealth, which could create “arbitrage opportunities for illicit actors.”
Managing High-Risk Jurisdictions and Complex Structures
As such, applying enhanced due diligence to non-U.S. investors, especially those from high-risk jurisdictions or those with opaque ownership structures, remains a good practice and may still be an expectation of a fund’s service providers and custodians. This diligence includes verifying source of funds and wealth, as well as conducting sanctions screening against lists administered by the Treasury Department’s Office of Foreign Assets Control.
Engaging with non-U.S. investors who pose AML risks can lead to significant reputational damage and potential enforcement actions, even in the absence of a specific Adviser AML Rule.
CFIUS Review Authority Unaffected by AML Rule Delay
For venture capital funds, particularly those investing in portfolio companies that develop critical technologies, the intersection of investor due diligence with national security concerns is increasingly relevant. As FinCEN noted, a “review of select BSA reporting identified several U.S. venture capital firms with significant ties to Russian oligarch investors that invested in firms developing emerging technologies with national security applications.”
To this end, we note that the Committee on Foreign Investment in the United States (CFIUS) continues to review direct and indirect foreign investments in U.S. businesses, especially those involving critical technologies, critical infrastructure or sensitive personal data. The postponement of the Adviser AML Rule has no bearing on CFIUS's authority or review processes. Advisers to venture capital funds should remain mindful of their investor base, especially where sensitive technologies are implicated.
Key Takeaway
While the rule’s postponement is welcome relief, advisers should be mindful of the additional risks highlighted in the literature from FinCEN. In particular, FinCEN’s focus on dual-use technologies and attendant national security risks highlights the need for advisers to private funds and venture capital funds to maintain a thoughtful diligence process for direct and indirect investors of a fund.
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