FinCEN

FinCEN stands for the Financial Crimes Enforcement Network. It serves as the main financial intelligence unit for the United States. As part of the Treasury Department, FinCEN works to fight financial crimes by collecting and analyzing financial information from banks, investment firms, and other financial institutions.

Think of FinCEN as a central clearinghouse for financial intelligence. When banks or other financial companies spot suspicious activityTransactions or patterns that may indicate money laundering, terrorist financing, or other illegal activities., they report it to FinCEN. The agency then analyzes these reports to identify patterns that might indicate money launderingThe process of making illegally obtained money appear legitimate through complex transfers and transactions., terrorist financingThe provision of financial support to terrorist organizations or activities., tax evasion, or other crimes that use the financial system.

FinCEN's oversight of investment advisers has changed significantly in recent years. In August 2024, the agency issued a final rule that would have required SEC-registered investment adviser and exempt reporting adviser to create comprehensive anti-money laundering (AML) Anti-money laundering (AML) Anti-money laundering (AML) refers to the set of laws, regulations, and procedures designed to prevent the conversion of illegally obtained funds into legitimate assets, requiring financial institutions to implement monitoring systems, customer due diligence, and suspicious activity reporting. programs. These programs would have been similar to those already required for banks and broker-dealerA person or firm engaged in the business of buying and selling securities for the account of others or for its own account..

However, FinCEN made a major policy change in July 2025. The agency postponed the rule's start date from January 1, 2026, to January 1, 2028. More importantly, FinCEN announced it would conduct a comprehensive review of the rule's requirements and scope.

This postponement shows that FinCEN recognizes the investment adviser industry has diverse business models and risk profiles. The agency wants to make sure AML requirements are properly tailored to different types of advisers while balancing compliance costs against regulatory benefits. During this extended period, FinCEN plans to revise the rule through new rulemaking.

When the revised rule eventually takes effect, covered investment advisers will need to file suspicious activity reportsReports filed with FinCEN when financial institutions detect potential money laundering or other suspicious activities. with FinCEN. They'll also need to designate chief compliance officer (CCO)The person responsible for overseeing a firm's compliance with applicable laws and regulations., conduct ongoing training and independent audits, and maintain comprehensive AML monitoring programs. FinCEN is working with the SEC to review proposed customer identification program requirements as well.

FinCEN operates under a comprehensive set of laws that has been significantly updated in recent years. At the end of 2020, Congress passed the Anti-Money Laundering Act of 2020Federal legislation that significantly expanded anti-money laundering requirements and included the Corporate Transparency Act. and the Corporate Transparency Act Corporate Transparency Act (CTA) The Corporate Transparency Act is U.S. legislation that requires certain entities to report information about their beneficial owners to the government. As of March 2025, only foreign companies registered to do business in the United States must comply with these reporting requirements. Domestic U.S. companies, including most hedge fund vehicles, are now exempt from these rules. . These laws aimed to strengthen and modernize existing AML requirements by encouraging compliance innovation and regulatory reform.

The Corporate Transparency Act, however, underwent major changes in March 2025. FinCEN issued an interim final ruleA rule that takes effect immediately while allowing for public comment before final adoption. that dramatically narrowed the law's scope. Under the revised framework, all domestic U.S. companies and U.S. persons are now exempt from beneficial ownership information (BOI) reporting BOI reporting Beneficial ownership information (BOI) reporting refers to disclosure requirements under the Corporate Transparency Act that require certain foreign entities registered to do business in the United States to identify and report the natural persons who ultimately own or control the entity to FinCEN. As of March 26, 2025, U.S. hedge funds and other domestic entities are exempt from these requirements. requirements.

This means most U.S. hedge funds no longer need to report who their beneficial ownersInvestors who have economic ownership in a fund, counted for purposes of the Section 3(c)(1) exemption's 100-investor limit. are. Only foreign companies that register to do business in the United States still have reporting obligations, and even these companies don't need to report their U.S. beneficial owners.

These changes work alongside other important laws. The Bank Secrecy ActFederal law requiring financial institutions to assist U.S. government agencies in detecting and preventing money laundering., as amended by the USA PATRIOT Act of 2001, provides FinCEN's basic authority. The agency also coordinates with the Office of Foreign Assets Control (OFAC sanctions OFAC sanctions OFAC (Office of Foreign Assets Control) sanctions are economic and trade restrictions imposed by the U.S. government against targeted countries, regimes, individuals, and entities, requiring hedge funds to implement compliance programs to screen investors and avoid prohibited transactions. ) on sanctions compliance and works within international legal frameworks that may affect hedge fund counterparties and service providers.

A FinCEN ID is a unique identifier that FinCEN assigns to individuals and entities for beneficial ownership reporting purposes. However, following the March 2025 rule changes, this system now mainly serves foreign reporting companies and their non-U.S. beneficial owners.

The FinCEN ID system makes reporting easier by allowing companies to reference these unique numbers instead of repeatedly submitting detailed personal information for beneficial owners who appear in multiple filings. Individuals can obtain a FinCEN ID by applying directly to FinCEN, though U.S. persons no longer need to do so because they're exempt from reporting requirements.

FinCEN maintains detailed requirements for suspicious activity reporting across various financial institutions that must follow Bank Secrecy Act rules. For entities like futures commission merchant (FCM) and introducing broker (IB) in the commodity futures industry, these standards are well-established.

These entities must file Suspicious Activity Reports (SARs) with FinCEN when they encounter suspicious transactions involving at least $5,000 in funds or assets. They must report when they know, suspect, or have reason to suspect illegal activity or attempts to avoid regulatory requirements.

The $5,000 threshold and reporting criteria reflect FinCEN's focus on identifying patterns that may indicate money laundering, terrorist financing, or other financial crimes. When the revised Investment Adviser AML RuleFinCEN rule requiring certain investment advisers to implement anti-money laundering programs and report suspicious activities. takes effect in 2028, covered advisers will face similar SAR filing requirements.

FinCEN facilitates important information sharing between financial institutions and law enforcement agencies through several programs. Section 314(a) of the USA PATRIOT Act requires financial institutions to search their records for accounts and transactions involving people, entities, or organizations suspected of money laundering or terrorist financing.

FinCEN distributes these subject lists every two weeks through its Secure Information Sharing System. Institutions must search their records and report any matches within specified timeframes. This helps law enforcement agencies track suspicious activity across the financial system.

The information sharing extends to other regulatory agencies and self-regulatory organizationsNon-governmental organizations that have the power to create and enforce industry regulations and standards for their members. that examine financial institutions for BSA compliance. FinCEN works with agencies including the CFTC, SEC, Federal Reserve, and FDIC to ensure comprehensive oversight of financial institutions' AML programs.

FinCEN administers various currency reporting requirements that affect hedge funds and their investors. Under the Bank Secrecy Act, U.S. persons must file Foreign Bank Account Reports (FBAR filing) using FinCEN Form 114 if they have financial interests in foreign accounts totaling more than $10,000.

This requirement affects hedge fund managers and investors with offshore fund interests or foreign banking relationships. The FBAR filing deadline is April 15 each year, with an automatic six-month extension available until October 15. No request is needed for this extension.

Penalties for non-compliance can be severe. Non-willful violations can result in $10,000 fines. Willful violationsIntentional or knowing violations of regulatory requirements, typically subject to enhanced penalties. can lead to penalties of the greater of $100,000 or 50% of account balances. Criminal penalties can include fines up to $250,000 and five years in prison. Some individuals with signature authority over foreign accounts have extended deadlines through April 15, 2026, while FinCEN finalizes related regulatory proposals.

As of September 2025, hedge funds face a significantly different compliance environment than previously expected. The postponement of investment adviser AML requirements until 2028 gives funds more time for compliance planning, though the ultimate scope and requirements remain under review.

The Corporate Transparency Act's March 2025 changes have eliminated beneficial ownership reporting obligations for most domestic hedge fund vehicles. This substantially reduces compliance burdens for U.S.-organized funds.

However, hedge funds with foreign organizational structures or foreign investor bases should carefully monitor ongoing regulatory developments. FinCEN continues to emphasize that illicit finance risks in the investment adviser sector remain significant, particularly those involving foreign corruption, fraud, tax evasion, and other criminal activities that may exploit the U.S. financial system.

These developments highlight the importance of maintaining flexible compliance frameworks that can adapt to evolving FinCEN requirements while ensuring effective operations and investor relations. Hedge funds should continue monitoring FinCEN guidance and regulatory developments as the agency conducts its comprehensive review of investment adviser obligations through 2027.