Last December the U.S. Department of Justice announced a record-setting anti-money laundering (AML) settlement with U.K. bank HSBC, claiming it allowed hundreds of millions of dollars from Mexican drug traffickers to flow through accounts in the United States. In total, HSBC paid more than $1.9 billion in penalties.

While few broker-dealers or investment advisors have the risk exposure of an entity like HSBC, this case is expected to have a substantial impact on AML compliance requirements going forward. That’s because federal regulators—who have been proposing substantially more proactive AML measures for broker-dealers and investment advisors for more than a decade—are expected to leverage the massive media attention the HSBC case has generated to bolster their AML efforts in 2013. Moreover, perhaps most ominously, Congress criticized HSBC’s regulators for laxness in past oversight.

As a result, new, stricter AML oversight is in the offing—with initiatives that will impact the country’s broker-dealers and investment advisors, including the trillion-dollar-plus hedge fund industry. In fact, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission, and the Financial Industry Regulatory Authority (FINRA) have already announced new AML initiatives.

FinCEN Initiatives

FinCEN announced that it plans to formally introduce new AML proposals for investment advisers this year. FinCEN’s interest in bringing AML compliance measures to investment advisers actually goes back more than 10 years. In 2003, for example, it published a notice of proposed rulemaking that would have required investment advisers—both registered and unregistered—to establish AML compliance programs. In 2002, it had published a similar proposal, but for unregistered investment companies only.

The proposed rules would have required investment advisors to do what banks, brokerages, and mutual funds are already required to do—monitor their transactions and file suspicious activity reports (SARs) when necessary. But both proposals were withdrawn in 2008, in part because of the difficulty in defining a hedge fund and enforcing the requirements.

However, after the Dodd-Frank Act required U.S. hedge fund advisers to register with the SEC, FinCEN indicated in 2011 that it was once again working on a regulatory proposal to require investment advisers to establish an AML compliance program and monitor/self-report suspicious activity.

In January 2013—with the HSBC case serving as a backdrop—the agency announced it is moving forward with the proposal and that the proposed rules should be released for public comment by mid-year.

SEC and FINRA Priorities