Hedge Funds and the Patriot Act

Several critics of the Patriot Act are now arguing that it is worthless because Hedge Funds are exempt. They are overlooking a wide range of restrictions. Sections 1956 and 1957 of the U.S. Code criminalize participating in money laundering.
The investment advisers who run hedge funds are required to file a Currency Transaction Report on customer cash transactions of $10,000 or more, or a pattern of activity that adds up to $10,000.
Hedge funds and their advisers are also subject to formal requirements designed to prevent money laundering and terrorist financing. This includes the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) rules.
OFAC maintains lists of individuals, groups, and countries with which U.S. persons (including hedge funds) may not do business.
The USA PATRIOT Act significantly strengthened the Bank Secrecy Act of 1970 (BSA). It compels U.S. businesses to assist government agencies in detecting and preventing money laundering. The PATRIOT Act empowered Treasury to prescribe standards for financial institutions’ Anti- Money Laundering programs. Treasury did not include hedge funds or their advisers in the definition of “financial institutions” for these purposes.
Hedge funds were excluded because they already have required minimum credentials for investors. They already place significant restrictions on liquidity (e.g., lockups and limited periodic opportunities for redemption). The high barriers to entry and exit make hedge funds a questionable choice for the “drug-runners and terrorists” of journalists’ fevered imaginations.
All hedge funds already have a “Customer Identification Program” (CIP). They already have due diligence programs to know their customer with reasonable certainty. There must be a certified copy of the person’s driver’s license.
Senators Carl Levin (D-MI) and Charles Grassley (R-IA) are co-sponsors of The Hedge Fund Transparency Act to require all Hedge Funds to institute an anti-money laundering program, but once again, they already exist in every hedge fund.

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