The Treasury Department granted venture capital firms temporary relief from the anti-money laundering (AML) statutes of post-September 11 anti-terrorism legislation. Coming a day before its April 24 effective date, the relief exempted VCs from the statute, which widens the scope of financial institutions obligated to guard against money laundering activities.
The announcement said the deferral could last as long as six months until the Treasury Department releases specific guidelines, but Paul Brownell, vice president for public policy at the National Venture Capital Association, says he expects implementing regulations to be released as soon as a couple of weeks. The treasury will likely require compliance shortly after the guidelines’ release.
Working closely with the Treasury Department, Brownell suggested to them that money-laundering risk is low for a 10-year venture partnership, but he also cooperated with the treasury in its efforts to draft the regulations.
“We recognize the threat the U.S. and the whole world is under,” Brownell says. “We’re definitely trying to be good corporate citizens.”
Under the counsel of Mayer, Brown, Rowe & Maw, the NVCA released several memoranda to its members, including a 6,000-word document providing basic guidelines to VCs on compliance with the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (Patriot Act).
This document, which is available on its Web site www.nvca.org outlines four key points to complying with the legislation:
- * Develop internal policies
* Designate a compliance officer
* Establish an ongoing training program
* Utilize an independent audit function
The Treasury Department will release specific guidelines shortly, but Brian Borders, of counsel with Mayer Brown, says he finds no reason to change the guidance at this point. The June 2002 issue of sister-publication Venture Capital Journal will provide a summary of the NVCA’s document.
Borders expects VCs to be required to know more about their investors. Even funds with only one limited partner will be required to comply, but the degree of necessary internal changes and increased expenses will likely depend on the fund’s size and its investor base.
“In today’s world, you need to know who you’re dealing with,” says Elaine Wood, managing director with Kroll Inc., a corporate investigation company. She recommends clients establish risk assessment programs and enhanced due diligence procedures.
Wood says regulators will likely expect firms to elevate their level of due diligence when certain red flags are raised. For example, a VC will probably be expected to investigate an individual in a developing country more thoroughly than a state pension fund.
Red flags may include foreign domicile, criminal history, untrustworthy financial documents, unsatisfactory explanations from the individual or simply an incomplete public record of the individual’s activities.
“Once you get a red flag you have to ask yourself, How important is this investor? Is it worth investing more money to get to the bottom of the question?'” she says.
Better Asked And Answered
VCs may prefer to distance themselves from certain business partners rather than conduct an expensive investigation, but they won’t be well-served to leave those questions unanswered.
“You don’t want money that was looted from the Central Bank of Afghanistan ending up invested in your portfolio companies,” Borders says.
Regulators could freeze the assets of a portfolio company if one of its VCs has violated the act, so it’s good for VCs to know their co-investors as well. In addition, the new guidelines may require financial institutions to screen the entities in which they invest, but this should not be a leap for VCs that already conduct thorough due diligence.
“Venture capitalists tend to understand their investments very well,” Borders says. “I don’t think there’s much risk that a venture capitalist is going to unwittingly invest in a criminal front.”
Due to long-term commitment, venture funds are considered to be unlikely candidates for money-laundering operations, which are generally believed to look for quick flips. However, this new legislation is intended to uncover techniques that have not previously been investigated by the government.
“We have reason to believe that there are some terrorist organizations and drug organizations that have that kind of investment horizon,” Borders says.
Maybe this legislation will smoke out some criminal tricks nobody expected. After all, Americans never expected terrorists to commit years of training to become kamikaze pilots.
Contact Charles Fellers at: Charles.Fellers@tfn.com