U.S. Proposes Hedge Fund Rules to Prevent Terrorist Financing - 09/19/02

WASHINGTON, Sept. 18 ? The Treasury Department said today that it wanted to require the vast and largely unregulated hedge fund industry to hunt for and tell the government about suspicious clients that may be linked to terrorism.

The government also proposed making life insurance companies set up their own programs to spot potential money-laundering schemes. These preventative programs could end up enlisting millions of insurance agents as sources of information as well.

The proposals, which the department is likely to adopt, are the latest in a broader effort by the Bush administration to disrupt financial networks that support terrorist groups like Al Qaeda. In large part, they extend the reach of rules that already apply to banks and brokerage firms.

No one has suggested that terrorist groups have used hedge funds as part of their financial networks. But the hedge fund industry has grown enormously over the past decade, managing about $560 billion in assets, and many funds fall outside the regulations that apply to ordinary mutual or pension funds.

Hedge funds are private funds that usually accept money only from very wealthy investors who can afford to accept high risks. The funds invest in everything from foreign currencies and commodities to stocks and real estate.

The Bush administration is worried that some hedge funds could become conduits for terrorist financing. Under the new regulations, the hedge funds would have to verify the identity of their clients, determine that a client is not a front for someone else and report any unusual or suspicious financial transactions to the government.

Hedge fund executives and insurers have both been bracing for the new rules and do not appear inclined to fight them. But executives in both industries are nervous about the details.

The hedge fund rules, for example, would probably apply to many offshore funds if they have any American investors. That is likely to be disquieting to investors in scores of private funds scattered from the Cayman Islands to Switzerland, which have prided themselves on their ability to offer customers confidentiality.

Michael Tannenbaum, a lawyer for many unregistered funds and a board member of the Hedge Fund Association, said many tax-exempt institutional investors, like pension funds and university endowments, used offshore funds because profits from hedge funds based in the United States can be deemed taxable.

"If the offshore funds decide they don't want that kind of regulation, they might choose to close themselves off from American investors," he said.

Others are more sanguine. Meg Bode, a spokeswoman for the Managed Funds Association, a lobbying group, said the industry was not opposed to the new rules and had already developed similar guidelines.

The rules to stop money-laundering through life insurers raise other issues. The Treasury Department said its main concern was that terrorists could buy and then cash in life insurance policies as a way of laundering money. In a preamble to the proposed regulation, the department said that Colombian drug traffickers had been found to use front people to buy expensive life insurance policies, paying upfront in a big lump sum, and then cashing them in shortly thereafter.

In its proposal, the Treasury Department said today that insurance sales agents were often the ones most likely to spot suspicious activity, such as the premiums being paid by someone unrelated to the person who bought insurance or people buying big policies without showing any interest in the details.

Victoria Fimea, a senior counsel at the American Council of Life Insurers, said the industry had worked closely with the Treasury Depatment and generally supported the rules. But she said neither the government nor the insurance industry had yet suggested how insurers should try to verify the identify of their customers.

"At minimum, compliance, legal, and fraud personnel with regulations will range from thousands to even hundreds of thousands of dollars," she said.

 

         _x000D_