A REPORT TO CONGRESS
 

IN ACCORDANCE WITH § 356(c)
 

OF THE
 

UNITING AND STRENGTHENING AMERICA BY PROVIDING APPROPRIATE 

TOOLS REQUIRED TO INTERCEPT AND OBSTRUCT TERRORISM ACT OF 2001
 

(USA PATRIOT ACT)
 

SUBMITTED BY
 

THE SECRETARY OF THE TREASURY,
 

THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, 

THE SECURITIES AND EXCHANGE COMMISSION
 

The staff of the Commodity Futures Trading Commission also assisted in the preparation 

of this Report.
 

December 31, 2002
 
A REPORT TO CONGRESS 

IN ACCORDANCE WITH § 356(c) OF THE USA PATRIOT ACT 

TABLE OF CONTENTS 

I.	 Introduction..............................................................................................................1
 

II.	 Background ..............................................................................................................2
 

A.	 Evolution of the Bank Secrecy Act as a Tool to Combat Money 

Laundering and Terrorist Financing ............................................................2
 

B.	 The Crimes of Money Laundering and Terrorist Financing........................5
 

1.	 Codification as Federal Crimes .......................................................5
 

2.	 Stages of the Money Laundering Process........................................7
 

3.	 Use of Investment Companies in Money Laundering .....................7
 

III.	 Effective Regulations to Apply the BSA to Investment Companies.....................10
 

A.	 Registered Investment Companies ............................................................11
 

1.	 Mutual Funds .................................................................................12
 

2.	 Closed-End Funds..........................................................................15
 

3.	 Unit Investment Trusts ..................................................................17
 

B.	 Unregistered Investment Companies .........................................................19
 

1.	 Hedge Funds ..................................................................................19
 

2.	 Commodity Pools ..........................................................................24
 

3.	 Private Equity and Venture Capital Funds ....................................26
 

4.	 Real Estate Investment Trusts (“REITs”) ......................................29
 

5.	 Proposed Rule for the Application of the BSA to Unregistered 

Investment Companies...................................................................31
 

IV. Personal Holding Companies ................................................................................35
 

V. Recommendations ..................................................................................................36
 
 

 

 

 

 

 

1 

1
 

I.	 Introduction 

On October 26, 2001, the President signed into law the Uniting and Strengthening 

America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act 

(USA PATRIOT Act) of 2001, Pub. L. No. 107-56 (“USA Patriot Act”). Section 356(c) of the 

USA Patriot Act calls for a report to Congress (“Report”) within one year from the date of 

enactment containing recommendations for effective regulations to apply the record keeping and 

reporting requirements of the Bank Secrecy Act, Titles I and II of Pub.L. 91-508, (the “BSA”) to 

investment companies and personal holding companies.1 

Section 356(c) of the USA Patriot Act provides: 

Section 356 – Reporting of Suspicious Activities by Securities Brokers and Dealers; 

Investment Company Study 

* * * 

(c)	 REPORT ON INVESTMENT COMPANIES.– 

(1) IN GENERAL. – Not later than 1 year after the date of enactment of this Act, the 

Secretary, the Board of Governors of the Federal Reserve System, and the Securities and 

Exchange Commission shall jointly submit a report to the Congress on recommendations 

for effective regulations to apply the requirements of subchapter II of chapter 53 of title 

31, United States Code, to investment companies pursuant to section 5312(a)(2)(I) of title 

31, United States Code. 

(2)	 DEFINITION. – For purposes of this subsection, the term “investment company” – 

(A) has the same meaning as in section 3 of the Investment Company Act of 

1940 (15 U.S.C. 80a-3); and 

(B) includes any person that, but for the exceptions provided for in paragraph (1) 

or (7) of section 3(c) of the Investment Company Act of 1940 (15 U.S.C. 80a3(c)), would be an investment company. 

(3)	 ADDITIONAL RECOMMENDATIONS. – The report required by paragraph (1) may 

make different recommendations for different types of entities covered by this 

subsection. 

(4)	 BENEFICIAL OWNERSHIP OF PERSONAL HOLDING COMPANIES. – The report 

described in paragraph (1) shall also include recommendations as to whether the 

Secretary should promulgate regulations to treat any corporation or business or 

other grantor trust whose assets are predominantly securities, bank certificates of 

deposit, or other securities or investment instruments (other than such as relate to 

operating subsidiaries of such corporation or trust) and that has 5 or fewer 

common shareholders or holders of beneficial or other equity interest, as a 

financial institution within the meaning of that phrase in section 5312(a)(2)(I) 

and whether to require such corporations or trusts to disclose their beneficial 

owners when opening accounts or initiating funds transfers at any domestic 

financial institution. 
 

 

 

2
 

In accordance with section 356(c) of the USA Patriot Act, the Secretary of the Treasury 

(the “Treasury”), the Board of Governors of the Federal Reserve System (the “Federal Reserve 

Board”), and the Securities and Exchange Commission (the “SEC”) submit this Report. The 

staff of the Financial Crimes Enforcement Network (“FinCEN”) and the Commodity Futures 

Trading Commission (the “CFTC”) also assisted in the preparation of this Report. Specifically, 

we address three questions raised by section 356(c) of the USA Patriot Act: (1) what are the 

appropriate “effective regulations” to apply the requirements of the BSA to investment 

companies; (2) which of those regulations should be applied to investment companies to best 

achieve the goals of the BSA; and (3) what investment companies should be subject to the BSA 

regulatory scheme? 

II.	 Background 

A.	 Evolution of the Bank Secrecy Act as a Tool to Combat
 

Money Laundering and Terrorist Financing
 

Congress passed the BSA in 1970 to prevent the use of cash payrolls for tax evasion and 

to provide tools to fight organized crime. Until last year, the stated purpose of the BSA was “to 

require certain reports or records where they have a high degree of usefulness in criminal, tax, or 

regulatory investigations or proceedings.”2 The original focus of the BSA was on banks, which 

are the main financial institutions that deal in cash. 

As the nature and sophistication of financial institutions have grown, new and creative 

ways to hide sources of illegally obtained profits have been devised. To protect the U.S. 

financial system from criminal activity and to promote the detection and prosecution of financial 

crimes, Congress added anti-money laundering provisions to the BSA in 1992, which authorized 

31 U.S.C. 5311. Language expanding the scope of the BSA to intelligence or counterintelligence activities to protect against international terrorism was added by section 358 of the 

USA Patriot Act. 

2 
 

 

 

 

 

 

 

 

 

 

 

3
 

Treasury to apply the law to many different types of financial institutions.3 Prior to the passage 

of the USA Patriot Act, regulations applying the anti-money laundering provisions of the BSA 

were issued only for banks and certain other institutions that offer bank-like services or that 

regularly deal in cash. These regulations require such financial institutions to take the following 

actions: 

•	 Keep records related to certain monetary instrument purchases and funds transfers;4 

•	 Report currency transactions of more than $10,000 by, through, or to the financial 

institution; 5 

•	 Report the transport of currency across U.S. borders;6 

•	 Report certain accounts that United States citizens and residents hold at foreign financial 

institutions;7 and 

•	 Report suspicious transactions relevant to possible violations of the law. 8 

Title III of the USA Patriot Act amends the BSA to make it easier to prevent, detect, and 

prosecute international money laundering and the financing of terrorism by: 

•	 Requiring that every financial institution establish an anti-money laundering program that 

includes, at a minimum, (i) the development of internal policies, procedures, and 

controls; (ii) the designation of a compliance officer; (iii) an ongoing employee training 

program; and (iv) an independent audit function to test the program;9 

3	 31 U.S.C. 5312(a)(2). Treasury also has broad authority to adopt rules requiring other types of 

businesses to adopt anti-money laundering programs if those businesses deal in cash (31 U.S.C. 

5312(a)(2)(Z)) or engage in activities that Treasury determines to be “similar to, related to, or a 

substitute for” activities engaged in by one of the listed businesses. 31 U.S.C. 5312(a)(2)(Y). 

4	 See 31 CFR 103.29, 103.33. 

5	 See 31 CFR 103.22. 

6	 See 31 CFR 103.23. 

7	 See 31 CFR 103.24 and 103.25. 

8	 See 31 CFR 103.18, 103.19, 103.20, and 103.21. 

9	 See section 352 of the USA Patriot Act. 
 

 

 

 

 

 

 

 

 

4
 

•	 Requiring Treasury to prescribe, jointly with the federal functional regulators, regulations 

setting forth minimum standards regarding the verification of the identity of any person 

seeking to open an account;10 

•	 Requiring each U.S. financial institution that establishes, maintains, administers, or 

manages a private banking account or correspondent account in the United States for a 

non-U.S. person to take certain anti-money laundering measures with respect to such 

accounts;11 

•	 Prohibiting certain financial institutions from establishing, maintaining, administering, or 

managing a correspondent account in the U.S. for a foreign shell bank (other than certain 

foreign shell banks with regulated affiliates);12 and 

•	 Permitting financial institutions, their regulatory authorities, and law enforcement 

authorities to share information regarding persons engaged or reasonably suspected, 

based on credible evidence, of engaging in terrorist acts or money laundering activities.13 

The USA Patriot Act required the extension of the anti-money laundering requirements to 

financial institutions, such as investment companies, that had not previously been subjected to 

BSA regulations.14 The USA Patriot Act also added new entities to the statutory definition of 

financial institution, such as futures commission merchants, commodity trading advisors 

(“CTAs”), and commodity pool operators (“CPOs”).15 

In accordance with the USA Patriot Act, FinCEN, in conjunction with other federal 

financial regulators, has adopted or has proposed for adoption rules to implement the 

amendments to the BSA. These rules prescribe anti-money laundering program requirements for 

certain financial institutions16 and require certain financial institutions to implement reasonable 

10 See section 326 of the USA Patriot Act.
 

11 See section 312 of the USA Patriot Act.
 

12 See section 313 of the USA Patriot Act.
 

13 See section 314 of the USA Patriot Act.
 

14 See section 352 of the USA Patriot Act.
 

15 See section 321 of the USA Patriot Act.
 

16 See, e.g., Anti-Money Laundering Programs for Financial Institutions, 67 FR 21110 (April 29, 

2002); Anti-Money Laundering Programs for Money Services Businesses, 67 FR 21114 (April 

29, 2002); Anti-Money Laundering Programs for Mutual Funds, 67 FR 21117 (April 29, 2002); 
 

 

 

 

 

 

5
 

procedures to verify the identity of persons seeking to open accounts.17 The regulations also 

prohibit certain financial institutions from establishing, maintaining, administering, or managing 

a correspondent account in the U.S. for a foreign shell bank (other than certain foreign shell 

banks with regulated affiliates)18 and require certain financial institutions to implement due 

diligence programs for certain correspondent as well as private banking accounts.19 In addition, 

FinCEN promulgated a rule that sets forth procedures for information sharing between federal 

law enforcement agencies and financial institutions and voluntary information sharing among 

financial institutions.20 

B.	 The Crimes of Money Laundering and Terrorist Financing 

1.	 Codification as Federal Crimes 

In 1984, Congress passed the Money Laundering Control Act (“MLCA”), which made 

money laundering a federal crime.21 The financing of terrorist activities or of designated foreign 

Anti-Money Laundering Programs for Operators of a Credit Card System, 67 FR 21121 (April 

29, 2002); Anti-Money Laundering Programs for Unregistered Investment Companies, 67 FR 

60617 (September 26, 2002); Anti-Money Laundering Programs for Insurance Companies, 67 FR 

60625 (September 26, 2002). 

17	 See Customer Identification Programs for Banks, Savings Associations, and Credit Unions, 67 FR 

48290 (July 23, 2002); Customer Identification Programs for Certain Banks (Credit Unions, 

Private Banks and Trust Companies) That Do Not Have a Federal Functional Regulator, 67 FR 

48299 (July 23, 2002); Customer Identification Programs for Broker-Dealers, 67 FR 48306 (July 

23, 2002); Customer Identification Programs for Mutual Funds, 67 FR 48318 (July 23, 2002); 

Customer Identification Programs for Futures Commission Merchants and Introducing Brokers, 

67 FR 48328 (July 23, 2002). 

18	 See Anti-Money Laundering Requirements -- Correspondent Accounts for Foreign Shell Banks: 

Recordkeeping and Termination of Correspondent Accounts for Foreign Banks, 67 FR 60562 

(September 26, 2002). 

19	 See Anti-Money Laundering Programs; Special Due Diligence Programs for Certain Foreign 

Accounts, 67 FR 48348 (July 23, 2002). 

20	 See Special Information Sharing Procedures to Deter Money Laundering & Terrorist Activity, 67 

FR 60579 (September 26, 2002). 

21	 18 U.S.C. 1956 and 1957. 
 

 

 

 

 

 

 

 

6
 

terrorist organizations is also a federal crime.22 These crimes, like the vast majority of federal 

white-collar crimes and offenses traditionally associated with organized crime, also serve as 

predicate acts for the crime of money laundering. 

One section of the MLCA criminalized the conduct of a “financial transaction” involving 

proceeds that are known to derive from some “specified unlawful activity.”23 A transaction is a 

“financial transaction” under the statute if it involves monetary instruments, the movement of 

funds, the transfer of title to property, or the use of a financial institution. 24 To be guilty of 

money laundering under this section of the MLCA, the defendant must act with the intent to 

(1) promote the carrying on of a specified unlawful activity, (2) engage in tax fraud, (3) conceal 

or disguise the nature, location, source, ownership or control of the property, or (4) avoid a 

transaction reporting requirement.25 Thus, this section criminalized “smurfing” – the practice of 

intentionally structuring transactions to avoid reporting requirements by splitting the total 

amount of funds available for deposit into amounts below the $10,000 reporting threshold. 

Another section of the MLCA criminalized the engagement in a “monetary transaction” 

involving property of a value greater than $10,000 that is known to derive from a criminal 

offense, and that is actually derived from a “specified unlawful activity.”26 The term monetary 

transaction is defined broadly to cover almost any transaction by, through, or to a financial 

institution, including the deposit, withdrawal, transfer, or exchange of funds or a monetary 

instrument.27 Unlike the section of the MLCA discussed in the paragraph above, this section 

22 18 U.S.C. 2339A and 2339B. 

23 18 U.S.C. 1956. 

24 18 U.S.C. 1956(c)(4). 

25 18 U.S.C. 1956(a)(1). 

26 18 U.S.C. 1957. 

27 18 U.S.C. 1957(f)(1). 
7
 

does not require the defendant to know that the property was derived from a specified unlawful 

activity. Rather, this section requires the defendant to know only that the property was derived 

from some criminal offense. Therefore, a defendant cannot rely on willful blindness to avoid 

liability under this section of the MLCA. 

2. Stages of the Money Laundering Process 

The process of money laundering is accomplished in three stages. The first stage in the 

process is placement. The placement stage involves the physical movement of currency or other 

funds derived from illegal activities to a place or into a form that is less suspicious to law 

enforcement authorities and more convenient to the criminal. The proceeds are introduced into 

traditional or nontraditional financial institutions or into the retail economy. The second stage is 

layering. The layering stage involves the separation of proceeds from their illegal source by 

using multiple complex financial transactions (e.g., wire transfers, monetary instruments) to 

obscure the audit trail and hide the proceeds. The third stage in the money laundering process is 

integration. During the integration stage, illegal proceeds are converted into apparently 

legitimate business earnings through normal financial or commercial operations. 

3. Use of Investment Companies in Money Laundering 

For purposes of the Report, an investment company is defined broadly to include those 

entities listed in the definition of the term in the 1940 Act, entities that would be investment 

companies under the 1940 Act but for the exceptions provided in certain sections of the 1940 

Act, and certain other pooled investment vehicles that are not subject to the 1940 Act because 

they do not invest primarily in securities. The money laundering risks associated with 

investment companies generally are discussed below. 
 

 

 

8
 

a. Placement Stage 

Investment companies can be used by criminals at every stage of the money laundering 

process. Investment companies are less likely than other types of financial institutions (e.g., 

banks) to be used during the placement stage because they rarely receive from or disburse to 

investors significant amounts of currency. However, money launderers appear to have used 

investment companies at this initial stage. FinCEN has received a number of reports concerning 

the use of a stolen, altered check to establish an account with an investment company. Other 

suspicious activity observed in the purchase of investment company interests includes the use of 

money orders and travelers checks in structured amounts to avoid currency reporting by the 

financial institution issuing such instruments. Similarly, money launderers have purchased an 

initial interest in an investment company with several wire transfers, each in an amount under 

$10,000 and from different banks and brokerage firms. 

b. Layering Stage 

Money launderers are most likely to use investment companies in the layering stage of 

the money laundering process. Money launderers can use investment company accounts to layer 

their assets by sending and receiving money and rapidly wiring it through several accounts and 

multiple institutions, or by redeeming an interest in a company originally purchased with illegal 

proceeds and then reinvesting the proceeds received in another investment company. In fact, a 

number of reports have described the use of wire transfers, checks, cash, and money orders to 

deposit money into an investment company account, followed by withdrawals from the account 

on the same day or during the same week.28 

Cf. Correspondent Services Corp. v. J.V.W. Investments Ltd., 120 F. Supp. 2d 401 (S.D.N.Y. 

2000) (noting that account was frozen by financial services firm due to concerns with possible 

money laundering involving purchases of mutual funds and other investments). 

28 
 

 

9 

Layering may also entail the purchase of an interest in an investment company in the 

name of a fictitious corporation or an entity designed to conceal the true owner. Beyond that, 

criminals themselves may even create investment companies to conceal further the source and 

ownership of illicit proceeds. For example, the facts of a case decided by the Cour t of Appeals 

for the Eleventh Circuit in 2001 demonstrate how drug smugglers created an elaborate money 

laundering operation utilizing three different investment companies to launder funds.29 The 

defendants in this case converted cash obtained from drug sales into cashier’s checks. They then 

deposited the cashier’s checks in a shell company located in Liechtenstein. Through a web of 

other sham investment companies, the defendants were able to move the funds to the United 

States and “loan” it back to themselves. The deposit of the cashier’s checks in Liechtenstein 

prevented authorities from tracing the drug proceeds to their final destination. Similarly, any 

attempt to trace the source of the loan in the United States would reveal only that the loan was 

from a foreign entity protected by bank secrecy laws. 

c. Integration Stage 

Finally, investment companies may be used in the last stage of the money laundering 

process: the integration of illicit income into legitimate assets. For example, if an individual 

redeems an interest in an investment company that was purchased with illegal proceeds and 

directs the investment company to wire the cash from the redemption to a bank account in the 

individual’s own name, the wire transfer would appear legitimate to the receiving bank. 

Moreover, money launderers sometimes organize a sham investment company to defraud 

investors or clients and to make payments from the company’s account to their personal accounts 

appear legitimate. For example, in one case a defendant organized a venture capital firm to 

U.S. v. Gilbert, 244 F.3d 888, 893-897 (11th Cir. 2001). 29 
 

 

 

10
 

defraud clients seeking capital for business ventures.30 He used the venture capital firm to 

operate an advance-fee scheme by which he would agree to obtain funding for a client within a 

certain time frame in exchange for a sizable up-front fee. Never intending to fund the business 

projects or return the advance fees, the defendant deposited the money in the firm’s account and 

then proceeded to write large checks on the account made out to third parties and himself.31 

III.	 Effective Regulations to Apply the BSA to Investment Companies 

Different types of investment companies have different susceptibilities to money 

laundering, requiring variations in the regulatory approaches to them. To be effective, 

regulations applying the requirements of the BSA to investment companies must reflect the 

particular investment company’s structure and vulnerability to being used in one or more stages 

of the money laundering process. In this section of the Report, we provide a description of the 

types of investment companies that currently exist, any special vulnerabilities that a certain type 

of investment company may have to being used for money laundering or terrorist financing, and 

the action taken or recommended to apply the provisions of the BSA to these companies. 

The first step in drafting the regulations that would apply the requirements of the BSA to 

investment companies is to define the term “investment companies.” A broad definition of 

“investment company” could include a large range of entities from small investment clubs to 

large corporate holding companies and, in between, an array of financing vehicles many of 

which are unlikely to be used for money laundering purposes. The discussion below reviews the 

various types of investment companies within two categories—those registered with the SEC 

under the 1940 Act and all others. 

30	 U.S. v. Davis, 226 F.3d 346, 348-349 (5th Cir. 2000). 

31	 See also U.S. v. Mullens, 65 F.3d 1560 (11th Cir. 1995) (using an investment company to operate 

a Ponzi scheme). 
 

 

 

11
 

A.	 Registered Investment Companies 

Section 356(c)(2) of the USA Patriot Act indicated that the definition of “investment 

company” provided in the 1940 Act should be the starting point in crafting an appropriate 

definition. The 1940 Act defines “investment company” to include any issuer of securities that 

is, or holds itself out as being, engaged primarily in the business of investing, reinvesting, or 

trading in securities.32 Most investment companies offered to the public are registered with the 

SEC under the 1940 Act, which subjects them to a comprehensive scheme of regulation. 

The 1940 Act classifies almost all registered investment companies as either 

“management companies” or “unit investment trusts.”33 Management companies, which often 

adjust (or “manage”) their portfolios in an active manner, are subclassified as “open-end” and 

32	 Section 3(a)(1) of the 1940 Act defines “investment company” as any issuer that (A) is or holds 

itself out as being engaged primarily, or proposes to engage primarily, in the business of 

investing, reinvesting or trading in securities; (B) is engaged or proposes to engage in the 

business of issuing face-amount certificates of the installment type, or has been engaged in such 

business and has any such certificate outstanding; or (C) is engaged or proposes to engage in the 

business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes 

to acquire investment securities having a value exceeding 40 per centum of the value of such 

issuer’s total assets (exclusive of Government securities and cash items) on an unconsolidated 

basis. 15 U.S.C. 80a-3(a)(1). 

33	 A “management company” is any investment company other than a unit investment trust or a 

face-amount certificate company. 15 U.S.C. 80a-4(3). A “unit investment trust” is an 

“investment company which (A) is organized under a trust indenture, contract of custodianship or 

agency, or similar instrument, (B) does not have a board of directors, and (C) issues only 

redeemable securities, each of which represents an undivided interest in a unit of specified 

securities, but does not include a voting trust.” 15 U.S.C. 80a-4(2). A “face-amount certificate 

company” is “an investment company which is engaged or proposes to engage in the business of 

issuing face-amount certificates of the installment type, or which has been engaged in such 

business and has any such certificate outstanding.” 15 U.S.C. 80a-4(1). A “face amount 

certificate” is “any certificate, investment contract, or other security which represents an 

obligation on the part of its issuer to pay a stated or determinable sum or sums at a fixed or 

determinable date or dates more than twenty-four months after the date or issuance, in 

consideration of the payment of periodic installments or a stated or determinable amount” or 

“any security which represents a similar obligation on the part of a face-amount certificate 

company, the consideration for which is the payment of a single lump sum.” 15 U.S.C. 

80a-2(a)(15). 
 

 

 

 

 

12
 

“closed-end” companies. An open-end investment company is a management company that is 

offering or has outstanding any redeemable securities that it issued.34 Open-end investment 

companies, which are more commonly called “mutual funds,” are by far the most prevalent type 

of registered investment company and may be the most susceptible to being used for money 

laundering. 35 

1.	 Mutual Funds 

Mutual funds are today one of the most popular ways individual investors participate in 

the securities markets. In 2001, more than 8,300 active mutual funds, with approximately $7 

trillion in assets, were registered with the SEC.36 Mutual funds are held by more than half of 

U.S. households.37 A mutual fund, like any other investment company, is a trust, partnership, or 

corporation whose assets consist of a portfolio of securities, interests in which are represented by 

the shares that the fund issues. A mutual fund raises money from shareholders and invests it in 

accordance with the fund’s stated objectives. Mutual funds are generally grouped into stock 

34	 15 U.S.C. 80a-5(a)(1). 

35	 The staff of the SEC estimates, based on filings with the SEC, that as of December 2001, 

approximately $6.97 trillion was invested in U.S. mutual funds (including $741 billion invested 

in open-end management companies that fund variable life insurance and variable annuity 

contracts, and $23 billion invested in open-end management companies that are exchange-traded 

funds), $130 billion was invested in closed-end funds, and $121 billion was invested in unit 

investment trusts other than insurance company separate accounts (including $59.5 billion 

invested in unit investment trusts that are exchange-traded funds). As to investment companies 

that fund variable life insurance and variable annuity contracts, see infra pp. 20-21. As to 

investment companies that are exchange-traded funds, see infra note 50. 

36	 Investment Company Institute, Mutual Fund Fact Book (2002) (“ICI Fact Book”) 7. The SEC 

staff estimates that as of December 2001, there were approximately 3000 registered investment 

companies that were open-end management companies. The staff further estimates that 1400 of 

these investment companies are “series companies” with an aggregate 7200 portfolios. A “series 

company” is a registered investment company that issues two or more classes or series of 

preferred or special stock, each of which is preferred over all other classes or serie s with respect 

to assets specifically allocated to that class or series. 17 CFR 270.18f-2. The assets allocated to 

such a class or series are commonly known as a “portfolio.” The series or portfolios of a series 

company operate, for many purposes, as separate investment companies. 

37	 See ICI Fact Book, supra note 36, at 24. 
 

 

 

 

 

 

13
 

funds, bond funds, and money market funds.38 In addition, like most investment companies, 

mutual funds usually do not have their own employees. One or more third-party service 

providers (which may or may not be affiliated with the mutual fund) conduct all of a mutual 

fund’s operations.39 

Unlike other investment companies, a mutual fund typically offers its shares continuously 

to the public, and redeems its shares on demand by investors, at a price based on the fund’s net 

asset value.40 A mutual fund usually offers its shares to the public through a principal 

underwriter, which is a registered broker-dealer.41 Shares also may be purchased directly from 

some funds (called “direct-sold funds”). In addition, they may be purchased through a variety of 

alternative distribution channels, such as fund “supermarkets” (through which investors may 

purchase shares of several different mutual funds), insurance agents, financial planners, and 

banks.42 Mutual funds employ transfer agents to conduct recordkeeping and related functions.43 

38	 Mutual funds also may specialize their investment objectives in certain ways, such as by 

geographic location, industry sector, or the type of security in which they invest. 

39	 A mutual fund may be organized or sponsored by an entity such as an investment adviser that 

provides other financial services. Thus, a mutual fund’s investment adviser may simultaneously 

provide investment advice to individual clients, act as the investment adviser for other registered 

investment companies, and provide investment advice to unregistered pooled investment vehicles 

such as hedge funds. Mutual funds may also be part of larger complexes of entities that provide 

financial services. Other entities in the complex (e.g., broker-dealers and investment advisers) 

will, of course, have employees. 

40	 Mutual funds issue “redeemable securities,” which entitle the holder to receive, upon presentation 

to the fund, the holder’s approximate proportionate share of the issuer’s current net assets, or the 

cash such share represents. 15 U.S.C. 80a-2(a)(32). 

41	 On April 22, 2002, the SEC approved NASD Regulation Rule 3011 and New York Stock 

Exchange rule 445, which require their member broker-dealers to develop, and a member of the 

firm’s senior management to approve, programs designed to achieve and monitor compliance 

with the BSA and related regulations. See Order Approving Proposed Rule Changes Relating 

to Anti-Money Laundering Compliance Programs, Securities Exchange Act Release No. 45798 

(April 22, 2002) [67 FR 20854 (April 26, 2002)]. 

42	 Generally, insurance agents, financial planners, and banks that sell mutual fund shares must also 

be registered as broker-dealers. The alternative distribution channels for mutual funds usually 

maintain omnibus accounts with the mutual fund whose shares they distribute. In such case, 
 

 

 

 

14 

Because mutual funds typically offer and redeem their shares continuously, money 

launderers may invest in mutual funds due to the ability to obtain access to their money. To 

ensure that mutual funds take adequate precautions against such risks, FinCEN issued an interim 

final rule on April 29, 2002 that requires mutual funds to develop and implement an anti-money 

laundering program (“AML”) reasonably designed to prevent them from being used to launder 

money or finance terrorist activities.44 In addition, FinCEN and the SEC jointly published in 

July 2002 a notice of proposed rulemaking that would require mutual funds to establish customer 

identification programs (“CIPs”).45 

These rules, in mandating mutual funds’ BSA obligations, recognize the particular way in 

which mutual funds are orga nized. They permit mutual funds to delegate responsibilities for 

implementation of an anti-money laundering program to one or more service providers or 

neither the fund nor its transfer agent typically knows the identities of the individual investors. 

See note 43 infra, discussing the duties of transfer agents. 

43	 Transfer agents maintain records of shareholder accounts, calculate and disburse dividends, and 

prepare and mail shareholder account statements, federal income tax information, and other 

shareholder notices. Some transfer agents prepare and mail statements confirming shareholder 

transactions and account balances, and maintain customer service departments to respond to 

shareholder inquiries. 

44	 See 67 FR 21117, supra note 16. The program must meet four minimum standards. First, it must 

establish and implement policies, procedures, and internal controls reasonably designed to 

prevent the mutual fund from being used to launder money or finance terrorist activities, 

including, but not limited to, achieving compliance with the applicable provisions of the BSA and 

the implementing regulations thereunder. Second, the mutual fund must provide for independent 

testing by fund personnel or by a qualified outside party of its program to ensure compliance with 

the applicable portions of the BSA and implementing regulations. Third, the mutual fund must 

designate a person or persons responsible for implementing and monitoring the operations and 

internal controls of the program. Fourth, the fund must provide ongoing training to appropriate 

persons regarding the BSA requirements relevant to their functions and the recognition of 

possible signs of money laundering that could arise in the course of their duties. 

45	 See 67 FR 48318, supra note17. The proposed regulation would require mutual funds to 

implement reasonable procedures to (1) verify the identity of any person seeking to open an 

account, to the extent reasonable and practicable , (2) maintain records of the information used to 

verify the person’s identity, and (3) determine whether the person appears on any lists of known 

or suspected terrorists or terrorist organizations provided to investment companies by any 

government agency. The comment period for the proposed rule ended on September 6, 2002. 
 

 

 

 

 

 

 

 

15
 

intermediaries. These intermediaries, through which investors purchase interests in mutual 

funds, include broker-dealers and banks, which are required to have their own anti-money 

laundering and customer identification programs.46 

2.	 Closed-End Funds 

A closed-end investment company (or “closed-end fund”) is a management company 

other than an open-end investment company. 47 Like a mutual fund, a closed-end fund is a trust, 

partnership, or corporation whose assets consist of a portfolio of securities, interests in which are 

represented by the shares that the fund issues.48 Closed-end funds differ from mutual funds in 

that they do not offer their shares continuously, nor do they redeem their shares on demand.49 

Instead, a closed-end fund issues a fixed number of shares, which typically trade on a stock 

exchange or in the over-the-counter market.50 Investors seeking to buy or sell these shares must 

46	 Virtually all intermediaries that can hold mutual fund shares in an omnibus account are or may be 

subject to various anti-money laundering or SAR requirements. For example, a broker-dealer or 

investment adviser can hold shares for customers in omnibus accounts. Broker-dealers are 

already covered by the BSA’s anti-money laundering provisions (including SAR reporting), and 

Treasury may extend these provisions to investment advisers. 

47	 15 U.S.C. 80a-5(a)(2). The staff of the SEC estimates, based on filings with the SEC, that as of 

December 2001 there were 632 registered closed-end funds, with aggregate assets of 

approximately $130 billion. The majority of these funds are publicly traded. The SEC staff 

estimates that as of December 2001 there were 54 closed-end funds, with assets of approximately 

$11.4 billion, that were not publicly traded. These funds are registered with the SEC solely under 

the 1940 Act. 

48	 Recently some closed-end funds have registered with the SEC that invest predominantly in 

securities issued by hedge funds. See Robert H. Rosenblum & Leigh M.P. Freund, A Primer on 

Structuring Registered Funds of Hedge Funds, 9 Inv. Law 4 (Apr. 2002). As to hedge funds 

generally, see section III.B.1. infra. 

49	 Section 23(c) of the 1940 Act [15 U.S.C. 80a-23(c)] generally prohibits a registered closed-end 

investment company from purchasing any security of which it is the issuer except on a securities 

exchange, pursuant to a tender, or under such other circumstances as the SEC may permit by 

rules, regulations, or orders designed to ensure that the purchases are made in a manner or on a 

basis which does not unfairly discriminate against any holders of the securities to be purchased. 

See infra notes 54 - 57 and accompanying text. 

50	 Other types of registered investment companies may also be traded on a stock exchange. These 

“exchange-traded funds” or “ETFs” are registered with the SEC as open-end funds or unit 

investment trusts (“UITs”). Unlike typical open-end funds or UITs, ETFs do not sell or redeem 
 

 

 

16
 

buy or sell them through a broker-dealer on the exchange. Like other publicly traded securities 

(and unlike the shares of a typical mutual fund), shares of a closed-end fund trade at a market 

price that fluctuates and is determined by supply and demand in the marketplace.51 

Closed-end funds typically do not have an account relationship with their investors. As a 

result, those funds (and their service providers) are not in a position to detect and prevent money 

laundering. Purchases and sales of closed-end fund shares are effected through broker-dealers or 

banks, and these entities are already subject to anti-money laundering regulation. 52 For these 

reasons, closed-end funds do not appear to present a risk of money laundering that would be 

effectively addressed by subjecting them to additional regulation, and Treasury has not extended 

BSA regulatory requirements to closed-end funds.53 

Although most closed-end funds do not redeem their shares, a category of closed-end 

funds – “interval funds” – do have limited redemption features. Interval funds rely on rule 23c-3 

their individual shares at net asset value. Instead, ETFs sell and redeem ETF shares at net asset 

value only in large blocks (e.g., 50,000 ETF shares). National securities exchanges list ETF 

shares for trading, which allows investors to purchase and sell individual ETF shares at market 

prices throughout the day. ETFs therefore possess characteristics of traditional open-end funds 

and UITs, which issue redeemable shares, and of closed-end funds, which generally issue shares 

that trade at negotiated prices on national securities exchanges and are not redeemable. The SEC 

staff estimates, based on filings with the SEC, that as of December 2001, there were nine 

separately registered investment companies, four UITs and five open-end funds, offering such 

securities. The SEC staff further estimates that as of December 2001, the five open-end funds 

offered 98 series with aggregate assets of approximately $23 billion, and the UITs had aggregate 

assets of approximately $59.5 billion. The separate series of a registered investment company 

that is a series company operate, for many purposes, as separate investment companies. See 

supra note 36 (discussing registered investment companies that are series companies). 

51	 The price of closed-end fund shares may be above or below the fund’s net asset value per share. 

This price differential is commonly referred to as a premium or discount, and reflects the 

market’s assessment of the value and liquidity of the fund’s portfolio assets, among other things. 

52	 See 67 FR 21110, supra note 16. 

53	 In April 2002, Treasury temporarily exempted investment companies other than mutual funds 

from the requirement that they establish anti-money laundering (“AML”) programs. Id. Treasury 

stated its intention to continue to consider the type of AML program that would be appropriate for 

these companies, including the extent to which they pose a money laundering risk that is not more 
 

 

 

 

 

 

 

 

17
 

under the 1940 Act to periodically offer to repurchase from shareholders a limited number of 

fund shares at net asset value.54 Rule 23c-3 describes the intervals at which such repurchase 

offers may be made (three, six or twelve months)55 and the amount of stock that may be the 

subject of a repurchase offer (not less than five percent nor more than twenty-five percent of the 

fund’s outstanding stock).56 There are currently an estimated 30 interval funds.57 

Because investors in an interval fund control neither the timing nor the amount of the 

issuer’s repurchase offer, the redemption features of interval funds do not appear to present 

significant money laundering risks. Accordingly, Treasury has not extended BSA regulatory 

requirements to interval funds, but it may reconsider this issue if the SEC were to liberalize the 

circumstances in which interval funds may make repurchase offers. 

3.	 Unit Investment Trusts 

A unit investment trust (“UIT”) is a registered investment company that buys and holds a 

generally fixed, unmanaged58 portfolio of securities and then sells redeemable shares (called 

“units”) in the trust to investors. UIT investors receive a proportionate share of dividends or 

interest paid by the investments.59 

effectively covered by the AML program of another financial institution through which investors 

purchase and sell their interests (e.g., a broker-dealer or insurance company). Id. at 21117-21118. 

54	 17 CFR 270.23c-3. 

55	 17 CFR 270.23c-3(a)(1). 

56	 17 CFR 270.23c-3(a)(3). 

57	 This estimate is based on filings with the SEC on Form N-23C-3 [17 CFR 274.221] during 2001. 

58	 A UIT has no investment adviser and no board of directors. 

59	 The 1940 Act defines a “unit investment trust” as an investment company that (i) is organized 

under a trust indenture, contract or similar instrument, (ii) does not have a board of directors, and 

(iii) issues only redeemable securities that represent undivided interests in a unit of specified 

securities. See note 33 supra. As discussed above, in April 2002, FinCEN temporarily exempted 

investment companies other than mutual funds from the requirement that they establish AML 

programs. See 67 FR 21110, supra note 16. Therefore, UITs currently are not subject to BSA 

regulatory requirements. 
 

 

 

 

 

18 

There are two types of UITs. The “traditional” UIT is sponsored by a broker-dealer, 

which deposits securities into a trust and offers interests (“units”) in the trust to brokerage 

customers. Although these units can be redeemed, sponsors typically support a secondary 

market into which redeeming shareholders sell. These traditional UITs have many of the same 

characteristics of mutual funds that can make them attractive to persons seeking to launder 

money. However, they are entirely creatures of their sponsoring brokerage firms, which are 

already required by the BSA to establish AML programs and report suspicious transactions in 

connection with such entities.60 It does not appear that applying anti-money laundering rules to 

this type of UIT would appreciably decrease the UIT’s risk of being used for money laundering, 

and thus such application has not been made. 

The second type of UIT is an insurance company separate account.61 These separate 

accounts issue variable annuity contracts and variable life insurance policies, and invest the 

premiums received by the insurance company in one or more mutual funds. In this arrangement, 

the UIT separate account functions as a conduit to the underlying mutual funds. These UITs are 

sponsored by insurance companies, which are likely to be required to establish anti-money 

laundering programs in accordance with the BSA once a proposed rule is finalized.62 Applying 

60	 See Amendment to Bank Secrecy Act Regulations; Requirement that Brokers or Dealers in 

Securities Report Suspicious Transactions, 67 FR 44048 (July 1, 2002); 67 FR 21110, supra note 

16. Treasury and the SEC have jointly proposed a rule that would require broker-dealers to 

establish and implement customer identif ication programs. See 67 FR 48306, supra note 17. 

61	 Based on filings with the SEC, the SEC staff estimates that as of December 2001 there were 

approximately 683 unit investment trusts that were insurance company separate accounts, with 

aggregate assets of $650.5 billion. 

62	 Insurance companies have long been defined as financial institutions for purposes of the BSA. 

See 15 U.S.C. 5312(a)(2)(M). In April 2002, Treasury temporarily deferred the anti-money 

laundering program requirement contained in section 352 of the USA Patriot Act that would have 

applied to insurance companies, to enable it to consider how anti-money laundering controls 

could best be applied to that industry, taking into account differences in size, location, and 

services within the industry. See 67 FR 21110, supra note 16. On September 26, 2002, Treasury 
 

 

 

 

19
 

another set of anti-money laundering rules to such separate accounts appears unlikely to increase 

protection against money laundering. 

B.	 Unregistered Investment Companies 

In addition to “investment companies” that are required to be registered under the 1940 

Act, there are similar pooled investment vehicles that are not “investment companies” for 

purposes of the 1940 Act that should be considered to be “investment companies” for purposes 

of the BSA. Such entities may include (i) privately offered funds that have a limited number of 

investors that rely on the exc eption in section 3(c)(1) of the 1940 Act; (ii) funds that are privately 

offered to qualified purchasers that rely on the exception in section 3(c)(7) of the 1940 Act; and 

(iii) entities that are not subject to the 1940 Act because they do not invest primarily in securities. 

These types of investment vehicles would include hedge funds, private equity funds, venture 

capital funds, commodity pools, and real estate investment trusts.63 

1.	 Hedge Funds 

The term “hedge fund” refers generally to a privately offered investment vehicle that 

pools the contributions of its investors in order to invest in a variety of asset classes, such as 

securities, futures contracts, options, bonds, and currencies.64 A precise figure for the size of the 

proposed a new rule that would prescribe minimum standards applicable to insurance companies 

pursuant to the BSA requirement that financial institutions establish anti-money laundering 

programs. See 67 FR 60625, supra note 16. The comment period on the proposed rule ends on 

November 25, 2002. Id 

63	 As described in detail below, on September 26, 2002, FinCEN published a Notice of Proposed 

Rulemaking that would require many of these entities to establish anti-money laundering 

programs. 67 FR 60617, supra note 16, discussed at section III.B.4. of this report. 

64	 The President’s Working Group on Financial Markets describes a “hedge fund” as “any pooled 

investment vehicle that is privately organized, administered by professional investment managers, 

and not widely available to the public.” Report of the President’s Working Group on Financial 

Markets, “Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management,” at 1 

(1999) (“Working Group Report”). It remains a matter of debate whether the term “hedge fund” 

refers only to funds that provide performance-based compensation for their managers, funds that 

actually hedge their exposure to the market, funds that engage in any investment strategy that is 
 

 

 

 

 

20
 

hedge fund industry, in terms of the number of funds and the total value of assets managed, is 

unavailable because no official reporting organization exists for hedge funds. As of the last 

quarter of 2001, however, it was estimated that there were between 4,000 and 5,000 hedge funds 

worldwide that managed between $400 and $500 billion in capital.65 Although the hedge fund 

industry remains small in relation to the mutual fund industry, 66 investment in hedge funds is 

growing. 

Hedge funds domiciled in the United States are usually organized as limited partnerships 

or limited liability companies. The sponsor/general partner/manager usually holds an interest in 

the fund along with investors/limited partners/members,67 who are, in most circumstances, either 

wealthy individuals or institutions such as savings associations, broker-dealers, investment 

companies, and employee benefit plans.68 Further, hedge funds do not engage in “public 

offerings” of the interests in the funds. The sponsor often handles marketing and investor 

intended to be non-correlated with the overall securities markets, funds that are not required to be 

registered, or some combination of the foregoing. 

65	 See The Financial Stability Forum (“FSF”) Recommendations and Concerns Raised by Highly 

Leveraged Institutions (“HLIs”): An Assessment, March 2002, at 1-2 

(http://www.fsforum.org/Reports/HLIreviewMar02.pdf). The FSF is a 40-member organization 

convened in April 1999 by the Finance Ministers and Central Bank Governors of the G-7 

countries. 

66	 As discussed previously, as of December 2001, there were an estimated 8300 mutual funds with 

approximately $7 trillion in assets. See note 36 infra and accompanying text. 

67	 The investors purchase interests in the hedge fund. These interests, whether denominated as 

units, shares or limited partnership interests, are securities. The Securities Act of 1933, however, 

provides an exemption from registration for securities that are not publicly offered. 15 U.S.C. 

77d(2). 

68	 Generally, hedge funds offer and sell interests to persons who qualify as “accredited investors,” 

“qualified purchasers,” or “qualified clients” as those terms are defined respectively for purposes 

of the Securities Act of 1933, the Investment Company Act of 1940, and the Investment Advisers 

Act of 1940. See 15 U.S.C. 77b(a)(15), 17 CFR 230.215, and 17 CFR 230.501 (defining 

“accredited investor”), 15 U.S.C. 80a-2(a)(51) (defining “qualified purchaser”) and 17 CFR 

275.205-3(d) (defining “qualified client”). Limiting investors in this way enables a fund to avoid 

registering the securities issued by the fund under the Securities Act of 1933, avoid registering the 
 

 

 

 

 

21
 

services, and often serves as the fund manager with responsibility for making decisions regarding 

operations and investment strategy. A hedge fund also may retain an investment adviser or 

multiple advisers. It is not uncommon, however, for the sponsor, manager, and investment 

adviser(s) to be either the same legal entity or separate legal entities that might be owned by the 

sponsor. A typical hedge fund is similar to a mutual fund in that it maintains several contractual 

relationships that are integral to the operation of the hedge fund, including relationships with 

prime brokers, executing brokers, custodians, administrators, placement agents, registrars and 

transfer agents.69 

For various reasons arising from tax, administrative, and regulatory concerns, hedge 

funds often are established under U.S. law as partnerships (“U.S. domestic hedge funds”) or as 

corporations in a foreign jurisdiction (“U.S. hedge funds with an offshore related fund”).70 

Hedge funds that are offered to U.S. investors tend to be structured in ways to address the needs 

of either tax-exempt investors or taxable investors. U.S. domestic hedge funds are usually in the 

form of limited partnerships to accommodate taxable U.S. investors. Partnerships provide 

favorable tax treatment for individual investors because the partnership’s income is taxed only at 

the level of the individual investors in the partnership, as opposed to a corporation’s income that 

is taxed at both the entity and individual investors’ levels.71 In contrast, some U.S. hedge funds 

fund itself under the Investment Company Act of 1940, and enables the fund to pay its investment 

adviser a performance-based fee, even if the adviser is registered with the SEC. 

69	 Matthias Bekier, Marketing of Hedge Funds (1996), excerpts available at 

http://209.130.127.8/aimasite/research/bekierhf/hfstru23.htm. 

70	 In addition, any of the persons contractually affiliated with a hedge fund (e.g., prime broker, 

administrator, custodian, adviser, or distributor) may be located offshore. 

71	 Some domestic hedge funds are organized as limited liability companies, which provide their 

investors with tax benefits identical to those of a limited partnership. 
 

 

 

 

 

22
 

with an offshore related fund accommodate tax-exempt U.S. investors, such as pension funds and 

university endowments, and non-U.S. investors. 72 

Generally, all hedge funds require investors to complete subscription agreements that 

detail the investors’ identity, domicile, and net worth, among other information. 73 The investor 

then returns the subscription agreement to the hedge fund manager or administrator and forwards 

his initial investment to the hedge fund’s account with its custodian or its prime broker.74 For the 

redemption of investment assets, U.S. domestic hedge funds usually rely on their custodian or 

prime broker to forward assets from the hedge fund’s account to the investor’s account. A U.S. 

hedge fund with an offshore related fund generally processes a redemption through its fund 

administrator, which sends the redeemed investment to the investor’s bank account identified in 

the subscription documents. 

A typical hedge fund often has a one-year “lock-up” period from the date of investment, 

during which the investor cannot redeem his investment.75 Once the initial lock-up period is 

over, the right of an investor to redeem is governed by the partnership agreement. Most 

investors may demand a redemption during a set period that occurs on a quarterly, semi-annual, 

72	 U.S. tax-exempt entities, such as university endowments and pension funds, are taxable on 

unrelated business taxable income (“UBIT”) and therefore may seek to avoid the generation of 

income that the IRS may consider subject to UBIT by investing in an offshore fund that is a 

corporate entity. 

73	 A subscription agreement is an agreement to buy shares or interests in a hedge fund. It also 

outlines the terms and conditions of redemptions and transfers of such shares or interests. 

74	 Hedge funds rarely, if ever, receive or disburse currency to investors. Most investments are made 

by wire transfers from a financial institution, such as a bank, to the hedge fund’s custodian or 

prime broker. When investors redeem their investments, most hedge funds forward the 

redemption proceeds to the account at the financial institution from which the initial investment 

was made. 

75	 See Lori R. Runquist, Hedge Funds: Alternative Investment Choices, Market Signals 

Supplement, The Northern Trust Co., (Feb. 2002), at 

www.northernfunds.com/library/personal/mrkt_newsletters/money_matters/020200.pdf 
23
 

or annual basis. There is no formal domestic secondary market for hedge fund shares. 

Of the unregistered investment companies, hedge funds may be the most susceptible to 

abuse by money launderers because of the liquidity of their interests and their structure. 

Compared to the lock-up period imposed upon an investment by other unregistered investment 

companies, the lock-up period imposed upon an investment by a hedge fund is relatively short. 

Because money laundering has become such an expensive activity (estimated to cost 8%-10% of 

the amount of the money laundered), money launderers may be willing to invest their assets for a 

limited period to launder them in a manner that generates a return rather than a loss. 

The structure of hedge funds also makes them vulnerable to money laundering. A U.S. 

domestic hedge fund is comprised of a general partner and a limited partner that form a U.S. 

limited partnership to hold a portfolio of liquid securities. A limited partner, either an individual 

or a corporate limited partner, could easily transfer the proceeds of crime into the hedge fund. 

Without anti-money laundering compliance responsibilities, a hedge fund has no responsibility to 

determine the source of an investor’s funds or to analyze whether the source of those funds is 

questionable. 

The U.S. hedge fund with an offshore related fund has a complex structure that begins 

with a general partner and limited partners in a U.S. limited partnership. The limited partnership 

often provides funds to an offshore corporate master, which invests the funds in a portfolio of 

liquid securities. The corporate master has an investment manager and an offshore 

administrator. The offshore corporate master also receives funds to invest from an offshore 

corporate feeder. The beneficial owners of the offshore corporate feeder may be composed of 

offshore investors and U.S. tax-exempt entities that invest offshore for tax purposes. 

Depending on the jurisdiction in which the offshore corporate feeder is organized, it may 
 

 

 

 

 

24
 

be impossible to identify the beneficial owners of the money invested in the fund through the 

offshore corporate feeder or the source of the money being invested. The potential availability of 

“anonymous” investment and the inability of law enforcement to obtain information about the 

beneficial ownership of corporate entities in certain jurisdictions make this type of hedge fund 

particularly attractive to money launderers.76 In fact, the Report of the President’s Working 

Group on Financial Markets notes that a significant number of hedge funds have been 

established in offshore financial centers that are tax havens and may be engaged in or facilitating 

illegal tax avoidance and other inappropriate purposes.77 

2.	 Commodity Pools 

A commodity pool is an investment trust, syndicate or similar form of enterprise operated 

for trading commodity interests.78 Commodity pool operators (“CPOs”) are required to register 

with the CFTC as CPOs, and are subject to comprehensive regulation and oversight by the 

CFTC. 79 As of September 30, 2001, approximately 1,700 CPOs registered with the CFTC 80 

operated an estimated 2,558 active commodity pools with $346 billion in assets.81 

76	 See Gilbert, supra note 29. 

77	 See Working Group Report, app. B at B-3. 

78	 A “pool” is defined in 17 CFR 4.10(d), a rule promulgated by the CFTC under the Commodity 

Exchange Act (“CEA”), as “any investment trust, syndicate or similar form of enterprise operated 

for the purpose of trading commodity interests.” As a general matter, there are two types of 

commodity pools: public pools and private pools. Securities issued by public pools (i.e., pools 

offered through public offerings) are registered with the SEC under the Securities Act of 1933 

and the Securities Exchange Act of 1934. If those public pools are investment companies, they 

also are registered with the SEC under the 1940 Act. Private pools (i.e., pools that are offered 

through private placements) also may register with the SEC under the 1940 Act as investment 

companies. 

79	 The CEA defines the term “commodity pool operator” as “any person engaged in a business that 

is of the nature of an investment trust, syndicate, or similar form of enterprise, and who, in 

connection therewith, solicits, accepts, or receives from others, funds, securities, or property, 

either directly or through capital contributions, the sale of stock or other forms of securities, or 

otherwise, for the purpose of trading in any commodity for future delivery on or subject to the 

rules of any contract market or derivatives transaction execution facilit y, except that the term 
 

 

 

 

 

 

 

 

25 

Pursuant to the CFTC’s rules and depending upon the amount of assets in the pool, a 

CPO must provide investors and the CFTC with monthly or quarterly financial statements,82 

distribute and file an annual report for each pool that it operates,83 and maintain and make 

available for CFTC inspection certain books and records.84 CPOs also are subject to the general 

and specific anti-fraud provisions of the CEA and CFTC regulations.85 The CFTC and the 

National Futures Association (“NFA”), the futures industry’s self-regulatory organization, 

review all of the commodity pools’ annual financial statements. Further, each CPO must 

complete an annual self-audit questionnaire and undergo an onsite examination by NFA 

approximately once every 2.5 years. That examination covers the CPO itself and every 

commodity pool operated by the CPO. NFA maintains a publicly available database that can be 

used by both regulators and investors and contains the names, addresses, NFA identification 

numbers, regulatory history, and other pertinent information regarding the CPOs and commodity 

pools.86 

does not include such persons not within the intent of the definition of the term as the 

Commission may specify by rule, regulation, or order.” 7 U.S.C. 1a(5). 

80	 CFTC 2001 Annual Report, “Futures Industry Registrants by Location as of September 30, 

2001,” at 150. 

81	 This information is based on estimates supplied to the staff of the CFTC by the National Futures 

Association. 

82	 17 CFR 4.22. 

83	 17 CFR 4.22(c). Before a commodity pool can accept funds or other property from investors in 

the pool, the CPO must distribute and file a disclosure document with the CFTC and National 

Futures Association. 17 CFR 4.21, 4.24-4.26. 

84	 17 CFR 4.23. 

85	 7 U.S.C. 6b prohibits fraudulent activity in or in connection with a futures contract. 7 U.S.C. 6o 

prohibits fraudulent transactions by CPOs and CTAs. 17 CFR 32.9 and 33.10 bar fraud by any 

person in connection with commodity option transactions. 

86	 The National Futures Association database can be searched on the Internet at 

http://www.nfa.futures.org/basic. As described in detail below, on September 26, 2002, FinCEN 
 

 

 

 

 

 

26
 

3. Private Equity and Venture Capital Funds 

Private equity funds are vehicles in which investors pool money to invest in unregistered 

securities of public or private companies that have been in existence for several years and have 

established products, customers, and operating records. A venture capital fund is a type of 

private equity fund87 in which participants pool capital to invest in the seed, start-up or early 

stages of companies. These funds88 do not engage in public offerings and generally have a small 

number of institutional and wealthy individual investors.89 

There is little information on the number of private equity funds and the total value of 

assets managed by such funds because, like hedge funds, there is no official reporting 

organization that exists for private equity funds. However, in 2001, an estimated 1,627 venture 

capital funds were in existence with $250 billion in capital under management.90 

Private equity funds are sponsored by private equity firms, which typically sponsor more 

than one fund. Each fund, however, is organized as a separate legal entity. Most private equity 

funds are structured as limited partnerships with the general partner being the private equity firm 

published a notice or proposed rulemaking that would require commodity pools, and therefore, 

CPOs indirectly, to establish anti-money laundering programs. 67 FR 60617, supra note 16, 

discussed at section III.B.4. of this report. 

87	 There are other types of private equity funds including leveraged buyout funds, which finance the 

purchase of established companies; mezzanine funds, which are used to purchase and recapitalize 

private companies; and opportunity funds, which invest in distressed companies. However, most 

of the details and descriptions in this report focus on the practices of private equity funds 

generally and venture capital funds which are a subset of private equity funds. 

88	 For purposes of this report, both types of funds will be referred to generally as “private equity 

funds.” 

89	 See supra note 77 regarding “accredited investors,” “qualified purchasers,” and “qualified 

clients.” 

90	 The NVCA 2002 Yearbook, National Venture Capital Association (“NVCA”), (“The NVCA 

2002 Yearbook”), at http://www.nvca.org. 
 

 

 

 

 

27
 

and the investors serving as limited partners.91 Typically, the general partner serves as the fund’s 

manager and is responsible for researching the companies in which the fund might invest.92 In 

some instances, particularly in venture capital funds, the general partner plays an active role in 

the companies in which the fund invests, either by sitting on the board of directors or becoming 

involved in day-to-day management. The general partner establishes a management company to 

handle routine administrative matters such as administering payroll and benefits for the fund’s 

employees, leasing office space, and recording the limited partners’ investments in the fund. 

Many private equity funds establish offshore mirror funds. These offshore funds have 

separate limited partners from the domestic fund, but the funds invest in the same or similar 

companies. Funds with an offshore element can be structured in a number of ways, but the 

general partner of the companion U.S. fund generally manages them.93 As with hedge funds, the 

investors in offshore private equity funds are typically U.S. tax-exempt organizations and foreign 

persons or institutions. 

The general partner of a private equity fund “solicits” investors directly—there is no 

general advertisement or public offering of the fund’s securities.94 Investors typically include 

91	 Some private equity funds are organized as limited liability companies and, occasionally, 

corporations. 

92	 Depending on the size of the fund and the types of investors, the manager may be required to 

register as an investment adviser under the 1940 Act, 15 U.S.C. 80b-1 et seq. But, generally, 

private equity funds are subject to limited government regulation. 

93	 Regardless of the structure of the onshore/offshore arrangement, the general partner’s 

management company in the U.S. typically has custody of the records of all of the investors, 

although there is often a copy of the records for the offshore investors kept in the jurisdiction of 

the offshore fund. In the case of a fund that has some U.S. investors but is strictly an offshore 

fund (i.e., organized by non-U.S. general partners), such records typically will be kept offshore. 

94	 Private equity funds are not required to provide disclosure information to investors. Nonetheless, 

they typically provide offering memoranda to prospective investors. The general partners of 

private equity funds usually collect a large amount of information about prospective limited 
 

 

 

 

 

 

28
 

high net worth individuals and families, pension funds, endowment organizations, banks and 

insurance companies.95 

In most cases, private equity funds have a lifespan of 10 to 12 years, although the 

investment in each portfolio company usually lasts for a shorter period, such as 3 to 7 years.96 

Investors commit to invest a certain amount of money with the fund over the life of the fund. 

Investors make their contributions to the fund in response to “capital calls” from the general 

partner. Capital calls are made when the general partner has identified a portfolio company in 

which the private equity fund will invest and needs access to capital to make the investment. 

Once an investor meets the capital call, the private equity fund invests the new capital in the 

portfolio company almost immediately. The private equity fund typically does not retain a pool 

of uninvested capital. 97 

Private equity funds are long-term investments and provide little, if any, opportunity for 

investors to redeem their investments.98 There is no formal secondary market for shares in a 

partners to confirm that the limited partners will be able to meet their capital commitments when 

required by the private equity fund. 

95	 Industry sources estimate that individuals and families account for less than 10% of the assets 

invested in private equity funds, pension funds account for about 30%, endowments account for 

about 20%, and banks and insurance companies account for about 40%. The NVCA estimates 

that individuals and families account for approximately 10% of the invested assets in venture 

capital funds, pension funds account for 40%, endowments account for 20%; and banks, 

insurance companies and corporations account for about 30%. The NVCA 2002 Yearbook, supra 

note 90 

96	 The term of existence of each private equity fund is found in the fund’s partnership agreement. 

97	 Investors’ contributions are wired to the private equity fund’s bank account from which they are 

routed to the portfolio company. The administrative arm of the private equity fund is responsible 

for keeping records of investors’ contributions and distributions. 

98	 Although a private equity fund rarely redeems its investors’ shares in the fund, the fund may pay 

its investors dividends. A private equity fund may distribute a cash dividend to its investors when 

it profits from the sale of a particular portfolio investment or may distribute a stock dividend to its 

investors when it receives shares in a particular portfolio company after the company has 
 

 

 

 

 

 

29
 

private equity fund, although there is a small informal secondary market that is comprised of 

private equity funds specializing in buying interests in established funds.99 

4.	 Real Estate Investment Trusts (“REITs”) 

A REIT is an investment vehicle that allows investors to own interests in incomeproducing real estate properties or participate in mortgage financing.100 There are three basic 

types of REITs: equity REITS, mortgage REITs and hybrid REITS. Equity REITs, which own 

and operate income-producing real estate, account for 96.1% of REITS. Mortgage REITs, which 

lend money directly to real estate owners and operators or extend credit indirectly through the 

acquisition of loan interests, account for 1.6% of REITS. Hybrid REITs, which both own 

properties and make loans to real estate owners and operators, account for 2.3% of REITS.101 

The structure of a typical REIT is dictated by certain provisions of the Internal Revenue 

Code (“IRC”).102 A REIT must be organized as a corporation, trust or associa tion that would be 

subject to U.S. corporate income taxation but for the REIT provisions of the IRC.103 The IRC 

also requires that a REIT be managed by a board of directors or trustees, have shares that are 

fully transferable, have a minimum of 100 shareholders, have no more than 50% of its shares 

undergone an initial public offering. To facilitate the transfer of shares from the fund to its 

investors in the case of a stock dividend, the fund usually retains the services of a transfer agent. 

99	 In 1999, five private equity funds raised $1.6 billion for purchases of secondary interests in other 

private equity funds. See David M. Toll, “Private Equity Primer,” in Galante’s Venture Capital 

& Private Equity Directory. 

100	 A REIT is not an investment company under the 1940 Act. See 15 U.S.C. 80a-3(a)(1)(A) 

(defining investment companies to be in the business of investing, reinvesting, or trading in 

securities) and 15 U.S.C. 80a-3(c)(5)(C) (excluding from the definition of investment companies 

certain issuers that are engaged primarily in the business of purchasing or otherwise acquiring 

mortgages or other liens on an interests in real estate.) 

101	 These statistics are available from the National Association of Real Estate Investment Trusts 

(“NAREIT”), at www.nareit.com. 

102	 Subchapter M of the Internal Revenue Code, 26 U.S.C. 851 et seq. 

103	 26 U.S.C. 856. 
 

 

 

30
 

held by five or fewer individuals during the last half of each taxable year, invest at least 75% of 

its total assets in real estate assets, derive at least 75% of its gross income from rents from real 

property or interest on mortgages on real property, have no more than 20% of its assets consist of 

stocks in taxable REIT subsidiaries, and pay at least 90% of its taxable income to investors in the 

form of dividends.104 

According to industry sources, as of March 2001 there were approximately 300 REITs 

operating in the U.S. with assets totaling over $300 billion. 105 Currently, approximately 190 

large REITs are registered with the SEC as public companies under the Securities Exchange Act 

of 1934 and trade on the national stock exchanges.106 The securities of REITs registered with the 

SEC are traded through broker-dealers, which are already subject to anti-money laundering 

regulations promulgated under the BSA. Approximately 100 private REITs, entities whose 

securities are not listed on a securities exchange, are in existence. The typical life span of a 

private REIT is 10 to 15 years. They are similar to the publicly listed and traded REITS in terms 

of structure due to the requirements of the IRC. The securities of the private REIT may be 

registered with the SEC under the Securities Act of 1933 or may be private placements. In most 

cases, investors purchase private REIT securities through an SEC-registered broker-dealer. Most 

private REITs provide investors with the opportunity to purchase additional shares through a 

dividend reinvestment program. An investment in a private REIT tends to be illiquid because the 

104 Id. 

105 See www.investinreits.com/faqtext.cfm#how_many 

106 According to NAREIT, there are approximately 149 REITs listed on the New York Stock 

Exchange, 27 REITs listed on the American Stock Exchange, and 12 REITs listed on the 

NASDAQ National Market System. See “Frequently Asked Questions about REITs,” at 

http://www.nareit.com/aboutreits/faqtext.cfm 
 

 

 

31
 

investors usually have no right to redeem their interests and the REIT often restricts the transfer 

of interests to comply with other IRC requirements. 

5.	 Proposed Rule for the Application of the BSA to Unregistered 

Investment Companies 

The rule that temporarily exempts investment companies other than mutual funds from 

the BSA requirement that investment companies implement anti-money laundering programs, 

applies to all unregistered investment companies.107 However, in that rule, FinCEN observed that 

a number of unregistered entities such as hedge funds are excluded from the 1940 Act definition 

of “investment company” and that those entities would likely be required to establish anti-money 

laundering programs under section 352 of the USA Patriot Act in the future.108 

With respect to investment companies not registered under the 1940 Act, Treasury 

considered two different approaches in creating an appropriate definition. Treasury could have 

defined, to the extent possible, the various sub-categories of unregistered investment companies 

(such as hedge funds, private equity funds, and venture capital funds) and then could have 

fashioned regulations for each sub-category based on the extent to which that sub-category is 

vulnerable to money laundering. One disadvantage of such an approach is that the labels for 

many of these entities are somewhat colloquial in nature and are not susceptible to precise 

definition. Thus, this approach risked failing to capture companies that have characteristics that 

would enable them to be used for money laundering. At the other extreme, including every 

perceivable sub-category of entities would unnecessarily burden businesses that money 

launderers are unlikely to use. Moreover, an overly inclusive definition would bring within the 

scope of the BSA’s anti-money laundering requirements so many entities as to tax resources of 

107 67 FR 21117, supra note 16. 

108 Id. at n.5. 
 

 

 

32
 

the federal regulatory agencies charged with oversight of financial institutions and, thus, 

diminish the effectiveness of that oversight. 

Treasury proposed an alternative approach in defining unregistered investment 

companies: consider the group as a whole and define the characteristics of such entities that 

present money laundering risks. This approach subjects entities to regulation under the BSA 

only if they possess those characteristics that present cognizable risks of money laundering. 

On September 26, 2002, FinCEN issued a proposed rule that would require certain 

“unregistered investment companies,” including certain entities that rely on the exceptions in 

sections 3(c)(1) and 3(c)(7) of the Investment Company Act, commodity pools, and REITs, to 

develop and implement anti-money laundering programs reasonably designed to prevent them 

from being used to launder money or finance terrorist activities.109 The proposed rule was 

carefully designed to balance the need for a comprehensive national program to prevent money 

laundering against the burdens imposed by the BSA on businesses, including small businesses. 

Under the proposed rule, an “unregistered investment company” is an issuer of securities 

that (i) would be an investment company under the 1940 Act, but for the exclusions provided in 

sections 3(c)(1) and 3(c)(7) of that Act; (ii) is a commodity pool; or (iii) invests primarily in real 

estate and/or interests therein. 110 Because of the broad scope of the type and nature of businesses 

that fall within these categories, FinCEN proposed to further narrow the definition of 

109 See 67 FR 60617, 60618, supra note 16. 

110 This definition thus would include entities consisting of pools of three asset classes: securities, 

commodity futures contracts, and real estate. The notice of proposed rulemaking requests 

comment whether there are other entities, not covered by other rules requiring anti-money 

laundering programs, that pool assets and provide a similar opportunity for money laundering or 

terrorist financing, and whether such entities should be required by the final rule to establish antimoney laundering programs. 
 

 

33
 

unregistered investment company by several limitations and exceptions from the definition, as 

described below. 

Redemption Rights. FinCEN proposed to define “unregistered investment company” to 

include only those companies that permit an investor to redeem a portion of his or her investment 

within two years after that investment was made. Investment companies rarely receive from or 

disburse to investors significant amounts of currency. Therefore, if these companies are used to 

launder money, they are more likely to be used as a transition method of investment, in order to 

obscure the source and eventual use of tainted proceeds. The use of financial institutions at this 

stage of the process generally requires that the money launderer be able to redeem his or her 

interests in the company within a relatively short period. Conversely, companies whose shares 

are not redeemable, or whose shares are redeemable only after a lengthy holding (or “lock-up”) 

period, generally lack the liquidity that makes them attractive to money launderers. The 

proposed rule’s “redeemability” requirement will likely have the effect of excluding from the 

rule publicly traded REITs, a large number of special purpose financing vehicles, and many 

private equity and venture capital funds. 

Minimum Asset Size. Some entities, such as small businesses and investment clubs, are 

so small that they are unlikely to be used for money laundering. 111 Therefore, the Proposed Rule 

would exclude from its coverage companies with less than $1,000,000 in assets as of the end of 

the most recent calendar quarter. 

Offshore Funds. Because many unregistered investment companies operate “offshore” 

and offer interests to both U.S. and foreign persons, the rule would extend to funds that (i) are 

FinCEN believes that entities with less than $1,000,000 in assets pose significantly lower money 

laundering risks than larger entities. See also section 312(a)(4)(b) of the USA Patriot Act 

(defining “private banking account” to include accounts of not less than $1,000,000). 

111 
 

 

 

34
 

organized in the United States; (ii) are organized or sponsored by a U.S. person; or (iii) sell 

ownership interests to U.S. persons.112 Treasury proposed the rule having a long jurisdictional 

reach to prevent circumvention of the rule by money launderers who could easily shift operations 

to a hedge fund organized offshore in a jurisdiction that did not have adequate laws prohibiting 

money laundering. The proposed rule reflects Treasury’s determination that it is appropriate and 

reasonable to require issuers that benefit from the financial and legal systems of the United 

States to establish anti-money laundering programs to prevent, detect, and facilitate the 

prosecution of international money laundering and terrorist financ ing. 

Exceptions. FinCEN proposed to except from the rule investment companies that are 

(i) family companies, (ii) employee securities companies, and (iii) employee benefit plans that 

are not construed to be pools in CFTC Rule 4.5(a)(4).113 These types of companies are unlikely 

to be used for money laundering purposes by third parties given their size, structure and purpose. 

The proposed rule also excepts other types of financial institutions under the BSA to prevent 

duplicative application of the BSA anti-money laundering rules to the same financial institution. 

Notice. The proposed rule would require a company falling within the definition to file a 

brief notice with FinCEN containing basic information about the company, such as its legal 

name and address, the name and contact information of its anti-money laundering program 

compliance officer, the dollar amount of the assets under its management, and the number of 

investors in the company. The notice will enable Treasury or its designee to identify 

unregistered investment companies subject to the rule and to monitor their compliance. 

112	 The rule would not apply, however, to an unregistered fund that is merely advised by a U.S. 

person because such a person would be unlikely to be in a position to administer the rule. 

113	 17 CFR 4.5. CFTC Rule 4.5(a)(4) sets forth the employee benefit plans that are not construed to 

be pools. 
 

 

 

 

35
 

IV. Personal Holding Companies 

Section 356 also requires that the report include recommendations on whether the 

Secretary should promulgate regulations requiring “personal holding companies” to disclose 

their beneficial owners when opening accounts or initiating transfers at any domestic financial 

institution. 

The USA Patriot Act defines a personal holding company as a business, including a 

corporation or business or other grantor trust whose assets are predominantly securities, bank 

certificates of deposit, or other securities or investment instruments (other than those relating to 

operating subsidiaries of the corporation or trust) and that has 5 or fewer common shareholders 

or holders of beneficial or other equity interest.114 

Personal holding companies may be located anywhere in the world and can be defined in 

several ways. In the United States, the Internal Revenue Code defines a personal holding 

company115 and a foreign personal holding company116 by reference to the amount of passive 

income it earns and whether it is closely held. Moreover, certain foreign jurisdictions offer asset 

management vehicles that they describe as personal holding companies, which are often intended 

for use by high net worth individuals as a means of managing wealth. 

Personal holding companies, which are also known as personal investment companies, 

may be used by individuals as vehicles for managing their personal finances, estate planning, and 

114 In the event that a personal holding company beneficially owned by a non-U.S. person establishes 

or maintains a “private banking account” (as defined in section 312 of the USA PATRIOT Act) 

with a U.S. financial institution, the institution would be required by Section 312 to identify, and 

perform other due diligence with respect to, such beneficial owner and account. 

115 26 U.S.C. 542 

116 26 U.S.C. 552 
36
 

other purposes. In addition, entrepreneurs may use personal holding companies to better 

diversify their investment risk, or manage their personal finances. 

The issue of whether and to what extent additional anti-money laundering controls may 

be needed for a variety of different types of asset management vehicles and products is one that 

Treasury continues to study, drawing on the knowledge and expertise of others within the 

Federal regulatory community and within law enforcement. It is important to ensure that a 

balance is struck between the potential for abuse of asset management vehicles, such as trusts, 

personal holding companies, and other vehicles, and the limitation and costs resulting from 

regulatory requirements. Regulatory requirements may have the unintended economic effect of 

limiting access to such asset management vehicles. At this time, no additional recommendations 

regarding anti-money laundering controls for personal holding companies are being made. 

V. Recommendations 

Treasury and the federal functional regulators have greatly expanded the scope and reach of 

regulations under the BSA since Congress passed the USA Patriot Act approximately one year 

ago. This report has described regulations, some final, some proposed, that have been 

promulgated to deter criminals and terrorists from laundering money through the various entities 

defined as financial institutions under the BSA. Some of these regulations apply to various types 

of investment companies, both registered and unregistered. This section of the report will briefly 

summarize the regulations promulgated to date, the regulations that are still under consideration, 

and the recommendations for regulatory action by the Treasury, the SEC and the Federal Reserve 

Board. 
 

 

 

37 

REGISTERED INVESTMENT COMPANIES: 

Mutual Funds: 

•	 Interim Final Regulation requiring the establishment of an anti-money 

laundering program (issued April 26, 2002). [67 FR 21117]
 

•	 Proposed Regulation requiring establishment of customer identification 

programs (issued July 23, 2002). [67 FR 48318]
 

•	 Proposed Regulation requiring implementation of due diligence programs for 

correspondent and private banking accounts (issued May 30, 2002). [67 FR 

37736] 

•	 Final Regulation setting forth procedures for information sharing between 

federal law enforcement agencies and financial institutions and permitting 

voluntary information sharing among financial institutions (issued September 

26, 2002) [67 FR 48348] 

•	 Treasury recommends requiring mutual funds to file suspicious activity 

reports.
 

Closed-End Funds: 

•	 No regulations are recommended for these investment companies. Because 

these funds’ securities operate much like securities issued by a corporation, 

these funds do not appear to present a money laundering risk sufficient to 

warrant regulation at this time. 

•	 In an interval fund (a type of closed-end fund with limited repurchase rights), 

investors do not control either the timing or the amount of a repurchase offer. 

As a result, it does not appear that these funds present a money laundering 

risk sufficient to warrant regulation at this time. 

Unit Investment Trusts (UITs): 

•	 These funds’ securities are available only through broker-dealers or life 

insurance companies. Registered broker-dealers are subject to both antimoney laundering and (as of January 1, 2003) SAR reporting regulations 

(issued April 29, 2002 and July 1, 2002). [67 FR 21110; 67 FR 44048] 

Treasury and the SEC have jointly proposed to require registered brokerdealers to adopt and implement customer identification programs (issued July 

23, 2002). [67 FR 48306] Treasury has proposed regulations requiring life 

insurance companies to implement anti-money laundering compliance 

programs and to file SARs (issued September 26, 2002 and October 17, 

2002) [67 FR 60625; 67 FR 64067]. No new regulations are recommended 

for these investment companies. 
38 

UNREGISTERED INVESTMENT COMPANIES: 

•	 Proposed regulation requiring certain unregistered investment companies to 

establish anti-money laundering programs (issued September 26, 2002). [67 

FR 60617] 

•	 Treasury recommends requiring unregistered investment companies to 

establish customer identification and verification programs. 

PERSONAL HOLDING COMPANIES 

• No regulations are recommended for personal holding companies.