Advisers recruited in terror war

The newly passed anti-terrorism law enlists securities firms in this “war unlike any other,” and financial advisers – depending on their businesses – will be among the foot soldiers.

While advisers say they’re naturally more attuned to anything suspicious following the Sept. 11 attacks, several who were interviewed doubt that potential terrorists will use them to further their goals.

Advisers rarely find clients showing up with “bags of cash,” says Gary Schatsky, an attorney and fee-only financial adviser with IFC Personal Managers in New York.

“There are plenty of things we sometimes deal in that are foolish, but not suspicious,” says Mr. Schatsky, who is also chairman emeritus of the National Association of Personal Financial Advisors.

Even so, observers think that independent advisers will be forced to put their clients under greater scrutiny.

“They’re now asking in-depth questions of their clients, primarily to determine the suitability of the investment and their ability to pay,” says Charles Intriago, a former federal prosecutor and publisher of Money Laundering Alert.

“They have not been asking too deeply about the legitimate origin of funds or the destination. They advise people involving the movement of billions of dollars,” he says. “They need to be brought into the regulatory loop.”

The fact that the new law does not require independent advisers to file suspicious-activity reports doesn’t mean they shouldn’t, says Stephen R. Heifetz, a Washington attorney with Wilmer Cutler & Pickering.

“There may be lots of reasons to voluntarily file an SAR, because if there are a lot of red flags, for example, dealing with clients in known money laundering havens, they run a risk of allegations of being willfully blind to money laundering.”

Not all advisers, however, share that view.

“It’s a non-event, generally, for investment advisers,” says Stephen Cassaday, head of the Washington chapter of the Financial Planning Association and president of Cassaday & Co. Inc., which has $350 million under management.

“The only thing would be transactions in securities prior to an event, clearly shorting insurance stocks or property-casualty stocks or companies that might be directly affected by an attack,” he says.

In the end, however, advisers ultimately may be forced to file SARs.

The law requires a study of investment advisers to see if they should come under certain tenets of the law, says Betty Santangelo, a securities and money laundering specialist with the law firm of Schulte Roth & Zabel in New York.

“To the extent that banks and broker-dealers deal with investment advisers, they have an obligation to know their customers,” she says. “There will be a sort of a trickle-down effect, because then investment advisers will be pressed, in turn, to know their customers in more detail.”

Sharing information

For the most part, the law signed by President Bush on Oct. 26 is directed at brokerage firms and fund companies, requiring them to establish anti-money-laundering programs similar to those of banks.

Financial planning firms won’t have to do that, but there are provisions that clearly cover advisers, say legal experts familiar with the law.

The law puts greater pressure on non-banks, including advisers, to file reports with the government concerning transactions involving more than $10,000 in cash.

Also, brokerage firms and broker-dealers will have to file reports to law enforcement on “suspicious” customer activity.

While the new law requires securities firms to file SARs, the U.S. Treasury, the Securities and Exchange Commission and federal bank regulators are working on what constitutes suspicious activity. Firms have to start filing such reports by July.

At least as it applies to banks, suspicious activity covers transactions in which bank officials believe the money is derived from an illegal activity or if the customer is trying to evade reporting regulations, say legal experts.

Meanwhile, absent formal regulations, the SEC has requested that all securities-related firms – whether or not they are registered with the SEC – voluntarily share information with law enforcement.

By Oct. 26, firms were asked to have designated a senior-level official to review a list of names suspected of having ties with terrorist organizations.

David Tittsworth, executive director of the Investment Counsel Association of America, a registered investment adviser trade group in Washington, believes advisers have an obligation to comply with the SEC’s request. He’s urging his organization’s members to do so.

“It’s voluntary. There is no legal requirement, but to me it’s a no-brainer,” he says.

Concerns are being voiced as securities firms become more involved in the war on terrorism, from the cost of money laundering programs to the effects on customer privacy.

“The product becomes less attractive to customers if privacy is breached,” says Sam Peltzman, a professor of economics at the University of Chicago’s Graduate School of Business who specializes in business regulations.

“They have an industry goal to attract customers, but if the product becomes sufficiently unattractive, the industry will lose customers to other investment vehicles, perhaps in other countries.”

Mr. Tittsworth says that there is a “tension between government requests for as much information as possible and privacy concerns, which include the adviser-client relationship.

“There is no black-and-white answer,” he says. “I think investment advisers should be more concerned with both sides of the fence, if you will – the privacy of their clients and the government request for information.”