Have you checked out all of your LPs? “You don’t want money that was looted from the Central Bank of Afghanistan ending up invested in your portfolio companies,” says attorney Brian Borders.
Laugh if you want, but the Treasury Department is dead serious about implementing anti-money laundering statutes that are part of post-September 11 anti-terrorism legislation. VCs were supposed to be in compliance with the legislation, known commonly as the Patriot Act, on April 24, but the Treasury announced they could have a brief reprieve.
Some say it could be as long as six months, but Paul Brownell, vice president for public policy at the National Venture Capital Association, says the Treasury could implement regulations by the time this issue of VCJ hits readers’ desks.
So don’t dawdle. Elaine Wood, managing director with corporate investigator Kroll Inc., recommends that clients establish risk assessment programs and enhanced due diligence procedures. Regulators will likely expect firms to elevate their level of due diligence when certain red flags are raised, she says. For example, VCs will probably have to investigate an individual in a developing country more thoroughly than a state pension fund.
Red flags may include foreign domicile, criminal history, untrustworthy financial documents or an incomplete public record of the individual’s activities.
Regulators could freeze the assets of a portfolio company if one of its VCs has violated the act, so it’s good for VCs to know their co-investors as well. In addition, the new guidelines may require financial institutions to screen the entities in which they invest.
Due to long-term commitment, VC funds are considered unlikely candidates for money-laundering. However, this new legislation is intended to uncover techniques that have not previously been investigated by the government.
“We have reason to believe that there are some terrorist organizations and drug organizations that have that kind of investment horizon,” says Borders, an attorney at law firm Mayer, Brown, Rowe & Maw.
Under the counsel of Mayer Brown, the NVCA issued a 6,000-word document providing basic guidelines for VCs to comply with the Patriot Act. The document (briefly summarized by VCJ below) is available on the