# AML/KYC — Anti-Money Laundering and Know Your Customer

## What It Is

Anti-Money Laundering (AML) and Know Your Customer (KYC) rules are designed to prevent the financial system from being used for money laundering, terrorist financing, and other financial crimes. The primary US law is the Bank Secrecy Act (BSA), as amended by the USA PATRIOT Act.

## Current Regulatory Status for Investment Advisers

### Historical Gap

Investment advisers have historically not been subject to BSA/AML requirements. FinCEN proposed a rule in 2015 to bring investment advisers under the BSA, but it was never finalized.

### FinCEN 2024 Final Rule

In August 2024, FinCEN finalized a rule requiring SEC-registered investment advisers and exempt reporting advisers to implement AML/KYC programs. Key points:

- **Effective date**: January 1, 2026
- **Applies to**: SEC-registered advisers AND exempt reporting advisers (ERAs)
- **Requirements**: AML program, suspicious activity reporting (SARs), recordkeeping, and compliance with FinCEN information-sharing requests

### What the AML Program Must Include

1. Written AML policies and procedures
2. Designation of a compliance officer
3. Ongoing employee training
4. Independent testing (audit) of the AML program
5. Risk-based customer due diligence (CDD) procedures
6. Filing of Suspicious Activity Reports (SARs)
7. Currency Transaction Reports (CTRs) for cash transactions over $10,000

## KYC Requirements

### Customer Identification Program (CIP)

For each investor, collect and verify:

- **Individuals**: Full legal name, date of birth, address, government-issued ID number (passport, national ID)
- **Entities**: Legal name, address, formation jurisdiction, tax ID (EIN), principal place of business
- **Beneficial owners**: Identify individuals who own 25%+ of the entity or who control the entity

### Enhanced Due Diligence (EDD)

Required for higher-risk investors:

- Foreign investors (including Korean investors)
- Politically exposed persons (PEPs)
- Investors from high-risk jurisdictions
- Complex ownership structures

### Korean Investor-Specific KYC

For Korean investors in Palace Fund:

- **Passport**: Korean passport as primary ID
- **Korean national ID** (resident registration number): secondary verification
- **Source of funds**: Document the origin of investment capital
- **Korean entity investors**: Obtain corporate registration certificate (saeopja deungnok jeunmyeongseo), beneficial ownership information
- **Korean regulatory approvals**: Verify that the investor has made required foreign exchange filings with their Korean bank (per FETA)
- **PEP screening**: Check whether the investor or beneficial owners are Korean politically exposed persons

## How It Applies to Palace Fund

### With Korean Investors

Palace Fund has elevated AML/KYC requirements because:

1. **Foreign investors** require enhanced due diligence under US AML rules
2. **Cross-border wire transfers** from Korea trigger additional documentation requirements
3. **Korean banks** will perform their own AML/KYC on outbound transfers, providing a partial layer of due diligence

### Practical AML Program for a Small Fund

Even before the FinCEN rule takes full effect, best practice is to implement:

1. **Subscription document KYC**: Collect identity documents, source of funds declarations, and beneficial ownership information during the subscription process
2. **Screening**: Run investor names against OFAC SDN list, PEP databases, and adverse media (see [OFAC](ofac.md))
3. **Ongoing monitoring**: Review investor transactions and behavior for suspicious activity
4. **Record retention**: Keep all KYC records for at least 5 years after the investor relationship ends

## Subscription Document Requirements

Include in the subscription agreement and investor questionnaire:

- Identity verification (passport copy, entity formation documents)
- Beneficial ownership disclosure (individuals owning 25%+ or exercising control)
- Source of funds and source of wealth declaration
- PEP status declaration
- Tax residency and taxpayer identification
- OFAC/sanctions compliance representation
- FATCA/CRS self-certification (W-8BEN or W-8BEN-E)

## Action Items

1. **Draft a written AML/KYC policy**: Document procedures for investor identification, verification, screening, and ongoing monitoring.
2. **Designate an AML compliance officer**: For a small fund, this is typically the fund manager.
3. **Build KYC into subscription documents**: Require all investors to provide identity documents, beneficial ownership information, and source of funds.
4. **Set up screening tools**: Use OFAC SDN list screening (free from OFAC website) and consider a paid service for PEP and adverse media screening.
5. **Retain records**: Keep all KYC documentation for at least 5 years after the investor exits the fund.
6. **Prepare for FinCEN compliance**: The 2024 final rule requires full AML programs by January 1, 2026. Have the program operational before accepting investors.
7. **File SARs if needed**: If suspicious activity is identified, file a SAR with FinCEN within 30 days. Do not tip off the investor.

## Key Takeaway

AML/KYC is mandatory for Palace Fund, especially with Korean investors who require enhanced due diligence as foreign persons. Build KYC collection into the subscription process from day one. The FinCEN 2024 rule makes formal AML programs explicitly required for ERAs starting January 1, 2026.