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IRS: A Fate Worse Than The SEC?

Be careful what you wish for: If the Securities and Exchange Commission is stymied in its bid to regulate hedge funds, the Internal Revenue Service is likely to get the job.

Be careful what you wish for: If the Securities and Exchange Commission is stymied in its bid to regulate hedge funds, the Internal Revenue Service is likely to get the job. Ross Delston of Washington-based Kalorama Partners (headed by former SEC Chairman Harvey Pitt) said in an interview with Lipper HedgeWorld that the Treasury Department has already tapped the IRS with to examine unregistered funds – registration rule or not – so for those hedgies that haven’t signed up with the SEC, consider this: If hedge funds fall under the IRS jurisdiction, they would have to comply with a host of anti-money laundering measures, such as filling out suspicious activity reports and verifying the identity of their customers. All this, even though hedge funds, says Delston, are a “relatively low risk” investment. That assessment could change, he says, however, as dedicated money launderers, faced with tighter policies, may look for new outlets, such as hedge funds. According to Lipper HedgeWorld, while the IRS can be legitimately poking its nose into possible money laundering problems at a hedge fund, it may stumble upon tax irregularities – which no doubt are more common. So an unregistered hedge fund could potentially find itself hit with double whammy of fines from the IRS for tax and anti-money laundering violations (imposed courtesy of Treasury’s Financial Crimes Enforcement Network, or FinCen). By the way, hedge funds, says Deltson, are currently the only sector not covered by anti-money laundering enforcement, though Treasury has been working on rules for unregistered funds for three years, and even if they are ready for release, the agency imbued with enforcement responsibility, FinCen, reportedly doesn’t have a big enough staff to enforce the rules anyway.

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