Hedge fund managers in Bermuda and around the world could be facing reams of new red tape from the United States government as early as May this year, according to a leading US bank regulator.

John Byrne, director of the American Bankers Association's Center for Regulatory Compliance, yesterday told members of Bermuda's business community that new anti-money laundering regulations for hedge funds were expected to be passed by May or June this year.

"It will be sooner rather than later," said Mr. Byrne, speaking to members of the Bermuda International Business Association yesterday.

The rules for hedge funds to comply with the money laundering provisions of the US Patriot Act have been thrashed out in committees in Washington, but pose a huge compliance burden on the sector.

And when they become law in a couple of months, hedge fund managers and operators will have to make sure that they have the same kind of detailed anti-money laundering procedures in place that banks and other financial institutions have to have in place ? including training and detailed procedures set up by the board of directors.

"There are no formal regulations on hedge funds as yet," Mr. Byrne told following his speech on the Patriot Act yesterday at the Fairmont Hamilton Princess. "But when it comes into effect, hedge funds will have to have a system for supervising activities and transactions and have this written out. "It will be more administration and cost to the hedge funds because of the amount of compliance they will have to do."

Those who manage hedge fund operations and assets will soon have to cope with the demands created by the new regulatory requirements which will change both procedures or business practices.

And they will have to check that they fully understand the regulatory structure put in place as well as have the resources necessary to properly administer them.

"They will be like any other financial service provider," said Mr. Byrne.

"And will have to comply with the anti-money laundering procedures set out."

And while he said that there was at the moment no evidence that money was being laundered through Bermuda or any other offshore hedge fund centre, it had been seen as an area that was open for abuse.

"It is another place that it could happen, such as a broker/dealer, pawn brokers, jewellers," he said.

"So the US took it upon itself to formalise regulations."

Mr. Byrne also said that shortly, also under the Patriot Act, a clause called 3/12 would be brought in that requires US financial institutions that have relationships with foreign banks, such as Bank of Bermuda or Bank of Butterfield, need to enhance their due diligence.

He said that it will mean that US banks will be able to ask foreign (to the US) banks for details of their anti-money laundering procedure and training.

He said: "If they pass the test, and have looked at the transactions and it looks good, but see something abnormal, they have to find out why, and if they are not satisfied then they will pass on the information to the federal authorities."

But he said that Bermuda had nothing to fear ? as it was only disreputable banks that would be penalised.

"It will discourage US institutions from working with foreign banks that do not have policies and procedures in place. You are not going to see an effect on Bermuda's banks as such."