Money Laundering Risks in Private Investment Funds
Trillions of dollars are invested worldwide in private investment funds (PIFs), which include hedge funds, private equity, venture capital and other pooled vehicles. Yet in most countries, and in the US in particular, these funds are subject to even weaker anti-money laundering checks than other types of legal entities (such as shell companies).
This poses a grave threat. In June 2020, the FBI reported “with high confidence” that these financial vehicles are being used by bad actors to circumvent the US regulatory system to commit fraud, money-laundering, and sanctions-evasion. According to the FBI’s own assessment, “criminally complicit investment fund managers likely will expand their money laundering operations as private placement opportunities increase.”
Yet little is being done to correct the situation and prevent the further exploitation of these loopholes. As pointed out in a recent report by the Financial Action Task Force, the US regulatory environment for anti-money laundering (AML) “has some significant gaps, including minimal coverage of certain institutions and businesses,” including investment advisers.
Recommendations for EU Policymakers
Following our In the Dark: Who is Behind Luxembourg’s 4.5 Trillion-euro Investment Fund Industry? with TI, ACDC supports calls for Luxembourg to close loopholes that continue to enable corruption and money laundering. These include:
Ensuring that all beneficiaries of investment funds, the real natural person who are the end-investors, are accurately identified, disclosed and recorded in the RBO.
Conducting an assessment of the data registered to determine if legal entities are complying with the rules. Cases of non-compliance and / or false information should be sanctioned in a timely manner.
Adopting a mechanism to verify and validate the information provided by legal entities. This can be done, for example, by cross-checking information in the register against other government databases or by making use of advanced analytics. The parameters for verification should be well specified and in accordance with security and confidentiality provisions.
Moreover, we call on the European Union to strengthen the current beneficial ownership of the Anti-Money Laundering Directive by:
Ensuring member states adequately define beneficial owners according to the nature and risks posed by a legal vehicle.
Mandating member states independently verify the information recorded in their beneficial ownership registers.
Recommendations for US Policymakers
In the United States, private investment funds (PIFs), whose gross assets are approximately $14 trillion, account for the majority of the sector globally. However these funds are subject to even weaker anti-money laundering checks than other financial sectors in the US.
The Anti-Corruption Data Collective seeks to leverage our investigative capacity to support reforms that address these risks in the US private investment fund sector, such as by:
Finalizing the 2015 FinCEN rule requiring investment advisers to establish effective AML programs. This effectively will remove the exception for PIF managers under current AML program requirements.
Requiring Investment Advisors (IAs) to report beneficial owners behind investments as well as the investment positions held by their funds.
Strengthening FINCEN capacity and resources for supervising implementation of the Bank Secrecy Act, allowing jointly scoped or executed PIF exams by FinCEN and the SEC.
Reducing the minimum size requirement of funds that need to be self-reported to SEC (currently that minimum is set at $150,000,000).
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