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 report In the Dark: Who is Behind Luxembourg’s 4.5 Trillion-euro Investment Fund Industry? in partnership with Transparency International, the Anti-Corruption Data Collective supports calls for Luxembourg to close loopholes that continue to enable corruption and money laundering. These include:

Moreover, we call on the European Union to strengthen the current beneficial ownership of the Anti-Money Laundering Directive by:

Recommendations for US Policymakers

Private investment funds in the United States account for the majority of the sector globally, with gross assets of approximately $14 trillion. However these funds are subject to even weaker anti-money laundering checks than other financial sectors in the US.

The Anti-Corruption Data Collective supports reforms that address these risks in the US private investment fund sector, such as by:

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