U.S. Sens. Elizabeth Warren (D-MA) and Sheldon Whitehouse (D-RI) are calling on Biden administration officials to close the loophole that exempts the private investment industry from anti-money laundering (AML) and countering the financing of terrorism (CFT) obligations.
The exemption for the $11 trillion private investment industry, which includes hedge funds and private equity firms, allows these companies and their advisers to manage money without needing to know basic information about their investors or clients. In effect, it could allow criminals, terrorists, and sanctioned individuals like Russian oligarchs to hide and grow their wealth, the senators said.
Warren and Whitehouse are calling on Treasury Secretary Janet Yellen and Securities and Exchange Commission (SEC) Chair Gary Gensler to immediately close the AML/CFT loophole for private investment companies and advisers.
“Exempting the private investment industry from AML/CFT requirements endangers our national security and poses systemic risks to our financial system… First, the United States cannot reliably determine how much money in the private investment market comes from illicit actors, whether criminal organizations, terrorists, or sanctioned individuals… Second, the United States is less capable of enforcing sanctions against wealthy individuals — including Russian oligarchs and government officials — or even understanding the sanctions’ impact… Third, by granting unfettered, anonymous access to America’s lucrative private financial markets, the United States is enabling and legitimizing foreign corrupt and criminal actors to some extent, without any understanding of how the geopolitical risk associated with doing so may contribute to market instability,” Warren and Whitehouse wrote to the administration officials.
AML/CFT programs require financial institutions to identify their customers, keep records on the source of client funds, report suspicious activity, and monitor account transactions. Many financial institutions, such as banks, mutual funds, credit unions, broker-dealers, and casinos, are subject to AML/CFT requirements. However, unregistered investment companies (including hedge funds, private equity firms, and venture capital firms) nor their investment advisers are subject to federal AML/CFT requirements.
The senators cited a report from the New York Times showing how Roman Abramovich, a Russian oligarch with close ties to President Vladimir Putin, has invested billions of dollars in American hedge funds and private equity firms over the past twenty years. If Abramovich were to be sanctioned, these hidden funds would make it nearly impossible to enforce sanctions against him effectively.