For many years, the federal government has required banks, brokerages and even casinos to take steps to stop customers from using them to clean dirty money.
Yet one major part of the financial system has remained stubbornly exempt, despite experts’ repeated warnings that it is vulnerable to criminal manipulation. Investment companies such as hedge funds and private equity firms have escaped multiple efforts to subject them to rules meant to combat money laundering.
The latest attempt, which began in 2015, appears to have ground to a halt, according to sources familiar with the process.
“You’ve got several trillion dollars, the management of which nobody is required to ask any questions about where that money is coming from,” said Clark Gascoigne, deputy director of the Financial Accountability and Corporate Transparency Coalition. “This is very problematic.”
The Financial Action Task Force
, an intergovernmental organization that seeks to combat money laundering around the world, characterized the lack of anti-money laundering rules for investment advisers, such as those who manage hedge funds and private equity funds, as one of the United States’ most significant lapses in a report two years ago.
The push to regulate hedge funds and similar investment firms took off after the Sept. 11 attacks, when Congress passed the Patriot Act. Among other things, the law required federal agencies to take new steps to keep illicit money out of the U.S. financial system. The Treasury Department exempted investment firms at the time, planning to return to them after tackling other sectors. “Eighteen years ago, the Patriot Act required investment companies to install their own AML [anti-money laundering] programs,” said Elise Bean, a former staff director of the U.S.
Senate investigations subcommittee who supports the proposed rule. “But Treasury has yet to enforce the law,” she said.
The Treasury Department, through its Financial Crimes Enforcement Network, or FinCEN, initially proposed rules in 2002 and 2003 requiring firms like hedge funds and their investment advisers to adopt anti-money laundering measures. That attempt languished as FinCEN waited for the Securities and Exchange Commission to retool its approach, said Alma Angotti, who wrote the original proposal while at FinCEN and is now co-head of global investigations for the consulting firm Navigant. So much time passed that FinCEN withdrew the proposed rules in 2008. FinCEN then launched its second attempt to impose such regulations seven years later.
That second attempt is the one that has now crawled to a virtual stop. “It’s the kind of thing that should have taken two to three years, not 17,” said Joshua Kirschenbaum, senior fellow focusing on illicit finance at the nonpartisan think tank the German Marshall Fund and a former supervisor in FinCEN’s enforcement division.
Hedge funds and private equity funds can be attractive to big-dollar launderers who prize the funds’ anonymity, the variety of investments they offer and, in some cases, their use of off-shore tax and secrecy havens, experts say. After 2001, the number of annual hedge fund launches surged more than threefold, according to one report
, and investments by high net worth individuals exceeded those of institutional investors. Continue Reading