Last week, the WSJ reported that Senator Sheldon Whitehouse along with a collection of public-policy groups urged the Biden administration during a meeting to expand anti-money-laundering (AML) rules to cover private investment advisers “calling private-equity vehicles and hedge funds a vulnerability in the nation’s efforts to prevent criminals and adversaries from gaining access to the nation’s financial system.” The advocacy groups further stated that “dirty money is flooding through private-equity funds, raising the need for tighter rules at a time when U.S. regulators are training their sights on the buyout industry.” The group, consisting of the FACT Coalition, Global Financial Integrity, and Transparency International, followed up this week by releasing a joint report titled ‘Private Investments, Public Harm,’ in which they “explore a gaping hole in the U.S. anti-money laundering framework that undermines U.S. national security, jeopardizes the world’s democracies, and touches the lives of ordinary Americans,” further underscoring the urgent need for action.In their report, the advocacy groups make the case that “the U.S. private investment industry, unfortunately, offers a perfect confluence of factors that make it an ideal place to hide and launder the proceeds of corrupt and criminal activity,” given its size, opaqueness, and complexity. Notably, the size of the U.S. private investment market would classify it as the 3rd largest economy in the world following the United States and China. In fact, its size is nearly equivalent to the combined economies of Japan, Germany and the United Kingdom. Yet, unlike broker-dealers, the industry isn’t required to establish AML programs or conduct reviews to understand who they’re doing business with. According to the report, the estimated 5,000 “U.S. commercial banks, which do have KYC responsibilities, now hold approximately $22.5 trillion in deposits. The private investment market, [with its nearly 13,000 hedge funds, private equity, venture capital firms, and family offices] is quickly growing to an equivalent size” and yet, operates without similar requirements or scrutiny.
In addition to highlighting a leaked FBI memo, which Sigma previously reported on, recognizing the national security threats posed by the industry, the report presents several case studies that demonstrate “how opaque private investment vehicles can be misused by U.S. adversaries as well as criminals and other wrongdoers.” Among the concerning cases, the group highlighted the use of private investment vehicles by Chinese and Russian interests to access sensitive U.S. technology and innovation. In another instance, the “lack of disclosure in private equity obscured the majority stake owned by a Russian oligarch in a U.S. voting management firm active in Maryland, calling into question election security.” Once a pioneer in global standards, the group goes on to suggest that the failure to impose AML requirements on the industry “relegates the United States to a place in line behind many of its allies,” like the United Kingdom and the European Union who have imposed requirements on the industry in 2015 following the passage of the 4th Anti-Money Laundering Directive (4th AMLD). First and foremost, a national security risk worth addressing, the report makes an extremely strong case for the “need to bring greater transparency to the funds flowing through this multi-trillion-dollar industry” in order to bring the opaque market out of the shadows once and for all.