Possible Illicit Financial Flows in Private Investment Funds Pose Systemic Risks to the U.S. and Global Financial Markets and May Weaken Sanctions
WASHINGTON, DC – The Financial Accountability and Corporate Transparency (FACT) Coalition is calling on the Securities and Exchange Commission (SEC) to address the undisclosed presence of possible illicit financial flows in private investment markets. Without further action from the SEC, these flows may enrich and embolden potential adversaries, such as Putin’s regime, and eventually destabilize U.S. and global financial markets. Meanwhile, the failure to identify these flows undermines current sanctions against Russian oligarchs, and may jeopardize future tools that the U.S. might wield against aggressive governments.
“It is absurd that not a single actor is required to identify, recordkeep, or report regarding the ultimate individuals investing in the U.S. through this $11 trillion and growing market,” said Ian Gary, executive director of the FACT Coalition. “This makes the U.S. an attractive destination for illicit financial flows, and obstructs the effectiveness of current sanctions against Russian oligarchs who have been able to secretly invest in the U.S. for years.”
Among other recommendations, the FACT Coalition comment urges the SEC to require investment advisers to conduct risk-based customer due diligence necessary to report certain beneficial ownership and source of funds information on Form PF for each fund they advise. In December, the FACT Coalition and allies issued a report highlighting the risks posed by having nearly 13,000 investment advisers in the U.S. with little or no anti-money laundering due diligence responsibilities.
“The SEC has the authority and the expertise necessary to begin weeding out the pervasive roots of secrecy afforded to private investment fund investors, including Russian oligarchs,” said Ryan Gurule, FACT’s policy director. “Putin’s recent attacks make it clear that it’s time to better understand how geopolitical risks stemming from and relating to corruption and illicit flows into the private investment industry jeopardize the foundation of our financial markets.”
Since Russia’s unprovoked and illegal invasion of Ukraine, the U.S. and its allies have coordinated to invoke economic sanctions meant to alienate the Russian economy. This includes cutting off Putin and his inner circle from the massive sums they have siphoned away and hoarded offshore, including in the U.S.
However, U.S. hedge funds, private equity funds, venture capital funds, and other types of private placement funds are being utilized to shield, protect and grow the wealth of Russian oligarchs and the wealth of other potential U.S. adversaries or corrupt foreign officials.
“People want to sanction oligarchs, but the U.S. investment system is so shrouded in secrecy that enforcement is difficult, making it a perfect place for corrupt money,” said Gary. “The money laundering risks in this massive, opaque, and complex sector jeopardize the world’s democracies, harm U.S. national security and may contribute to systemic risks to our financial markets in a way that merits immediate attention.”
The private investment industry, which targets high-net worth investors, is not subject to the same recordkeeping or reporting requirements and anti-money laundering obligations as are banks, broker-dealers, or retail funds marketed to ordinary investors.
Notes to the Editor:
- The FACT Coalitions’ comment letter on Form PF can be found here. The FACT Coalition recommends that the SEC take the following steps:
- Require investment advisers to conduct risk-based customer due diligence to ensure they know who their customers are, understand the source of the customers’ capital investments, and can provide reliable information on Form PF about the private funds they are advising. Requiring risk-based customer due diligence would be consistent with current Form PF requirements that direct investment advisers to gather and disclose certain limited information about the private funds they advise.
- Require investment advisers to report on Form PF beneficial ownership information for each investor in each private fund they advise and identify any foreign “politically exposed person” (PEP) or “senior foreign political figure” under 31 U.S.C. 5318(i)(3)(B). These disclosures would be consistent with current reporting requirements regarding foreign beneficial ownership, value of investments, and deployment of fund investments. The disclosure requirements should generally require determining the natural persons who directly or indirectly own or control an entity client.
- Require investment advisers to report on Form PF – on a country-by-country basis – the country of origin of each investor in a private fund and the source of that investor’s funds as well as provide a range indicating the total amount of funds invested by each such investor in each such fund using U.S. dollars.
- The FACT Coalition, Global Financial Integrity, and Transparency International-US Office released “Private Investments, Public Harm”, in December set of recommendations for the Financial Crimes Enforcement Network of the Treasury Department (FinCEN) to address the money laundering and national security risks of private investment vehicles.
- The SEC’s proposed rulemaking to amend Form PF can be found here. Chairman Gary Genslar’s comments on the proposed rulemaking, highlighting the evolving nature of systemic risk, can be found here.
- Recent coverage from the New York Times (on repeated occasions), the Wall Street Journal, the Washington Post, and Pitchbook highlights the loophole discussed in this press release, and how it complicates effectively sanctioning Russian oligarchs that are or may be invested in the U.S. private investment industry.