A US government loophole is helping Putin’s friends hide their money – Mother Jones

Over the past four decades, private equity has become a powerful and malicious force in our daily life. In our May / June 2022 issue, Mother Jones investigates the vulture capitalists who chew and spit out American businesses, the politicians who empower them, and the common people who react. Find the complete package here.

After Russia invaded Ukraine, Western nations reacted with punishment sanctions against not only Russian leaders, banks and businesses, but also the fabulously wealthy oligarchs most closely associated with Vladimir Putin. Their yachts have been impounded. Their air travel was limited. And they were cut off from the black American Express cards and international money transfers that allowed them to live lavishly in London, Miami and Spain.

But it turns out that yachts and shopping in Knightsbridge aren’t where real money is buried. The oligarchs have hidden huge sums across the global financial system and you can’t sanction money you can’t find. Thanks to huge regulatory gaps, many Wall Street titans, particularly private equity firms and hedge funds, have little obligation to investigate where the huge heaps of money they are investing actually come from. The billions they raise from customers and then use to buy real estate, factories, and farmland are largely exempt from the anti-money laundering rules that other US-based financial institutions have to follow.

Under strict US government “know your customer” rules, an oligarch cannot even open a bank account with Bank of America without the bank identifying the source of the funds and alerting the authorities. Private equity fund managers, however, are not subject to the same requirements. Technically, they still have to comply with financial penalties, but they don’t have to do much to determine who they’re actually doing business with. If you can avoid learning that your client is a sanctioned individual, then you cannot obey the sanctions. This is how the oligarchs were able to deposit millions, and possibly billions, in private equity funds without asking questions about who the money really came from and how they got it in the first place.

One of the most prominent examples of how this loophole can undermine US efforts to sanction Putin’s allies is the case of Roman Abramovich. Abramovich made billions in the first few years after the collapse of the Soviet Union, gaining control of huge oil and aluminum resources and leveraging the money into Western investments, including ownership of the iconic London football club Chelsea. While Abramovich denied being close to Putin, both the European Union and the UK have sanctioned him. The US would have considered sanctioning him, but has reportedly resisted at the request of Ukrainian President Volodymyr Zelenskyy, who argued Abramovich could be useful in negotiations with Putin.

If Abramovich is sanctioned, however, the exemptions and loopholes enjoyed by private equity firms and hedge funds would make it much more difficult for the US government to crack down on its assets. According to New York Times, for two decades Abramovich invested in American private equity and hedge funds with the help of shell companies that transported money through anonymous tax havens and an investment advisor who helped put money into big-name funds like BlackRock, Carlyle and DE Shaw. It is unclear how much money was invested overall, but the Times evidence of at least 100 transactions was reported.

“The status quo is clearly unsustainable”, Sens. Sheldon Whitehouse (DR.I.) and Elizabeth Warren (D-Mass.) he wrote in a recent letter to Treasury Secretary Janet Yellen and SEC Chairman Gary Gensler. “If the United States were to sanction Abramovich … neither the United States government nor the entities managing his secret investments would have a full understanding of where Abramovich has invested his billions in the American financial system, let alone the ability to impose sanctions against him effectively. “

In 2001, following the 9/11 attacks, Congress passed a series of new anti-money laundering laws and required compliance by all financial institutions that are covered by the 1970 Bank Secrecy Act. Know who your customers are truly they are a key part of any anti-money laundering effort. But in 2002, in response to industry requests, the Treasury Department granted “temporary exemptions” to several categories of financial institutions, including investment advisers. The result was that banks, mutual funds, credit unions, brokers and even casinos would have to follow the new law, but investment advisors, which include private equity and hedge funds, would be exempted. That “temporary” exemption has lasted for two decades and remains in effect.

It’s a problem enough that the FBI produced in 2019 a confidential note (which was later leaked) warning that the bad actors are taking advantage of the system to hide their wealth.

“The FBI estimates that threat actors are likely to use private placement of funds, including investments offered by hedge funds and private equity firms, to launder money, bypassing traditional anti-money laundering programs. This assessment is done with great confidence.” the reminder declared.

“The FBI estimates, in the long run, that criminally complicit investment fund managers will expand their money laundering operations as private placement opportunities increase, resulting in continued infiltration into the licit global financial system,” continues the memorandum. “If increased regulatory scrutiny forces private investment funds to identify and disclose underlying beneficial owners of investments to financial institutions, this would reduce the attractiveness of these investment firms to threaten actors.”

As the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN, proposed new rules in 2015, the industry protested and the effort ran out. In December, the matter was resumed when the Biden administration released a lengthy document relationship (“Anti-Corruption Strategy”) which recommended “prescribing minimum reporting standards for investment advisors and other types of equity funds”. Last month, Whitehouse and Warren wrote their letter urging the Treasury and the SEC to take action.

“Close the private investment [Anti-Money Laundering/Countering the Finance of Terrorism] the loophole will help the US government track down the hidden wealth of sanctioned Russian elites and better combat money laundering, terrorism, the proliferation of weapons of mass destruction and other criminal activities, “they wrote.” Further delay will not is an option. “

Even the exact size of the problem is difficult to estimate because private equity investments are monitored so loosely. while who is investing is not carefully examined, the grand total invested in the industry is monitored, and it’s huge: the US private investment sector is potentially as large as $ 11 trillion and there are as many as 13,000 investment advisors who are exempt from the anti-money laundering provisions followed by most other US-based financial institutions .

Many private equity firms and hedge funds to say they regularly try to determine who their customers really are. After all, the things that tend to put a person on the list of sanctioned persons – financial fraud, kleptocratic theft – and the reasons a person might try to hide their money – tax evasion, attempts by governments to seize assets – do not. for a great customer. And, the industry pointed out, many private equity funds don’t allow clients to transfer money in and out quickly – the money is invested and stays invested for years. If you are looking to launder money quickly, it is not useful.

In a 2015 comment letter Objecting to FinCEN’s proposed expansion of anti-money laundering requirements to include private equity and hedge funds, the Private Equity Growth Capital Council, the trade association representing the industry in Washington, noted that FinCEN’s previous assessments they had established that private equity was a vehicle for money laundering. (The group has since changed its name to the American Investment Council.)

“The PEGCC is not aware of any facts or circumstances that would change FinCEN’s previous analysis,” the letter stated.

The trading group also complained that any attempt to quickly establish new anti-money laundering rules would be costly and that compliance with the proposed rules in 2015 would take much longer to acquire new customers than FinCEN estimated.

The 2019 FBI note on the matter dismissed the notion that private equity was not a good vehicle for money laundering. While this may be true for some funds that have stricter investor requirements, this is not the case for all funds, FBI analysts have determined. “The FBI has discounted this alternative because the proliferation of private investment funds has made the sector less rigid regarding the investment structure in an attempt to attract more capital,” the statement concluded.

The explosive growth of private equity, the FBI added, creates “ever-increasing opportunities for threat actors to co-opt investment funds without being over-scrutinized.” The office cited a particularly relevant example for the current crisis in Europe: a 2017 incident in which “a New York-based private equity firm received more than $ 100 million in wire transfers from an identified company. in Russia allegedly associated with the Russian organized crime organization ».