FBI leak targets AML deficiencies in private investment funds

Why investment advisors, hedge funds and private equity firms should prepare compliance programs for increased regulatory scrutiny

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By Vanessa Malone

In a leaked bulletin prepared by the U.S. Federal Bureau of Investigation in May 2020, the agency reported that “threat actors” are likely using hedge funds and private equity firms to launder money and avoid anti-money laundering (AML) roadblocks. Intelligence for the report was collected between March 2017 and July 2019.

According to the report, “The FBI assumes AML programs are not adequately designed to monitor and detect threat actors’ use of private investment funds to launder money. Additionally, the FBI assumes threat actors exploit this vulnerability to integrate illicit proceeds into the licit global financial system,”

The agency cites four cases where threat actors, defined by the agency as financially motivated criminals and foreign adversaries, avoided traditional AML programs through hedge funds and private equity firms in order to facilitate transactions in support of fraud, transnational organized crime, and sanctions evasion.

  1. An identified former partner of a major US law firm assisted others in laundering more than $400 million from a fraudulent cryptocurrency investment scheme through a series of purported private equity funds holding accounts at financial institutions to conceal and disguise the nature, location, source, ownership, and control of the proceeds (as of April 2019).
  2. A representative of a New York and London based hedge fund proposed investing in private placement funds and using a series of shell corporations to purchase and sell prohibited items from sanctioned countries to the United States. The proposed hedge fund was to have operated entities registered in Luxembourg and Guernsey to evade regulatory requirements when transacting with sanctioned companies, according to a human source with direct access (as of July 2019).
  3. An unidentified Mexican cartel operating in the Los Angeles and Orange County California areas recruited and paid individuals to open hedge fund accounts at private banking institutions. The cartel laundered approximately $1 million through the accounts each week and then withdrew the money to purchase gold, according to a human source with direct access whose reporting has not been corroborated (as of January 2019).
  4. As of August 2017, a New York-based private equity firm received more than $100 million in wire transfers from an identified Russia-based company allegedly associated with Russian organized crime, according to a reliable source with excellent access (as of August 2017).

The FBI identifies that as private placement opportunities increase, criminally complicit investment fund managers will likely expand their money laundering operations.

To address this, the agency states that regulatory scrutiny could compel private investment funds to identify and disclose underlying beneficial owners to financial institutions which could reduce the appeal of the funds as money laundering vehicles.

These assessments were made with high confidence, which means that FBI’s judgement is based on high quality information from multiple sources.

In recent years, compliance requirements have continued to increase, and more entities are being pulled under the umbrella of stricter AML and Know Your Customer (KYC) compliance requirements in the U.S. and globally.

The SEC’s Office of Compliance Inspections and Examinations has cited AML programs at investment advisers as one of the top-seven examination priorities for 2020

Globally in June 2019, the Financial Action Task Force (FATF), an inter-governmental body built to combat money laundering on a global scale, amended their AML Recommendations to require all crypto exchange providers, digital securities issuers, and firms that deal with digital securities to adhere to their anti-money laundering rules.²

Investment advisors, private investment funds, including hedge funds and private equity firms are not currently required to develop AML compliance programs pursuant to the Bank Secrecy Act or U.S. Patriot Act. While some firms may have policies in place for compliance “best practice,” they aren’t tied to the same direct AML compliance program requirements as a broker-dealer or other financial institutions…yet.

As outlined in the FBI report, as long as these individuals and funds are not subject to AML compliance requirements, bad actors could pinpoint them as a low-risk way to launder money and enter the U.S. markets.

This latest FBI bulletin leak puts a spotlight on the time and resources being put to work to identify and mitigate these prevalent money laundering risks.

Based on recent actions, it is not bold to believe that new AML compliance policies are coming that will target investment advisors, hedge funds, private equity firms, and other private investment funds.

AML and KYC compliance can no longer be treated as a check-the-box task, it needs to be approached head-on to help avoid enforcement actions.

One key way for firms to stay compliant in 2020 is to integrate technology into their AML compliance programs. Technology has become a common, arguably necessary, part to any AML compliance program and this demand is only getting stronger.

There is a plethora of data coming in from clients, investors, or users that a firm has to process, which can cost firms time and money if there are program inefficiencies. Software can be used to greatly enhance and streamline the data collection process. And just because compliance requirements are increasing, doesn’t mean user experience, security, or timely onboarding has to decrease.

Horizon’s AML screening technology, AMLCop, offers firms a turn-key AML compliance solution for firms to continually streamline the verification of user details against a proprietary database of global sanctions, Politically Exposed Persons (PEPs), and watchlists.

Additional features include timestamped records of when someone is cleared and who cleared them for internal record keeping and compliance; standardized risk management reporting; and secure data storage to protect your client’s sensitive information.

Just as money laundering will continue to get more sophisticated, firms must be diligent in building or adapting their anti-money laundering compliance programs to effectively combat fraud. Horizon’s AML software is a timely solution built to enhance your AML compliance program and keep up with the evolving regulatory requirements.

To schedule a demo for Horizon’s anti-money laundering screening solution, AMLCop, please visit https://amlcop.com/. Please view our AMLCop E-brochure here:

Sources:

¹ Office of Compliance Inspections and Examinations

²FATF AML Amendments

*FBI AML Bulletin May 2020

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Horizon offers a suite of integrated securities software applications for compliant issuance through secondary trading of electronic securities.

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