FBI Say Private Funds Could Be Financial Crime Achilles Heel

The U.S. Federal Bureau of Investigation (FBI) has singled out the investment funds industry for its susceptibility to intrepid money launderers who are always at least one, if not two, steps ahead of regulators, the regulation, and even most of the tech designed to deter them. The Financial Times got its hands on a leaked document from the Bureau that was published in May, “Threat Actors Likely Use Private Investment Funds To Launder Money, Circumventing Regulatory Tripwires.” 

The FBI concluded it is highly confident that hostile foreign powers and criminals could use the private placement of funds offered by hedge funds and private equity (PE) firms to launder money, circumventing traditional anti-money laundering programs. It also determined that current anti-money laundering programs are not fit to monitor and detect criminal use of private funds for laundering.

The FBI pointed to a long-debated weakness in the financial crime net. The report states that, “hedge funds and private equity firms receive funds from entities registered in nations that maintain laws conducive to masking underlying beneficial owners, thereby making it harder for U.S. financial institutions and regulators to determine the source of funding.”

“…current anti-money laundering programs are not fit to monitor and detect criminal use of private funds for laundering.”

It then examines instances where hedge funds and private equity firms have been used to enable transactions supporting fraud, transnational organized crime, and sanctions evasion. These include a Mexican cartel in California which paid individuals to open hedge fund accounts at private banks, a representative from a global hedge fund who offered private placement investment and use of shell corporations to trade with U.S. sanctioned countries, and a NY-PE firm that received $100 million from a Russian company with undisputed links to Russian organized crime.

To be fair, many of the more advanced regulators have been warning the firms they regulate for some time of the growing use of corporate accounts by sophisticated financial criminals at the wholesale and institutional level of the financial market. To combat this trend, they have encouraged a closer relationship between the financial crime teams and the other risk control areas within firms to help connect the dots and share intelligence that might identify these instances. The technology is improving fast and is developing patterns of payment and relationship that can create more transparency around beneficial ownership and the origination of funds. But the industry still remains vulnerable to clever criminals who will target smaller firms where the investment in controls, technology, and compliance allow them to continue operating unidentified in the shadows.