03.30.22

Whitehouse, Warren Call on Treasury, SEC to Close Loophole Exempting the $11 Trillion Private Investment Industry from Anti-Money Laundering and Anti-Terrorism Requirements

Closing the loophole will help U.S. track down hidden wealth of sanctioned Russians and combat money laundering, terrorism, and criminal activity

Washington, DC – U.S. Senators Sheldon Whitehouse (D-RI), a member of the Senate Finance Committee, and Elizabeth Warren (D-MA), a member of the Senate Banking and Finance Committees, sent a letter calling on Secretary of the Treasury Janet Yellen and Chair of the Securities and Exchange Commission (SEC) Gary Gensler to close the loophole that exempts the $11 trillion private investment industry from anti-money laundering (AML) and countering the financing of terrorism (CFT) obligations.

The exemption for the private investment industry, which includes hedge funds and private equity firms, allows companies and their advisers to accept and manage huge sums of money without needing to know basic information about their investors or clients. This loophole undermines anticorruption, counterproliferation, and counterterrorism programs, and lets criminals and sanctioned individuals like Russian oligarchs hide and grow their wealth. The senators are calling on Secretary Yellen and Chair Gensler to use their existing authorities under federal law to immediately close the AML/CFT loophole for private investment companies and advisers.

“Exempting the private investment industry from AML/CFT requirements endangers our national security and poses systemic risks to our financial system… First, the United States cannot reliably determine how much money in the private investment market comes from illicit actors, whether criminal organizations, terrorists, or sanctioned individuals… Second, the United States is less capable of enforcing sanctions against wealthy individuals — including Russian oligarchs and government officials — or even understanding the sanctions’ impact… Third, by granting unfettered, anonymous access to America’s lucrative private financial markets, the United States is enabling and legitimizing foreign corrupt and criminal actors to some extent, without any understanding of how the geopolitical risk associated with doing so may contribute to market instability,” wrote Senators Whitehouse and Warren.

AML/CFT programs protect the financial system and national security by requiring financial institutions to identify their customers, keep records on the source of client funds, report suspicious activity, and monitor account transactions. Many financial institutions, such as banks, mutual funds, credit unions, broker-dealers, and casinos, are subject to AML/CFT requirements. However, for the past two decades, thanks in part to a 20-year “temporary exemption” granted by the Treasury Department in 2002, neither unregistered investment companies (including hedge funds, private equity firms, and venture capital firms) nor their investment advisers are subject to federal AML/CFT requirements. The Treasury Department has attempted to end this two-tiered system on several different occasions, but all its attempts to date have been unsuccessful in the face of industry opposition.

The senators are concerned that exempting the private investment industry from AML/CFT requirements endangers national security and poses systemic risks to the financial system. They cited recent reporting from the New York Times showing how Roman Abramovich, a Russian oligarch with close ties to President Vladimir Putin, has invested billions of dollars in American hedge funds and private equity firms over the past twenty years, many of which did not know or take the effort to find out who they worked for. If Abramovich were to be sanctioned, these hidden funds would make it nearly impossible to effectively enforce sanctions against him.

Senators Whitehouse and Warren expressed their support for the Biden administration’s plan to address the AML/CFT loophole for the private investment industry outlined in the U.S. Strategy on Countering Corruption and urged the Treasury Department and SEC to act immediately, given the need to fully enforce sanctions against Russia. The senators called on the Treasury Department and SEC to move swiftly to end the AML/CFT loophole, explain their plans to start the rulemaking process and any barriers they anticipate, and provide their staff a briefing on their actions by April 12, 2022.

Whitehouse has led the charge to strengthen America’s hand against international corruption and kleptocracy. He is the Chair of the Senate Caucus on International Narcotics Control, a member of the Commission on Security and Cooperation in Europe (or the Helsinki Commission), and a senior member of the Senate Judiciary Committee. Whitehouse is also the Democratic lead for the Congressional delegation to the annual Munich Security Conference.

Earlier this month, Senator Whitehouse introduced a bipartisan bill to enable the seizure and sale of Russian oligarchs’ assets to support humanitarian efforts in Ukraine. Whitehouse has also introduced legislation to modernize and strengthen criminal money laundering statutes, and put forward legislation to help international partners address sophisticated money laundering schemes by drug traffickers. In February, Whitehouse sent a letter to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) calling for a comprehensive effort to update and strengthen the nation’s anti-money laundering safeguards. He also sent a letter to FinCEN urging stronger anti-money laundering safeguards in the property market.

A PDF copy of the letter is available here.

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