Treasury considering rule to address AML ‘loopholes’ in private investment

“… [W]e know that many Russian oligarchs and elites are attempting to evade sanctions, and we are working tirelessly to prevent sanctions evaders from exploiting financial loopholes to hide and move their wealth,” said Brian Nelson, the Treasury’s under secretary for terrorism and financial intelligence, in a May 25 speech at an anti-money laundering (AML) conference.

The Treasury is gathering information, he said, as part of an effort that “will help us understand whether a rulemaking is necessary and, if so, how to design it to ensure that it is appropriately tailored.”

Because certain financial intermediaries, like investment advisers, are not subject to comprehensive AML/countering the financing of terrorism (CFT) regulations, Nelson said money launderers “may see some investment advisers as a low-risk way to enter the U.S. financial system” because they can circumvent traditional AML/CFT compliance programs in place at banks and broker-dealers.

While information gathering on potential rulemaking continues, the Treasury, through its Office of Foreign Assets Control (OFAC), is asking for the private sector’s continued assistance to prevent bad actors from using private investment funds to evade U.S. sanctions.

“We view illicit finance as a core national security issue, and we’re focused on addressing these threats,” Nelson said. “The compliance community is an integral partner in that endeavor. Accordingly, we ask that financial institutions work to understand their own risk profiles and take a risk-based approach to compliance.”

Some Democrats in Congress have previously urged the Treasury and Securities and Exchange Commission to close the loopholes on AML/CFT regulations followed by hedge funds and private funds.

The investment adviser community is taking the escalating risk seriously, said Karen Barr, president and chief executive of the Investment Adviser Association.

“Most advisers believe their risk is low,” she said. “They are taking a range of steps, however, such as escalating any suspicious activity. Additionally, many advisers already have anti-money laundering policies and procedures in place.”

Given the Treasury and OFAC have said the risk of sanctioned Russian individuals attempting to use private investment firms to evade sanctions is increasing, firms need to react accordingly, said Daniel Goren, partner at law firm Wiggin and Dana who specializes in international trade compliance. But the risk has always been there.

“I don’t think the requirement to know your customer has actually changed. It’s more that the pressure and the sense of risk feels different,” he said.

While some companies might have been satisfied in the past with a certification from a new investor that there are no sanctioned parties “lurking in the background,” that is not enough anymore, Goren said.

Increasingly, investment firms will “want and ask for detailed information about who the beneficial owners are of the parties with whom they engage. We need to know who you actually are, or we can’t do business with you,” he said. “It’s risk analysis on steroids.”

The Treasury, through the Financial Crimes Enforcement Network (FinCEN), is currently crafting a beneficial ownership registry that would allow firms to understand who owns the entities they are doing business with. However, the registry is still likely a year or more away from being implemented. And firms would still have to implement strong policies and procedures that would require a thorough examination of an entity’s beneficial ownership, particularly entities considered high risk for being controlled by sanctioned individuals.

On June 2, OFAC announced sanctions against a money manager it described as Russian President Vladimir Putin’s “middleman.”

Sergei Pavlovich Roldugin, a “cellist, conductor, and the artistic director of the St. Petersburg Music House,” was designated for being part of a system that manages Putin’s offshore wealth. Also sanctioned was Roldugin’s wife, soprano opera singer and actress Elena Yuryevna Mirtova.