Potential Illicit Financial Flows in Private Investment Funds Pose Systemic Risks to U.S. and Global Financial Markets and May Weaken Sanctions

WASHINGTON DC – The Coalition for Corporate Financial Accountability and Transparency (FACT) calls on the Securities and Exchange Commission (SEC) to address the undisclosed presence of possible illicit financial flows in private investment markets. Without further action by the SEC, these flows can enrich and embolden potential adversaries, such as the Putin regime, and potentially destabilize US and global financial markets. Meanwhile, failure to identify these flows undermines current sanctions against Russian oligarchs and may jeopardize future tools the United States may use against aggressive governments.

“It is absurd that no player is obligated to identify, register or report the ultimate people investing in the United States through this $11 trillion and growing market,” said Ian Gary, executive director of the FACT Coalition. “It makes the United States an attractive destination for illicit financial flows and hampers the effectiveness of current sanctions against Russian oligarchs who may have secretly invested in the United States for years.”

Among other recommendations, the FACT Coalition comment urges the SEC to require investment advisers to perform risk-based client due diligence necessary to report certain beneficial ownership and source of funds information on the PF form for each fund they advise. In December, the FACT Coalition and its allies released a report highlighting the risks posed by having nearly 13,000 investment advisers in the United States with little or no anti-money laundering due diligence responsibilities. silver.

“The SEC has the authority and expertise to begin to root out the pervasive roots of secrecy granted to private equity fund investors, including Russian oligarchs,” noted Ryan Gurule, FACT Policy Director. “Putin’s recent attacks make it clear that it is time to better understand how geopolitical risks stemming from and linked to corruption and illicit flows in the private investment sector are jeopardizing the foundations of our financial markets.”

Since Russia’s unprovoked and illegal invasion of Ukraine, the United States and its allies have coordinated to invoke economic sanctions designed to alienate the Russian economy. This includes cutting off Putin and his entourage from the massive sums they siphoned off and hoarded abroad, including in the United States.

However, US hedge funds, private equity funds, venture capital funds and other types of private equity funds are used to protect, protect and increase the wealth of Russian oligarchs and the wealth of other adversaries would-be Americans or corrupt foreign officials.

“People want to punish the oligarchs, but the US investment system is so shrouded in secrecy that enforcement is difficult, making it a perfect place for corrupt money,” said Gary. “Money laundering risks in this massive, opaque, and complex industry jeopardize the world’s democracies, harm U.S. national security, and can contribute to systemic risks to our financial markets in ways that deserve consideration. immediate attention.”

The private investment industry, which targets high net worth investors, is not subject to the same record keeping or reporting requirements and anti-money laundering obligations as banks, brokers or mutual funds. retail marketed to ordinary investors.


Notes to Editor:

  • The FACT coalitions comment letter on the PF form can be viewed here. The FACT Coalition recommends that the SEC take the following actions:
    • Require investment advisers to perform risk-based due diligence on clients to ensure they know who their clients are, understand the source of clients’ capital investments, and can provide reliable information on Form PF regarding the private funds they advise. Requiring risk-based client due diligence would be consistent with current Form PF requirements that require investment advisers to collect and disclose certain limited information about the private funds they advise.
    • Require investment advisers to report on Form PF information on the beneficial ownership of each investor in each private fund they advise and identify any foreign “politically exposed person” (PEP) or “high profile foreign political figure” in under 31 USC 5318(i)(3)(B). These disclosures would be consistent with current reporting requirements regarding foreign beneficial ownership, value of investments and deployment of fund investments. Disclosure requirements should generally require determining the natural persons who own or control, directly or indirectly, a client entity.
    • Require investment advisers to report on Form PF – country by country – the country of origin of each investor in a private fund and the source of that investor’s funds, along with a range indicating the total amount of funds invested by each of these investors in each of these funds using US dollars.
  • The FACT Coalition, Global Financial Integrity, and Transparency International-US Office released a set of “Private Investments, Public Harm” recommendations in December for the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to combat money laundering. and national security risks. private investment vehicles.
  • SEC Proposed Rule to Amend Form PF Available here. Chairman Gary Genslar’s comments on the proposed regulations, highlighting the evolving nature of systemic risk, can be found here.
  • Recent coverage of the New York Times (to repeated occasions), the the wall street journalthe Washington Postand Pitch book highlights the loophole discussed in this press release and how it complicates the effective sanctioning of Russian oligarchs who are or may be invested in the US private investment industry.