In 2018, FinCEN enacted its Customer Due Diligence Rule requiring banks, brokerages, mutual funds and futures commission merchants to verify the identity of individual account holders and the beneficial owners behind corporate customers.
And in January, Congress passed a law requiring owners of certain types of anonymous shell companies—a popular tool for laundering money—to disclose their names, addresses and other identifying information. The resulting government database will be accessible by intelligence agencies, law enforcement, regulators and financial institutions.
Opponents of anti-money laundering requirements for managers of private funds have argued that they don’t take physical custody of client assets. Instead, those assets are held by banks, brokerages or other “qualified custodians,” which are already required to monitor for signs of money laundering and report suspicious activity.
“Hedge funds present relatively limited money-laundering risks,” with the vast majority of investment advisers already using internal measures to track dirty money, the Managed Funds Association, which represents hedge funds, said in its 2015 written response to the FinCEN proposal.
‘Poor Vehicles’
Private-equity managers’ practice of requiring investors to tie up capital for long periods make their funds “poor vehicles for money laundering and terrorist financing,” and should be excluded from FinCEN’s proposed rule, American Investment Council, which represents the industry, said in its 2015 written response.
Jason Mulvihill, the council’s chief operating officer and general counsel, said that SEC-registered private fund advisers already provide detailed information about their activities, so adding anti-money laundering requirements is unnecessary. “The new legislation is not going after investment advisers and funds that are regulated,” he said. “It’s focus is on things that are less transparent.”
The FBI expressed a different view in its report last year. “The proliferation of private investment funds has made the industry less rigid as to the structure of the investment in an effort to attract more capital,” it wrote. “Furthermore, the profit motive does not incentivize the private investment fund manager to scrutinize the source of funds or the underlying beneficial owner.”
Self-policing by private equity and hedge funds is “not as robust as it would be if the 2015 proposal was adopted,” said Mederic Daigneault, a senior director with National Regulatory Services, a compliance consulting firm. That means the industry’s defenses could be strengthened through mandatory requirements for monitoring and reporting money laundering red flags, Daigneault said.
This article was provided by Bloomberg News.