The latest trend in the realm of financial crime that has caught the attention of several multination law enforcement authorities, including the United States Federal Bureau of Investigation (FBI), is money laundering with respect to private investing. The private equity industry is a huge player in the American economy, and while many have called for greater regulation on the predatory tactics used by private firms (including the deliberate concealment of fees and additional abuses), other more obvious – and dangerous – developments have emerged that pose heavy risks for the stability of both the U.S. and global financial systems. A recently released internal intelligence bulletin from the FBI notes that individuals that the Bureau has coined “threat actors” have begun to utilize “the private placement of funds, including investments offered by hedge funds and private equity (PE) firms to launder money, circumventing traditional anti-money laundering (AML) programs”5, this according to reporting from the U.S Department of Justice (DOJ) and other sources. In this context, a threat actor is defined as “as encompassing both financially motivated criminals and foreign adversaries.”5 Given that the collective private investment funds industry, which includes the aforementioned hedge and PE funds, is valued at several trillions of dollars, having criminals, politically exposed persons, and other shady characters entrenched within it could prove disastrous to U.S. interests in this regard. As such, significant concerns have been raised as to the extent of the damage that has already been done to the greater anti-money laundering (AML) movement given weak oversight of this sector as compared to the banking sphere – as well as fear of the potential of what’s to come.
The bulletin touches on the lack of sufficient anti-money laundering safeguards and programs seen across the industry, with the agency noting that current regulatory standards in general are far are too ineffective for a sector handling such a large degree of funds. The memo sums up the findings of their assessment, reading that the Bureau:
“…assumes AML programs are not adequately designed to monitor and detect threat actors’ use of private investment funds to launder money. Additionally, the FBI assumes threat actors exploit this vulnerability to integrate illicit proceeds into the licit global financial system.”5
It is believed that the individuals in question, who can emerge from virtually any region of the world, are transferring sizeable amounts of potentially ill-gotten cash into private investment funds in an effort to launder their money while avoiding detection from the proper authorities. Reuters notes that further complicating matters for law enforcement are private fund incorporations and tricky operating structures greatly favoring bank secrecy jurisdictions, allowing for the creation of general partnerships for global hedge funds and PE funds both domestically and overseas.2 The FBI believes that once complicit fund managers experience a taste of success in smaller investment pools that they are likely to expand their money laundering operations into new investment ventures, expanding their network while continuing to incrementally infect their regional financial systems. The deeper these criminals grow their roots into the system, the more difficult it will become to distinguish where their illegal enterprises begin and end, especially given the lack of transparency in this field to begin with. At its worst, money laundering facilitators may expand their operations to the creation of private investment funds with the sole purpose of “layering” their illegal financial gains to truly side-step public and private AML detection.5
The internal memo also cites four separate cases in which the FBI identified existing money laundering schemes proliferating in this sector. These ploys were operated in major metropolitan areas (New York, London, California, Luxembourg) as well as areas synonymous with illicit finance (Cayman Islands, Mexico, Russia). Each of the identified schemes utilized private investment to facilitate hundreds of millions of dollars worth of laundering – indicating the true severity and the widespread scope of these practices. The FBI document highlighting these respective cases can be found here.
Throughout their investigation, the Bureau set out to prove the alternative to their presented information, that is, private investment funds were in fact not the strategic targets of its so-called “threat actors” given that certain customer due diligence (CDD) protocols are currently in place that would perhaps prove adequate deterrents to financial crime. Unfortunately, the agency was ultimately unable to do so, due in large part to the fact that the proliferation of private investment funds in recent years has made the industry even less rigid as to the structure of the investment in an effort to attract more capital vs. maintaining financial integrity.5 So what is the FBI’s proposed solution to this growing problem? It recommends the continued federal sanctioning of state and criminal actors and companies involved in financial misconduct. The FBI has also called for a general increase in regulations that would effectively govern this industry, particularly legislation that would require investment funds to both identify and disclose to financial institutions all layers of beneficial ownership involved in their investments. The same way that banks are subjected to risk-based regulations and the identification of the true beneficial ownership structure of their clients and their companies – a similar approach, albeit less comprehensive, would also be applied to private investing. Analysts have been quick to shoot down these modifications, citing the incredible amount of money, manpower, and resources that would need to be allocated to such an effort, as well as such disclosures being a direct violation of a fund manager’s fiduciary duties to its investors. Despite the lack of consensus on this issue, one thing is for certain: financial criminals are undoubtedly capitalizing on this regulatory stalemate.
Dutch Banks Team Up To Fight Money Laundering
Becoming a more common practice across the globe, several of the Netherlands top financial services corporations have joined forces with hopes of better combating financial crime in the region. Dutch banks ING Group, ABN Amro, and Rabobank recently announced a joint partnership that, along with smaller entities Triodos Bank and Volksbank, will reportedly seek to “establish an agency to monitor all their transactions, potentially making it easier to detect unusual patterns of behavior.”3 With an estimated 16 billion euros ($18 billion USD) of illicit funds being laundered through accounts in the Netherlands on an annual basis, the country has become a breeding ground of illicit finance for foreign nationals and financial criminals looking for the safest ways to clean their dirty money. These findings coupled with the major risks posed to the country’s financial system, and the hefty settlement payments made by Dutch firms to national prosecutors to cover their compliance failures in recent years appear to have effectively pushed national lenders into action.
The culmination of several months of planning and assessment of the technical feasibility of their prospective venture, the banks have ultimately decided that the most effective way to combat this form of criminality is via close-knit cooperation with one another. The group will also reportedly be working alongside several government agencies including the Ministries of Finance and Justice and Security, the Fiscal Information and Investigation Service (FIOD) and the country’s Financial Intelligence Unit (FIU) on the initiative, which will tie directly into the national Money Laundering Action Plan that was announced in 2019.
Ireland, Romania Fined by EU Court Over AML Program Failures
Last week, the European Commission – the European Union’s executive branch – levied fines against Ireland and Romania for their failure to implement in a timely manner regulations passed to prevent the use of the 27-member Union’s financial system for purposes of money laundering and terrorism financing. These rules (part of EU Directive 2015/849), passed by European Parliament in May of 2015, aimed at increasing transparency within oft-complex beneficial ownership structures, as well as reinforcing surveillance requirements for financial firms, legal professionals, accountants, tax advisors, and others.
Both countries have argued that the basis of the fines were unjust, given that they had since complied with said directive. However, drafted regulatory standards outlining statewide compliance with the 2015 order were to be submitted to the Commission for review by the deadline date of June 26, 2017. Both countries were found to have failed to meet their obligations within this two-year period. A statement released by the high court following the ruling read that the two countries were ultimately at fault as “the fact remains that that failure to fulfill obligations existed on the expiry of the period prescribed in the respective reasoned opinions, with the result that the effectiveness of EU law was not ensured at all times.”4 Romania ultimately saw the worse end of the two decisions, as the Southeastern European country was issued a fine of €3 million ($3.42 million USD) versus the €2 million ($2.28 million USD) penalty handed down to Ireland.
Money Laundering Issues Continue For Wirecard
The probes into insolvent German payment processing giant Wirecard AG are mounting, as German prosecutors recently announced an additional investigation into potential money laundering by company executives dating back over a decade. With the group’s suspect accounting practices being called into question at the international level, longtime CEO Markus Braun, an unnamed director of a Wirecard unit based in Dubai, and other prominent senior administrators are facing prosecution for their potential misconduct. Aside from the alleged generation of fake revenue and the fumbling of a reported $2 billion that it claimed to have on its balance sheet (a fact exposed following the company’s decision to file for bankruptcy in June), U.S. authorities examining the company’s role in a $100 million bank-fraud conspiracy connected to an online marijuana marketplace.1
The Wall Street Journal writes that as part of this ploy, two businessmen have been “accused of conspiring with third-party payment processors and others to trick U.S. banks into approving credit-card payments for marijuana products”, with Wirecard playing a pivotal a role in the alleged conspiracy by “serving as both a payment processor and an offshore merchant bank.”1 While the investigation is still in its preliminary stages, it is believed that multiple former and current Wirecard executives had direct knowledge of this scheme.
Global RADAR will provide an update on these developments in the weeks to come.
- Kowsmann, Patricia, and Tom Fairless. “Germany Probes Possible Money Laundering by Wirecard Executives.” The Wall Street Journal, Dow Jones & Company, 9 July 2020.
- Lloyd, Timothy. “FBI Concerned over Laundering Risks in Private Equity, Hedge Funds – Leaked Document.” Reuters, Thomson Reuters, 14 July 2020.
- Meijer, Bart. “Dutch Banks Join Forces in Fight against Money Laundering.”Reuters, Thomson Reuters, 8 July 2020.
- O’Leary, Naomi. “EU Court Fines Ireland €2m over Anti-Money Laundering Rules.” The Irish Times, The Irish Times, 16 July 2020.
- “U) Threat Actors Likely Use Private Investment Funds To Launder Money, Circumventing Regulatory Tripwires .” FBI CRIMINAL INVESTIGATIVE DIVISION, 1 May 2020.