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On the FBI’s Radar...

This week, according to a leaked intelligence bulletin, the U.S. Federal Bureau of Investigation expressed concern over the money laundering risks in the $10 trillion private equity and hedge funds industry and believe with “high-confidence” that private investment funds (PIFs) are being utilized to launder illicit funds at scale. In addition to citing human sources, the bulletin referenced the increases in PIFs utilizing offshore shell companies and engaging in short-term investments among other indicators. Notably, the FBI stated that the industry “lacks adequate anti-money laundering programs and called for greater scrutiny by regulators, which have yet to issue rules for the industry.”

According to Reuters, the last time regulators attempted to impose AML requirements on the industry was in 2015. However, that “proposal appears to have died in 2017.” So, how did we get here?

The first significant attempt to regulate the private equity and hedge funds industry came as a result of the 2001 PATRIOT Act. At the time, the U.S. Treasury exempted investment firms and planned to return to it after tackling other sectors. Yet, in the time since 2001, the number of “annual hedge fund launches surged more than threefold, [while] investments by high net worth individuals exceeded those of institutional investors.” In fact, the Financial Action Task Force cited the lack of AML requirements for the industry as one of the U.S.’ most significant lapses in its 2016 Mutual Evaluation report.

In last month’s Rules & Guidance publication, the Financial Industry Regulatory Authority (FINRA) noted that the industry is spending “significant time and resources in developing AI-based applications to enhance their compliance and risk management functions.” Specifically, in terms of surveillance and monitoring, FINRA noted that RegTech firms offer the industry “the ability to capture and surveil large amounts of structured and unstructured data in various forms.”

While the SEC has cited “AML programs at investment advisers as one of the top-seven examination priorities for 2020,” firms can ensure they are a step ahead of regulatory action. With both the SEC and FINRA explicitly highlighting AML as an examination priority, the trends from 2019 warrant serious consideration. In 2019, according to ComplianceWeek, “enforcement actions against registered investment advisors (RIAs) and investment companies made up the biggest chunk (36 percent) of the 526 standalone actions.” Despite being in a gray area for approximately two decades, these events should serve as a warning sign to the industry to make compliance a priority. With estimates of enforcement-related remediation costs being 12-times greater than the fine itself, the alternative might be costlier.

AML Compliance Financial Crime Anti-Bribery & Corruption Risk Management
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