Know your customer.
It’s a basic rule of banking in the United States. Without it, the American financial system is at risk of being an unwitting participant in crimes ranging from money laundering to the funding of terrorism.
But the imposition of economic sanctions on Russian oligarchs over the invasion of Ukraine has exposed a loophole that prevents regulators from tracking the flow of offshore money into the United States: Hedge funds, private equity firms, family offices and venture capital firms don’t always know whose money they’re taking.
Now, some lawmakers on Capitol Hill are joining the calls for the Securities and Exchange Commission and the Treasury Department to require firms in the $11 trillion private funds market to do the same kind of checks performed by financial institutions including banks, brokerages, mutual funds and even casinos.
In a joint letter on Tuesday to Janet Yellen, the Treasury secretary, and Gary Gensler, the S.E.C. chairman, Senators Elizabeth Warren and Sheldon Whitehouse said that closing the loophole would “help the U.S. government track down the hidden wealth of sanctioned Russian elites and better combat money laundering, terrorism, the proliferation of weapons of mass destructions, and other criminal activity throughout our financial system.”
The two Democrats cited a report by The New York Times last week about the deeply complex financial holdings of one oligarch, Roman Abramovich, who has invested billions of dollars through private funds. (Mr. Abramovich has been the subject of sanctions by British authorities but not those in the United States.)
“The status quo is plainly untenable,” the senators wrote.
The Treasury Department and the S.E.C. did not immediately comment on the lawmakers’ letter.
The calls to tighten the monitoring of foreign money into hedge funds and private equity firms goes back about two decades, when the private fund industry was much smaller than it is today. But some contend the rationale for exempting those industries no longer holds given the impact of hedge funds and private equity on markets.
“Right now, broker-dealers, mutual funds and banks are legally required to understand who their clients are and evaluate the source of their clients’ funds before investing them,” said Elise Bean, former staff director and chief counsel of the Senate Permanent Subcommittee on Investigations, who has specialized in money laundering investigations. “But hedge funds, private equity, and venture capital funds don’…….
Source: https://www.nytimes.com/2022/03/30/business/oligarchs-hedge-funds-russia.html