FBI concerned over laundering risks in private equity, hedge funds – leaked document
16 Jul 2020

The U.S. Federal Bureau of Investigation believes firms in the nearly $10-trillion private investment funds industry are being used as vehicles for laundering money at scale, according to a leaked intelligence bulletin prepared by the agency in May.

“Threat actors” — including criminals in it for the money and foreign adversaries — “use the private placement of funds, including investments offered by hedge funds and private equity firms” to reintegrate dirty money into the legitimate global financial system, according to the bulletin.

It also said the industry lacks adequate anti-money laundering programs and called for greater scrutiny by regulators, which have yet to issue rules for the industry.

“The FBI 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,” it said.

A trade-group representative called the report misguided in its broad characterization of risk in the private-investment industry.

The FBI bulletin [bit.ly/2DDQ8cJ] cites four cases of planned or reported laundering operations, involving hundreds of millions of dollars, using private funds. One of those cases led to a criminal conviction.

“Criminally complicit investment fund managers likely will expand their money laundering operations as private placement opportunities increase, resulting in continued infiltration of the licit global financial system. If greater regulatory scrutiny compelled private investment funds to identify and disclose to financial institutions the underlying beneficial owners of investments, this would reduce the appeal of these investment firms to threat actors, at which time the FBI will re-visit this assessment,” the FBI bulletin said.

The FBI’s assessment is made with “high-confidence”, the bulletin read. The bureau declined to comment. “As you know, the FBI neither confirms nor denies the existence of an investigation,” said Tina Jagerson, a bureau spokeswoman.

LEAKED LAW ENFORCEMENT DOCUMENTS

The bulletin was contained among a cache of law enforcement documents, dubbed “BlueLeaks”, which were obtained through a security breach at a web development firm. The documents were initially posted online by Distributed Denial of Secrets, a self-described “transparency collective” of journalists and online computer activists.

A search of the online cache for Regulatory Intelligence revealed the FBI document.

Security news blog Krebs on Security cited an analysis by the National Fusion Center Association that confirmed the validity of the leaked data cache, said to come from state-owned “fusion centers” that gather and disseminate law enforcement information.

While the bulletin says its information is derived primarily from open source reporting from the Department of Justice, it also incorporates information provided to the FBI by multiple human sources.

Specifically, the report uses information from “two human sources with direct access, one whose reporting has been corroborated through consensual monitoring and one whose reporting has not been corroborated; and sensitive financial sources with direct access or firsthand knowledge of the financial industry.”

PRIVATE FUNDS

The Securities and Exchange Commission describes private funds as pooled investment vehicles that are excluded from the definition of ‘investment company’ under the Investment Company Act of 1940 [go-ri.tr.com/E4a3Vf], which governs mutual funds. Private funds generally include hedge funds and private equity funds, according to the SEC.

Hedge funds wager on public-market equity, debt, derivative, foreign exchange, cryptocurrencies, and other liquid investments. The conventional PE strategy similarly uses high amounts of debt purchase underperforming companies or corporate assets, which managers then restructure.

Unlike hedge funds, PE vehicles are illiquid, with long investor lockups being a signature of the asset class. Both asset classes cater exclusively to institutional clients and accredited investors, or people whose net worth exceed $1 million.

“Over the last several years, hedge funds have fallen out of favor among many institutional investors, while private equity funds and other private markets vehicles have continued to grow in assets under management,” said Bryce Klempner, a partner at consultants McKinsey & Company in Boston.

FOUR CASES

The bulletin cites four cases in which hedge funds and PE firms “have been used to facilitate transactions in support of fraud, transnational organized crime, and sanctions evasion”. Intelligence in the report was collected between March 2017 and July 2019.

First, the FBI highlights the case of Mark Scott, the disgraced partner of a major U.S. law firm, who was convicted in New York last year of helping the operators of initial coin offering scam OneCoin launder more than $400 million.

The FBI omits mention of Scott by name, but describes how fraud funds were moved and concealed “through a series of purported private equity funds holding accounts at financial institutions, including those in the Cayman Islands” and Ireland. Details of the Scott case match the FBI’s account.

Second, intelligence dated July 2019 details how a representative of an unnamed New York and London-based hedge fund “proposed investing in private placement funds and using a series of shell corporations to purchase and sell prohibited items from sanctioned countries to the United States.”

According to a “human source with direct access”, this proposed hedge fund planned to operate entities in Luxembourg and Guernsey to avoid sanctions compliance oversight.

Thirdly, a human source, whose account has not yet been corroborated, told the FBI that an unidentified Mexican cartel operative operating in Los Angeles and Orange County recruited and paid people to open hedge fund accounts at private banking institutions.

“The cartel laundered approximately $1 million through the accounts each week and then withdrew the money to purchase gold,” the bulletin reads. This report was last updated in January 2019.

And fourth, a “reliable source with excellent access” told the FBI that a “New York-based private equity firm received more than $100 million in wire transfers from an identified Russia-based company allegedly associated with Russian organized crime.” This intelligence was dated August 2017.

By Timothy Lloyd, Reuters, 14 July 2020

Read more at Reuters

Photo (cropped and edited): Dave Newman [CC BY 2.0] via Flickr

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