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Treasury is considering a rule to close 'loopholes' in private investment AML regulations

The US Treasury Department is considering rulemaking to address the growing risk that sanctioned Russian oligarchs and politicians will try to hide their assets through "hedge funds, private equity firms, and investment advisers."

"We know that many Russian oligarchs and elites are attempting to evade sanctions, and we are working tirelessly to prevent sanctions evaders from exploiting financial loopholes to hide and move their wealth," said Brian Nelson, the Treasury's under secretary for terrorism and financial intelligence, in a speech to an anti-money laundering (AML) conference on May 25.

He explained that the Treasury is gathering data as part of an effort to "understand whether a rulemaking is necessary and, if so, how to design it to ensure that it is appropriately tailored."

Because certain financial intermediaries, such as investment advisers, are exempt from comprehensive anti-money laundering/counter-terrorist financing (AML/CFT) regulations, money launderers "may see some investment advisers as a low-risk way to enter the U.S. financial system," according to Nelson, because they can avoid traditional AML/CFT compliance programs in place at banks and broker-dealers.

While the Treasury's Office of Foreign Assets Control (OFAC) continues to gather information for potential rulemaking, the private sector is being asked to help prevent bad actors from using private investment funds to evade US sanctions.

"We view illicit finance as a core national security issue, and we’re focused on addressing these threats," Nelson said. "The compliance community is an integral partner in that endeavor. Accordingly, we ask that financial institutions work to understand their own risk profiles and take a risk-based approach to compliance. "

Previously, some Democrats in Congress urged the Treasury and the Securities and Exchange Commission to close loopholes in AML/CFT regulations that are used by hedge funds and private funds.

Karen Barr, president and chief executive of the Investment Adviser Association, said the escalating risk is being taken seriously by the investment adviser community.

She stated, "Most advisers believe their risk is low. They are taking a range of steps, however, such as escalating any suspicious activity. Additionally, many advisers already have anti-money laundering policies and procedures in place ."

Given that the Treasury and OFAC have stated that the risk of sanctioned Russian individuals attempting to evade sanctions through private investment firms is increasing, firms must respond appropriately, according to Daniel Goren, a partner at law firm Wiggin and Dana who specializes in international trade compliance. However, the danger has always existed.

"I don’t think the requirement to know your customer has actually changed. It’s more that the pressure and the sense of risk feels different," he explained.

While a certification from a new investor that there are no sanctioned parties "lurking in the background" may have sufficed in the past, Goren believes it is no longer sufficient.

Investment firms will increasingly "want and ask for detailed information about who the beneficial owners are of the parties with whom they engage. We need to know who you actually are, or we can’t do business with you," he explained. "It is risk analysis on steroids," says the author.

The Treasury Department's Financial Crimes Enforcement Network (FinCEN) is currently working on a beneficial ownership registry that will allow businesses to see who owns the companies with which they do business. The registry, on the other hand, is likely to take a year or more to implement. Firms would still need to put in place strong policies and procedures that required a thorough examination of an entity's beneficial ownership, especially for entities that were deemed to be at high risk of being controlled by sanctioned individuals.

OFAC announced sanctions against a money manager it called Russian President Vladimir Putin's "middleman" on June 2.

Sergei Pavlovich Roldugin, a "cellist, conductor, and the artistic director of the St. Petersburg Music House," was named for his role in Putin's offshore wealth management system. Elena Yuryevna Mirtova, a soprano opera singer and actress, was also sanctioned.


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