April 06, 2022

At Hearing, Warren Calls on Treasury and SEC to Close Loophole that Allows Oligarchs to Evade Sanctions and Threatens Financial System

$11 Trillion Private Investment Industry Isn’t Subject to “Know Your Customer” Requirements

Video of Hearing (YouTube)

Washington, D.C. – At a hearing of the Senate Banking, Housing, and Urban Affairs Committee, U.S. Senator Elizabeth Warren (D-Mass.) called for the Treasury Department and Securities and Exchange Commission to immediately close the loophole that exempts the $11 trillion private investment industry from “know your customer” requirements. The exemption allows Russian oligarchs to evade sanctions and continue doing business in the U.S. without scrutiny. 

The loophole for the private investment industry, which includes hedge funds and private equity firms, allows companies and their advisers to accept and manage huge sums of money without needing to know basic information about their investors or clients, undermining anti-corruption, counterproliferation, and counterterrorism programs and letting criminals and sanctioned individuals like Russian oligarchs hide and grow their wealth. 

Senator Warren’s call to close this loophole follows a letter that she and Senator Sheldon Whitehouse (D-R.I.) sent last week to Secretary of the Treasury Janet Yellen and Chair of the Securities and Exchange Commission (SEC) Gary Gensler, urging them to move quickly to close this loophole. 

Transcript: Nomination Hearing
U.S. Senate Committee on Banking, Housing, and Urban Affairs 
Wednesday, April 6, 2022

Senator Elizabeth Warren: Thank you, Mr. Chairman.

The Biden administration has rallied the world to impose historic sanctions against Russia for its invasion of Ukraine. These sanctions include seizing yachts, mansions, financial holdings that Vladimir Putin and his oligarch buddies have stashed abroad.

But to enforce these sanctions, we need to know who owns what.

So, Mr. Rosen, if confirmed, you would play a leading role on the Committee on Foreign Investment in the United States. Now, CFIUS doesn’t enforce sanctions, but they do review foreign investments in the United States to make sure that they don’t pose a risk to our national security. That means that they know a lot about the importance of finding out who is behind an investment.

So, Mr. Rosen, when a shell company tries to buy a U.S. semiconductor company or real estate right next to a military base, CFIUS does a tremendous amount of work to find out who is behind the shell company, often, the entity known as the “beneficial owner.” So, why is it so important to national security that we know the actual identity of who’s investing in the United States?

Paul M. Rosen, Assistant Secretary Of The Treasury For Investment Security Designate, Department of the Treasury: Senator Warren, thank you for that question. 

Certainly, understanding where money is coming from, who is controlling the money, what is that flow looks like, are key considerations in any national security risk assessment. 

Senator Warren: But CFIUS only reviews a few hundred transactions a year, and it focuses on investments that lead to foreign control of important U.S. businesses. That’s its special niche. That prevents foreign adversaries from buying the companies that, for example, run our power grid – but it doesn’t stop criminals, terrorists, and sanctioned oligarchs from making other kinds of investments in the U.S — including just stashing a lot of money here.

We do have other safeguards. “Know your customer” requirements require the financial institutions to ask basic questions about potential clients before helping them hide buckets of cash in our financial markets.

Now, these rules apply to most American financial institutions — like banks and mutual funds, and even casinos. Catherine Cortez-Masto, I thought you might want to remember that. They’re all paying attention under “know your customer.” But there’s a huge loophole for the $11 trillion private investment industry.

Mr. Rosen, if a Russian oligarch uses a shell company to invest his billions with a U.S. private equity firm, is that private equity firm required to find out who’s actually behind that shell company?

Mr. Rosen: Senator, I do not believe so. 

Senator Warren: That’s right. And the answer is no. And that creates a huge loophole for oligarchs to be able to evade sanctions and to continue to carry on business right here in the United States. 

This loophole also poses a threat to the stability of our financial system. Because we don’t know what parts of the financial system have been infiltrated by Russian money, and that means we don’t know what impact sanctions could have, and it’s hard to be confident that private funds are actually complying with sanctions as required by current law.

So, Mr. Rosen, do you agree that it is a threat to both national security and financial stability to allow private investment companies to blindly accept cash of Russian oligarchs, not to mention money from human traffickers, drug lords, and terrorists?

Mr. Rosen: Senator, I certainly believe that beneficial ownership inquiry analysis is a key national security consideration, particularly when it comes to CFIUS. 

Senator Warren: Good, you know, last year, the Biden administration committed to fixing this loophole. But Russia’s invasion of Ukraine has made it clear, we don’t have any time to waste here. With every day that passes, Russian oligarchs and government officials continue to profit from illegal investments in the United States. That’s why I sent a letter last week to the Treasury Department and the SEC asking them to immediately close the “know your customer” loophole for the private investment industry. 

The United States has led the world in imposing strong sanctions against Russia, and we must use every tool possible to enforce those sanctions.

Thank you, Mr. Chairman.