March 30, 2022

Warren, Whitehouse Call on Treasury, SEC to Close Loophole Exempting the $11 Trillion Private Investment Industry from Anti-Money Laundering and Anti-Terrorism Requirements

Closing the Loophole Will Help U.S. Track Down Hidden Wealth of Sanctioned Russians and Combat Money Laundering, Terrorism, and Criminal Activity

Text of Letter (PDF)

Washington, D.C. – United States Senators Elizabeth Warren (D-Mass.), a member of the Senate Banking and Finance Committees, and Sheldon Whitehouse (D-R.I.), a member of the Senate Finance Committee, sent a letter calling on Secretary of the Treasury Janet Yellen and Chair of the Securities and Exchange Commission (SEC) Gary Gensler to close the loophole that exempts the $11 trillion private investment industry from anti-money laundering (AML) and countering the financing of terrorism (CFT) obligations. The exemption 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 anticorruption, counterproliferation, and counterterrorism programs and letting criminals and sanctioned individuals like Russian oligarchs hide and grow their wealth. The senators are calling on Secretary Yellen and Chair Gensler to use their existing authorities under federal law to immediately close the AML/CFT loophole for private investment companies and advisers. 

“Exempting the private investment industry from AML/CFT requirements endangers our national security and poses systemic risks to our financial system… First, the United States cannot reliably determine how much money in the private investment market comes from illicit actors, whether criminal organizations, terrorists, or sanctioned individuals… Second, the United States is less capable of enforcing sanctions against wealthy individuals — including Russian oligarchs and government officials — or even understanding the sanctions’ impact… Third, by granting unfettered, anonymous access to America’s lucrative private financial markets, the United States is enabling and legitimizing foreign corrupt and criminal actors to some extent, without any understanding of how the geopolitical risk associated with doing so may contribute to market instability,” wrote Senators Warren and Whitehouse. 

AML/CFT programs protect the financial system and national security by requiring financial institutions to identify their customers, keep records on the source of client funds, report suspicious activity, and monitor account transactions. Many financial institutions, such as banks, mutual funds, credit unions, broker-dealers, and casinos, are subject to AML/CFT requirements. However, for the past two decades, thanks in part to a 20-year “temporary exemption” granted by the Treasury Department in 2002, neither unregistered investment companies (including hedge funds, private equity firms, and venture capital firms) nor their investment advisers are subject to federal AML/CFT requirements. The Treasury Department has attempted to end this two-tiered system on several different occasions, but all its attempts to date have been unsuccessful in the face of industry opposition.

The senators are concerned that exempting the private investment industry from AML/CFT requirements endangers national security and poses systemic risks to the financial system. They cited recent reporting from the New York Times showing how Roman Abramovich, a Russian oligarch with close ties to President Vladimir Putin, has invested billions of dollars in American hedge funds and private equity firms over the past twenty years, many of which did not know or take the effort to find out who they worked for. If Abramovich were to be sanctioned, these hidden funds would make it nearly impossible to effectively enforce sanctions against him. 

Senators Warren and Whitehouse expressed their support for the Biden administration’s plan to address the AML/CFT loophole for the private investment industry outlined in the U.S. Strategy on Countering Corruption and urged the Treasury Department and SEC to act immediately, given the need to fully enforce sanctions against Russia. The senators called on the Treasury Department and SEC to move swiftly to end the AML/CFT loophole, explain their plans to start the rulemaking process and any barriers they anticipate, and provide their staff a briefing on their actions by April 12, 2022.

Senator Warren is a leader in ensuring the integrity and transparency of the financial system. As the United States has led global efforts to sanction Russia and Russian individuals in response to Putin’s unjustifiable invasion and war in Ukraine, Senator Warren has worked to ensure that these sanctions are fully enforced. 

  • At a hearing of the Senate Banking Committee, Senator Warren warned that Putin and Russian elites could use crypto to hide their wealth and evade economic sanctions. 
  • Senator Warren and Senators Jack Reed (D-R.I.), Mark Warner (D-Va.), and Jon Tester (D-Mont.) introduced the Digital Asset Sanctions Compliance Enhancement Act of 2022, which would ensure that Vladimir Putin and Russian elites don’t use cryptocurrencies and other digital assets to undermine the international community’s economic sanctions against Russia.
  • Senator Warren and Senators Warner, Sherrod Brown (D-Ohio), and Reed sent a letter to Treasury Secretary Janet Yellen raising concerns regarding the potential use of cryptocurrency to evade sanctions, which have become even more urgent amid the sanctions imposed on Russia after its invasion of Ukraine.