US Treasury to study how Russians could use equity and hedge funds to evade sanctions

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Russian oligarchs and elites may seek to use investment advisers as a low-risk way to evade US sanctions due to the industry’s vulnerability to illicit financing, a senior US Treasury Department official has said.

Brian Nelson, the Treasury’s undersecretary for terrorism and financial intelligence, told a conference hosted by the Securities Industry and Financial Markets Association last week that his agency is looking at the illicit finance risks facing the investment advisers and wants to engage with them to determine if additional rules are needed to help prevent the sector from being used for nefarious purposes.

Nelson’s remarks come amid growing concerns that Russian oligarchs and elites are seeking to evade sanctions imposed on them after the country invaded Ukraine. Nelson said the United States was working with its allies to “prevent sanctions evaders from exploiting financial loopholes to hide and move their wealth.”

The Treasury’s National Money Laundering Risk Assessment, released in March, noted that some financial intermediaries such as investment advisers are not subject to comprehensive anti-money laundering regulations and the financing of terrorism.

The Treasury has also posted 90 new questions and modified 76 frequently asked questions on its website since February to help provide the private sector with additional details about the U.S. sanctions program, Nelson said.

Lack of consistency
Although there are no consistent industry-wide anti-money laundering standards for investment advisers, some voluntarily conduct money laundering screening and prevention. But inconsistencies in whether and how they do so can create vulnerabilities that illicit actors can exploit, Nelson said. Additionally, the industry, which includes brokers, hedge funds and private equity funds, is segmented and visibility into who owns those funds or controls those transactions is limited, he said.

To fill the gaps, the Treasury’s Financial Crimes Enforcement Network proposed in 2015 to require certain investment advisers to implement anti-money laundering programs and report suspicious activity. But the network never issued a final rule.

Nelson said the Treasury is engaging with law enforcement and other regulators, such as the Securities and Exchange Commission, to learn more about the risk landscape facing investment advisers. The Treasury is also looking for ways to gather information on how Russian elites, proxies and oligarchs might use hedge funds, private equity firms and other investment advisers to hide their assets.

“This information-gathering effort will help us understand whether rulemaking is needed and, if so, how to design it to ensure it is appropriately tailored,” he said.

Excerpt from the Wall Street Journal

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