Implementing a robust sanctions policy toward Russia but failing to fix anti-money laundering loopholes in the U.S. financial system is like fighting an adversary with one hand behind your back: It blunts the power, agility, and precision of an attack. In other words, if Russian oligarchs are afforded nearly complete anonymity in their efforts to hide away and protect their ill-gotten gains from prying eyes, the U.S. and its allies are then unable to use their financial assets to pressure those same oligarchs.
There has been encouraging progress toward closing these loopholes through the hard-fought enactment of the bipartisan Corporate Transparency Act, as well as additional beneficial ownership transparency in Section 885 of the 2021 National Defense Authorization Act. There have even been promising signs from Treasury leadership to address money laundering in real estate. However, much more needs to be done to close the loopholes in the U.S. financial system that enable kleptocrats like Putin to shield their money, especially with respect to private investment funds.
What we need now, while America’s attention is focused on tightening the economic screws on kleptocrats, are the following five key pieces of top-line reform:
- Remove the loopholes in the Corporate Transparency Act that omit certain “pooled investment” vehicles (like private equity and hedge funds) and certain trusts from reporting their true (also known as “beneficial”) owners to law enforcement, and include effective compliance, operative, and enforcement systems.
- Ensure that the real estate sector and luxury goods sectors (including goods like art, planes, and yachts) will no longer be easy targets for money laundering and illicit financial flows by requiring an appropriate professional agent involved in the sale or purchase of these properties to identify and report beneficial owner clients and sources of funding, and, when necessary, to report suspicious activity to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
- Require private investment funds and their advisers to establish effective anti-money laundering programs, while also requiring investment advisors for those funds to report to the Securities and Exchange Commission the beneficial owners behind investments, as well as the investment positions of those funds.
- Create a uniform definition of politically exposed persons (PEPs) and ensure that these individuals are identified and risks associated with them are appropriately addressed across all oversight and compliance functions in the U.S. anti-money laundering regime, in line with international Financial Action Task Force standards.
- As with all laws and regulations, it will be necessary for Congress to consistently provide FinCEN and other applicable divisions within Treasury, such as the IRS criminal investigation unit, with the human and financial resources necessary to carry out supervisory and enforcement roles in order to effectively report illicit activity to relevant law enforcement institutions and enforce many of the reforms listed above. FinCEN has long been grossly underfunded. While the Russian invasion of Ukraine has led Congress to significantly increase the budget of FinCEN and the Office of Terrorism and Financial Intelligence for fiscal year 2022, we need to ensure that the resources for these agencies are there for the long term.
It’s time for the U.S. to stop kleptocrats and their cronies from hiding, protecting, and growing their ill-gotten gains in the U.S. financial system.