👉 The DISCLOSE Act Fails

In response to Russia’s invasion of Ukraine, President Joe Biden is expected to soon announce more sanctions aimed at Vladimir Putin and his cadre of oligarchs. The theory is that unlike sectoral sanctions that could harm the broader Russian population, inflicting financial pain on Putin and his wealthy cronies could force the Russian government to the negotiating table.

But while such a move might help deter further Russian incursions, Biden faces a significant obstacle: corporate lobbyists’ success in shrouding the American finance industry in secrecy, which makes it far easier for Russian oligarchs and their business empires to evade economic sanctions.

The situation spotlights how America’s money-drenched political process can create national security challenges. In effect, Wall Street’s overwhelming power to shape U.S. regulatory policy — fueled by massive campaign contributions and an army of lobbyists — may defang some of the White House’s most potent economic weapons against an international adversary.

More than two decades ago, federal investigators warned Congress of potentially illicit streams of cash flowing from Russia into the opaque American financial system — and leaks of the so-called Panama Papers and Pandora Papers over the past few years suggest those flows have only increased, as have oligarchs’ attempts to evade sanctions.

Of late, law enforcement officials and sanctions experts have been sounding ever-louder alarms about weak transparency and disclosure requirements specifically in the most opaque corners of the economy: private equity firms, hedge funds, shell companies, and investment vehicles such as real estate funds and art assets. And because such entities target high-net-worth individuals as clients, disclosure loopholes for them could particularly undermine oligarch-focused sanctions.

Biden doesn’t need Congress to crack down on money laundering through such shadowy conduits. His Treasury Department could revive a rule proposed during the Obama era under the half-century-old Bank Secrecy Act to extend existing disclosure rules to private funds and pooled investment vehicles. But he has so far declined to do so.

The department also recently backed off tightening such rules for the art industry, even after a bipartisan Senate report spotlighted that industry’s role in helping Russian oligarchs evade existing sanctions, such as by laundering money through auction houses.

The Treasury Department refusal to act came as the U.S. Chamber of Commerce, real estate titans, the legal industry, and art dealers lobby the agency on issues related to the bank secrecy statute, according to federal records reviewed by The Daily Poster.

Despite the warnings, corporate efforts to further weaken anti-money laundering laws continue — even now, as the threat of war looms.

In December, the Biden administration proposed a rule to implement a 2021 law requiring corporations and shell companies to more thoroughly disclose their actual owners. Experts say the initiative is necessary to strengthen the effect of any sanctions aimed at Russian financial institutions and oligarchs. But that bipartisan transparency legislation had already been watered down by a corporate lobbying blitz that included pressure from Wall Street’s private investment firms.

The result: Vast swaths of the financial, accounting and insurance industries were exempted from new transparency mandates.

Now, even as a military conflict unfolds and tougher sanctions are being sculpted, lobbying groups like the National Association of Manufacturers, which represents big corporations, and the Private Investor Coalition, which represents wealthy investors, are pressuring federal regulators to add more exemptions to the loophole-laden statute. Meanwhile, the National Federation of Independent Business (NFIB), a lobbying group that calls itself the “the voice of small business,” has been pledging to do everything it can to repeal the law.

“I’m confident we can hit Putin and his oligarchs hard, and President Biden is already ramping up sanctions pressure,” Sen. Sheldon Whitehouse (D-R.I.), who has advocated for anti-money laundering laws to apply to private investment advisers, said in a statement to The Daily Poster. “But shining the light of transparency on the dark channels through which kleptocrats move their money will make applying that pressure much easier… Private equity and hedge funds manage trillions of dollars without any anti-money-laundering safeguards — that’s an obvious problem to address.”

“Huge Volumes Of Russia’s Dark Money Are Being Held In The West”

While the United States has improved its anti-money laundering legal regime over the past few decades, the private investment industry has used its political power to carve out exceptions for itself, effectively avoiding the basic transparency laws that banks, public companies, and soon shell companies must follow.

As a result, about $11 trillion worth of assets and nearly 13,000 investment advisers are subject to few anti-money laundering regulations, according to a recent report by Financial Accountability and Corporate Transparency Coalition, Global Financial Integrity, and Transparency International.

That report — which included examples of private equity funds and hedge funds laundering money for organized crime rings and sanctioned individuals and companies in countries including Russia — was one of four such reports warning that the opacity of the U.S. financial system has made it harder to enforce sanctions.

The first of those analyses emerged in 2020 from the Federal Bureau of Investigation, which warned in a bulletin that existing anti-money laundering programs to track owners and sources of capital were failing to keep pace with the exponential growth of the private investment industry.

“The FBI assumes [anti-money laundering] programs are not adequately designed to monitor and detect threat actors’ use of private investment funds to launder money,” said the bulletin, part of the “BlueLeaks” trove of leaked law enforcement documents. “If greater regulatory scrutiny compelled private investment funds to identify and disclose to financial institutions the underlying beneficial owners of investments, this would reduce the appeal of these investment firms to threat actors.”

The bulletin referenced four cases where private investment firms “have been used to facilitate transactions in support of fraud, transnational organized crime, and sanctions evasion,” according to reporting by Reuters.

Soon after the FBI warning, scholars at the Atlantic Council — a Washington think tank funded by foreign governments, defense contractors, oil companies, and banks — published studies evaluating why sanctions against Putin and his business allies have not been more effective.

Among their conclusions: Wall Street’s success in blocking stronger financial transparency laws in the United States have helped Putin and his associates keep control of hundreds of billions of dollars stashed outside of Russia.

“Huge volumes of Russia’s dark money are being held in the West,” wrote the council’s economists Maria Snegovaya and Anders Åslund, the latter of whom advised the Russian government under Boris Yeltsin. “Traditionally, Russian dark money goes through several offshore havens in its laundering, but it predominantly stops in anonymous companies in two major economies that allow anonymous ownership — the United States and the United Kingdom.”

Spotlighting why the private equity disclosure issue is so significant for sanctions policy, the Atlantic Council noted: “There has been little work done in the public sector to monitor the activity of Russian firms and individuals in U.S. private equity and securities markets, largely due to privacy obligations between brokers and their clients. Russian participants are likely to be high-net-worth individuals with broad international connections and employ a network of financial intermediaries.”

Wall Street’s enormous power over elections and policymaking, and capture of financial regulatory institutions, has created an American legal regime which stands out among industrialized nations for how freely it allows opaque streams of money to flow in and out of its economy, according to a subsequent Alliance For Securing Democracy report by Josh Rudolph, who now advises the U.S. Agency for International Development under Biden.

“The United States is among the less than 10 percent of countries that do not require non-bank enablers to establish anti-money laundering programs,” he wrote. “Unlike enablers based in more than 90 percent of the world, U.S. non-bank enablers do not need to have compliance officers, trainings, audits, and controls reasonably designed to spot potential money laundering by identifying customers, scrutinizing transactions, keeping records, and reporting suspicious activity to the government.”

Rudolph noted that “Kremlin-connected oligarchs have repeatedly used private investment funds and their managers as conduits to secretly funnel money into Western political systems.”

All of this could make enforcement of new sanctions against Putin’s regime far more difficult.

“The ability to enforce sanctions comes from visibility,” said Lakshmi Kumar, Policy Director at Global Financial Integrity, whose sanctions evasion report included examples linked to Russian power brokers. “With investment vehicles, you immediately have layers of convenient opacity that the law enables… As long as someone brings a lot of money to the table, nobody’s going to ask, where did you get this money from? Are you on a list somewhere? No one’s going to poke further because there's no legal requirement to do so. Which makes it really easy to get around sanctions.”

A Battle Over A 52-Year Old Secrecy Law

Amid these periodic warnings, some regulators have sought to expand the Bank Secrecy Act to cover private investment advisers, and legislators recently passed a new statute designed to require more disclosure of the owners of shell companies.

But in both cases, officials have run up against sophisticated opposition campaigns by Wall Street lobbyists.

In 2015, President Barack Obama’s Treasury Department proposed using existing executive authority to expand the Bank Secrecy Act to cover private investment funds. The administration argued that an expansion was necessary because “as long as investment advisers are not subject to [anti-money laundering] program and suspicious activity reporting requirements, money launderers may see them as a low-risk way to enter the U.S. financial system.”

In response, a slew of private investment trade groups issued public comments arguing the rule wasn’t necessary or was overly burdensome.

“The [Bank Secrecy Act] does not need to be extended to all investment advisers with respect to all of their activities in order to have a comprehensive anti-money laundering regime in the United States,” wrote the Investment Adviser Association, which says it represents more than 550 financial firms that collectively manage approximately $16 trillion.

The Financial Services Roundtable (now known as the Bank Policy Institute), which lobbies on behalf of large banks, argued that “certain investment advisory activities are in fact so low-risk that a blanket exclusion from the final rule is warranted.”

Such low-risk investment advisory activities, the group argued, included those where investors could not easily retrieve their money, or illiquid investments.

That’s a common refrain used by private equity firms arguing against their inclusion in anti-money laundering law frameworks: Essentially, they say, criminals and sanctions evaders are not likely to enter into the longer-term investments that private equity demands.

Kumar of Global Financial Integrity disputes that point.

“If you are running a criminal enterprise or engaging in criminal activity, you treat it as a business,” she explained. “For a sophisticated kleptocrat or oligarch, it makes financial sense because you’re looking at long-term returns on how to legitimize your illicit money to legitimate money. If equity investments provide you with that, why wouldn’t you do it?”

But President Donald Trump took office before the proposed rule, slowed down by industry opposition, was enacted, and never implemented it.

Now, six years later, the Biden administration has not used its executive authority to resurrect the stalled Obama administration initiative, nor has it even revoked a Bush administration measure that expanded disclosure exemptions for private funds.

In December the White House published its “Strategy on Countering Corruption,” which implied that the Treasury Department might revive the 2015 rule. The document said that “prescribing minimum reporting standards for investment advisors and other types of equity funds” was a necessary part of an anti-corruption strategy.

Another Lobbying Blitz

A similar saga may now be unfolding after Congress last year passed the Corporate Transparency Act, which the Atlantic Council said is the “key” to a more deterrent sanctions system against Putin and his financial network.

However, that law was also written with significant exemptions, thanks to lobbying from the financial services industry and the NFIB.

The exemption for private investment was included to get the bill through Congress, wrote Forbes columnist and tax lawyer Robert Goulder at the time of the law’s passage.

“The scope of the Corporate Transparency Act has a notable exclusion that lets some types of entities off the hook,” he wrote. “That was a practical accommodation to private equity and hedge funds. Otherwise, the act would never have gotten off the ground. There’s no point in making foes of Wall Street if you don’t have to.”

Reporting by the Washington Post confirmed that narrative: The exemption for private investment advisers was included in the law thanks to “lobbying by the private-equity and hedge-fund sectors.” Indeed, federal lobbying records show the American Investment Council — the trade association representing the private equity industry — lobbied on the bill.

The NFIB, meanwhile, lobbied furiously against the law because it subjects private corporations and limited liability companies to transparency measures they hadn’t faced before.

“NFIB and small business owners have been advocating against this new paperwork mandate since it surfaced three years ago,” the group said in a statement after the law passed. “Even with the improvements NFIB was able to secure on behalf of small businesses, NFIB strongly opposes the legislation that was ultimately passed. We will work to repeal the mandate.”

A year after that watered-down legislation passed, Senate Democrats lauded news that regulators were beginning to implement the law with a detailed new rule. But regulators implementing the law now face renewed opposition.

Last year, as the rule was being developed, the Alternative Investment Management Association (AIMA) reported lobbying regulators on the Corporate Transparency Act. The political power of that group is illustrated by its self-description: AIMA says it is “the alternative investment fund industry organization that represents the interests of the whole industry — including hedge fund managers, fund of hedge fund managers, private credit managers, prime brokers, legal and accounting firms, investors, fund administrators and independent fund directors.”

AIMA recently told its members that it has been pressing regulators “to widen the scope of exempt reporting entities, which currently does not include certain private funds and commodity pools.”

In a letter to regulators, the group complained that under the proposed rule, “companies could be required to provide information with respect to a large number of beneficial owners” — and then demanded regulators limit the number of corporate owners that must be disclosed.

The American Investment Council similarly demanded exemptions for pooled investment vehicles in its own separate letter.

Meanwhile, the Private Investor Coalition requested a new exemption for so-called family offices — which are large pools of capital invested solely for the benefit of a single family. Powerful law firms representing wealthy clients chimed in with support for that exemption.

The National Association of Manufacturers is also now demanding new exemptions for part-owners of corporate subsidiaries.

But even if the Corporate Transparency Act is robustly implemented, in spite of this opposition, carveouts for private investment will continue to undermine the U.S. government’s anti-money laundering authority.

“As doors close on other financial secrecy vehicles — namely, anonymous U.S. shell companies, which are now subject to reporting under the Corporate Transparency Act — criminals will likely increase demand for opaque private investment funds,” according to the December report by global finance watchdogs. “And that demand will increasingly target U.S. markets, as other countries toughen [anti-money laundering] controls on investment advisers and investment companies operating within their borders.”


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