By Lakshmi Kumar
Over the last decades, the private investment fund sector has grown into a multi trillion-dollar industry. Private investment funds are vulnerable to money laundering because they contain a variety of structural risk factors that help camouflage illicit behavior.
A 2020 leaked bulletin from the Federal Bureau of Investigation (FBI) found that criminals were using “private placement funds including investments offered by private equity firms and hedge funds, to circumvent the anti-money laundering (AML) programs of other financial institutions and launder money.”
The new Global Financial Integrity (GFI) report Private Investment Funds in Latin America: Money Laundering & Corruption Risks examines the money laundering risk factors associated with these private investment funds in Latin America.
It analyzes the ring of actors and facilitators involved, the methods of contact used by perpetrators and the channels utilized to move illicit money. The report provides a series of case studies and analyzes AML regulation of private investment funds in four countries; Brazil, Mexico, Chile and Argentina.
“Despite the scale of wealth under management, ‘family offices’ have little to no regulatory oversight in most parts of the world,” noted Tom Cardamone, President and CEO at GFI. “This is especially concerning given the close nexus between wealth and corruption in many parts of the world. The unregulated nature of these funds makes them a particularly useful vehicle to mask proceeds of corruption or money laundering.”
Additionally, Private Investment Funds in Latin America uses a series of case studies to highlight how money laundering, corruption and organized crime risks exist in private investment funds in Latin America.
The risk factors include a customer base often composed of wealthy individuals, including politically-exposed persons; a close relationship between fund managers and their clients (i.e. investors); the use of shell companies and trusts to manage investments; outsourcing operations and risk management; weak transparency around source of wealth and source of funds; and investment structures which may include multiple accounts in different jurisdictions, including secrecy and tax havens, with funds moving through a concentration account.
GFI in this report offers the following key recommendations:
Global Financial Integrity is a Washington, D.C.-based think tank, producing high-caliber analyses of illicit financial flows, advising developing country governments on effective policy solutions and promoting pragmatic transparency measures in the financial system to promote global development and security.