Data collected by Transparency International looks at bribery, the diversion of public funds, officials using their office for private gain, conflicts of interest and legal protections for those denouncing corruption. Credit: UN News/Daniel Dickinson

By Lakshmi Kumar
WASHINGTON DC, Jan 3 2023 (IPS)

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:

• The Brazilian government, which has the largest assets under management in the region, should be the first to adopt AML regulations that will address future risks when they arise. As well as regulators pay closer attention to family office architecture and undertake a risk assessment of the sector
• Latin American authorities should look to regulate intermediaries and enabler professions for AML/CFT due diligence as they are critical in allowing illicit money to move through the financial system within the region but also to be invested in private investment funds overseas.
• The United States, Switzerland, the Cayman Islands, Malta, and other countries within the EU should conduct a robust money laundering risk assessment of their private investment fund sectors.
• Latin American law enforcement authorities involved in corruption, drug trafficking, and organized crime investigations should be provided training on the complexities of private investment funds and the manner in which they can be used to hide illicit assets.

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.

IPS UN Bureau

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Excerpt:

The writer is the Policy Director at Global Financial Integrity (GFI), a Washington, D.C.-based think tank specializing in research, advocacy, and advisory services.