Private investment funds and money laundering

By Tom Debets and Lisette de Zeeuw

Last year, through a hack of the US investigation services (blueleaks), among other things a document about money laundering through hedge funds and private equity firms was disclosed to the public. In this document the FBI cautioned that the existing AML-program in the US is insufficient to detect money laundering by means of private investment funds. An AML-program is not compulsory, namely, if an investment funds only provides its services to institutional investors. In view of this exception, the FBI considers it likely that US investment funds can be used for money laundering purposes. At least one case follows from the FBI-memo which shows that more than $ 400 million in criminal profits, derived from fraud with crypto-currency investments (ponzi-fraud), was laundered by various small investment funds (including hedge and private equity funds). The criminal profits were concealed as investments from rich European families, and were placed in the funds. The criminal profits were obscured with the help of various transactions between different funds and banks. The outgoing transactions were shown as investments made by the funds. In reality, however, they benefited those who had thought up the fraud and/or companies affiliated with them, by which the criminal profits were integrated.

The EU also has a market for investment funds. Furthermore, cases of fraud with crypto-currency investments are also known in Europe. A European investment fund qualifies as an institute for collective investments in securities (UCITS)[1] or an alternative investment institution (AIF)[2]. Those investment funds that do not qualify as UCITS qualify as Alternative Investment Funds (AIF). The AIF is based on the European AIFM-directive[3] which was adopted by the European Parliament on June 8, 2011. The AIFM-directive is a consequence of the financial crisis (2008), which provided insight into the fact that strategies of investment institutions entail large risks for investors, other market participants and markets. The directive provides a legal framework to monitor and supervise these risks. The AIF is of course free to choose where investments are made, including financial products, participations in enterprises, real estate and crypto-currencies. In this way hedge funds and private equity funds can also qualify as AIFs in Europe.

In the Netherlands, the legislative and supervisory framework has the task of preventing the misuse of investment institutions for money laundering purposes. This, at any rate, if legislation and regulations are actually observed, and supervision, enforcement and investigations are carried out effectively. However, recent investigations have shown that there may be a divergence between the intentions of the AML-policy and the results achieved.[4] In the Netherlands, some managers of an AIF (depending on the amount of the assets managed) fall under a light regime (registration regime), as a result of which there is reduced supervision of light AIF (managers). This probably means that there is a greater risk of money laundering. The Dutch supervisory authority AFM recently said that it would see to it that investment institutions and investment enterprises[5] bring transaction monitoring and reporting conduct in order.

Furthermore, the international character of the investment institutions is worthy of mention. Not only do foreign investors have access to Dutch investment institutions, but these same investment institutions can also make foreign investments. The fact that these foreign investments can also be used for money laundering is shown by the following example: In 2017, a Dutch investment institution invested in the gambling and betting company SKS365, which was active in Italy under the name Planetwin365.  The gambling and betting company appeared to be involved in an international money laundering network operating in the period 2015-2017 and was suspected of being run by the Italian mafia group ‘Ndrangheta.[6] A successive investment of the Dutch investment institution in another gambling and betting company linked to the mafia resulted in the Italian authorities suspecting the owner and staff of the Dutch investment institution of being involved in money laundering.[7]

In view of the fact that the Dutch 2019 National Money Laundering Assessment refers to money laundering via investment institutions/enterprises as ‘a money laundering risk with a future character’, it is in any case a good idea to further examine this together and to analyze whether and in which way money investment institutions and/or enterprises are able to launder money. In the Netherlands, the Public Prosecution Service, the supervisory authority AFM and the AMLC cooperate to obtain more insight into the light-managers population, and based on casuistry an initiative has been taken to indicate money laundering risks. It is moreover desirable to obtain a broader perspective of the phenomenon of money laundering, among other things based on practical examples. For this reason, in March 2021 a project was started under the flag of the Financial Expertise Center (FEC), which pertains to a broader analysis of money laundering via investment institutions and/or enterprises in the Netherlands.

In view of the cross-border character of the investment institutions, money laundering via investment institutions and/or enterprises is a subject which is worthy of the attention of international investigation services. Consequently, we are keen to establish contacts with a view to strengthening and sharing information about this subject. If you have any information on interesting cases or examples, please contact us at aml.centre_postbus@belastingdienst.nl

[1] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32009L0065

[2] https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=celex%3A32011L0061

[3] Alternative Investment Funds Managers Directive 2011/61/EU (AIFMD)

[4] Anti-money laundering: the world’s least effective policy experiment? Together, we can fix it. R.F. Pol 2020 – Policy design and practice 2020, vol. 3, no. 1, 73-94.

[5] An investment institution is an entity that provides an investment service or performs an investment activity within the meaning of the Dutch Financial Supervision Act. These are primarily the same parties that were covered by the term securities institutions in the Dutch Securities Transaction Act (Supervision) Act 1995.

[6] https://www.occrp.org/en/investigations/gambling-on-crime

[7] https://www.occrp.org/en/daily/10779-boekhoorn-and-partners-accused-of-money-laundering