American markets have “arguably” become the “the most popular place for criminals” to hide their money, a top anti-terrorism official in the Biden Administration has acknowledged.

“America acknowledges that it has its own corruption problem,” Elizabeth Rosenberg told the Union of Arab Banks February 3. “Our financial system provides too many shadows in which they can hide, in large part because of how our states allow people to establish shell companies. They can do it anonymously, without disclosing the ‘beneficial owners.’”

Rosenberg is the Assistant Secretary of Terrorist Financing and Financial Crimes at the Treasury Department. Her comments come barely three months after her boss, Treasury Secretary Janet Yellen, acknowledged that the US was a haven for money launderers and other bad guys (affiliate publication Regulatory Compliance Watch, January 14, 2022).

‘New era’

“We’re changing that now,” Rosenberg says. “This is a new era for financial compliance.”

Indeed, the Biden Administration is the first in American history to declare financial corruption a threat to national security. FinCEN has revived or posted a handful of notices that seek to expand the Bank Secrecy Act’s anti-money laundering and know-your-customer rules beyond banks, including private funds. The SEC has already proposed, and is still weighing, rulemaking that would impose “enhanced disclosures” on private fund advisers.

Whatever shape new rules take, Washington’s bureaucracy is aligning itself to pursue corruption, says Mark Mendelsohn, a former deputy chief in the Department of Justice’s antifraud section who now leads Paul, Weiss’s anti-corruption practice group. Private fund advisers are wise to take note, he says.

“What happens is, these various agencies all want to grow in terms of mandate and funding and head-count,” Mendelsohn tells RCW. “These agencies now have the opportunity because the White House is driving this process and agencies can say, ‘This is what we need, this is what we can accomplish, but we need support in this way.’”

Quality and quantity


On February 3, FinCEN extended comment deadlines on “gatekeepers” in the real estate industry to February 21. In any case, funds are likely to find themselves in regulatory crosshairs as a sheer function of bureaucratic population, Mendelsohn says. Congress has increased the budgets of both the SEC and FinCEN – in fact, FinCEN’s staff has nearly doubled over the past couple of years. All that weight is likely to come down on fund advisers who can bear it least, Mendelsohn says.

“A lot of smaller and mid-market funds have no idea what’s about to happen—and even when it happens, they still may not have any idea,” he says.

It’s not just the quantity of new regulators, Mendelsohn says. It’s also the quality. Both the SEC and FinCEN have filled their top enforcement roles with veteran prosecutors who have deep experience in complex white-collar litigation:

  • SEC Enforcement Director Gurbir Grewal is New Jersey’s former attorney general and once headed up the economic crimes task force for the US Attorney’s Office in Jersey.
  • Grewal’s deputy Sanjay Wadhwa was senior associate director of enforcement at the Commission’s New York office.
  • Treasury’s General Counsel Neil MacBride came from private practice, but spent years in the Eastern District of Virginia.
  • FinCEN’s top cryptocurrency expert is Michelle Korver, a decorated veteran from the Department of Justice.

History won’t wait

Mendolsohn is one of countless experts who believe some kind of AML or due diligence rules are coming to the private funds industry. Regardless, he says it’s worth it for fund advisers to go back to “Compliance 101” and get ahead of their due diligence problems before history overtakes them.

“Suppose Russia invades Ukraine,” he says, and the Biden Administration slaps sanctions on oligarchs. “What are you going to do if all of the sudden you’ve got an investor in your funds that you can’t do business with? There are all kinds of compliance issues. My sense is that many of the largely unregulated funds may be unprepared to deal with this.”