Primer On Private Equity Funds And Money Laundering

A 2009 paper from Oracle Financial Services explains how private equity firms fit into the money-laundering cycle. 

Read entire article here. . .

Excerpt

The following example illustrates how a hedge fund can be part of a larger money-laundering scheme.

A cocaine distributor has $4 million in cash he needs to launder. He has one hundred different checking accounts at various banks opened under false names. He and his employees deposit the $4 million into the accounts over the course of a couple weeks. Because all the deposits are about $5,000 and are spread out over time over various branches, no CTRs are filed, and no suspicions raised. The money has been successfully placed into the financial system.

The money is then consolidated from the one hundred accounts into five central accounts using a combination of checks, journals, and wire transfers. From the five accounts, the money is further consolidated into an offshore account in the Cayman Islands. It is then wired to another account in Jersey and further wired to an account in the Philippines. Finally, the $4 million is used as an opening deposit at a new hedge fund. The money is channeled through an intermediary and supposedly comes from a wealthy Asian business executive who wants a higher rate of return than he believes he can get with traditional investments. The hedge fund is eager to recruit new investors and does not want to turn any money away. They take the “Asian business executive” story at face value and do not dig too deep to verify that the business really exists. The layering step is complete; the money has been distanced from its criminal origins.

The launderer leaves the money in the hedge fund, and after two years it has grown to $7 million. At this point the launderer withdraws $1 million and retires to live in style. If anyone questions the origin of his funds, he has paperwork to show that he’s living off the large returns from a hedge fund. The layering and the passing of time are sufficient to cloud the origin of the original investment. The integration step is complete. The drug distributor is enjoying his illegal gains and has a plausible explanation for its origin.

Hedge funds are very susceptible to money laundering because they combine all the following traits in a single financial institution:

• Secrecy. Anonymity of investors, intermediaries hide identities, pooling of funds, funds of funds.
• Light regulation. Offshore countries with insufficient laws, exemption from registration.
• Rapid proliferation. Many new funds being started, lower minimum investments, increased use by nontraditional investors.

These three traits can combine to allow launderers to move large amounts of money without drawing too much attention.

 

Oracle Money Laundering Primer