The booming private investment industry has continued to grow its way into increased regulatory attention over the past decade, with major U.S. financial regulators taking steps to close gaps that bad actors have exploited. Shaquala Swinton, an associate director at Moody’s, talks about the crossroads advisers have come to: adapt early or play catch-up.
The private investment industry has experienced tremendous growth over the past decade. In the U.S. alone, regulatory assets under management have more than doubled since 2013, reaching $128 trillion in 2023. This trend is expected to continue with assets under management projected to reach $145 trillion by 2025.
This rapid expansion of private equity, real estate, hedge funds and venture capital has put the industry in the spotlight of regulators who are concerned about potential risks for investors and the financial system as a whole, including illicit finance risks.
The industry’s use of complex ownership structures, inconsistent anti-money laundering (AML) and Know Your customer (KYC) practices across the industry and its role in serving high-net-worth individuals are areas of particular scrutiny. For industry leaders, keeping up with regulatory changes shouldn’t just be about checking compliance boxes; this is an opportunity to strengthen their risk management practices, safeguard their investors and gain a competitive edge.
Industry practices have created significant vulnerabilities exploited by bad actors. A primary concern is the ongoing challenge of identifying and verifying beneficial ownership, especially in complex investment structures involving shell companies. As FinCEN has repeatedly emphasized, the opacity of ownership is a critical factor contributing to money laundering and terrorist financing. Furthermore, the global nature of financial markets exacerbates these risks, as cross-border transactions can be easily obscured. The reliance on self-certified AML information, as opposed to independent verification, has been identified by regulators as a significant loophole that undermines the integrity of the AML framework.
It’s within this landscape that FinCEN and the SEC introduced new proposals shaking up how investment advisers operate. These new rules aren’t just more red tape; they represent a major shift toward more robust financial oversight of the sector, aimed at closing illicit finance gaps that bad actors have exploited.
FinCEN’s proposal would include investment advisers under the Bank Secrecy Act (BSA), imposing more stringent AML and counter-financing of terrorism (CFT) program requirements. This change would begin to address loopholes that bad actors could have previously exploited and ensure investment advisers adhere to rigorous and more consistent standards.
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Read moreDetailsThis future regulatory landscape is likely to include increased transparency regarding fees, investment strategies and portfolio holdings; measures to mitigate potential systemic risks associated with excessive leverage in private investment vehicles; expanded reporting requirements regarding suspicious activity and investor demographics; and the implementation of robust management frameworks to identify and address money laundering vulnerabilities.
Private investment industry leaders are standing at a crossroads: Address these concerns now or play catch-up when further regulations come down the pipeline. Striking the right balance between fostering growth and innovation while adhering to robust and evolving compliance frameworks is crucial. By proactively addressing money-laundering risks, promoting transparency and collaborating with regulators, the industry can ensure a more secure and sustainable future for investors, its own long-term prosperity and the financial system as a whole.
This journey to compliance isn’t without its bumps. Data management stands out as a critical area that can either smooth the way or throw up roadblocks. Many firms struggle with data silos, inaccuracies and integration issues, which can lead to delayed reporting, regulatory scrutiny and missed opportunities.
The onus also falls to regulators to develop clear and consistent regulations, foster international cooperation and provide the industry with guidance on effective AML/KYC practices. By working together, all stakeholders can create a more secure and transparent environment for the private investment industry to thrive. This, in turn, will protect investors, safeguard the financial system and contribute to global economic stability.
Shaquala Swinton is an associate director of compliance and third-party risk at Moody’s. She previously served in multiple KYC-related roles at J.P. Morgan, State Street, Barclays and Natixis. 
