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Laundering Money with a Hedge Fund

Laundering Money with a Hedge Fund

Today most retail banks have become very good and I do mean very good at spotting money laundering. They have been doing it for some time and most have got the hang of spotting ‘iffy’ transactions and ‘iffy’ customers.

This is not true in the securities industry. The securities industry has often regarded money laundering as something others must address. This is referring, in a backhand manner, to retail bankers. In their mind it is unlikely that anyone would use a securities firm or a hedge fund to launder money – I mean after all none of these toney firms take cash.

We’ll give the fact that none of them take cash.   Cash is often just the lower end of money laundering. Cash is typically generated by street crimes such as drugs, prostitution, and tax evasion.

Money laundering is divided – poorly – into three parts, placement layering and integration. Cash for the most part is part of placement. Securities companies do not deal with cash so they think they are off the radar screen. This would be a big mistake. As securities firm are not looking for money laundering, that is where much of the process has been moving. Here are a few examples of how securities firms and in particular hedge funds have been used to launder money.

A Canadian Entrepreneur set up a new hedge fund almost every three months. These were small private funds, and would rise from two to seven million CD each time. The funds would raise the money, make a few investments and then – would fade away, neither bankrupt or insolvent that would just fail to renew their corporation status and fade away. The part time compliance officer found this to be odd, even more so when she noticed that many of the same investors invested in these hedge funds again and again. What was occurring was that the “manager” was actually involved in smuggling cigarettes into Canada and marijuana out of Canada. The hedge funds were used as a way for buyers to pay for their goods and suppliers to get paid for the supplies.

A hedge fund manager made an out of character investment; he bought a company for 8 million and within two weeks sold the company for 9.2 million dollars. While an admirable arbitrage, the parties to the transaction were not so admirable. The seller was a well-known mobster from Cicero, Il and the buyer a casino operator in the Dominica Republic. The company after even the most cursory of investigation turned out to be nothing more than a holding company with many “intangible assets” such as art molds. The company and its balance sheet were set up to be nothing more than window dressing to move sports betting profits to an undeclared owner of the casino from the Dominica Republic to the United States.

A woman opened up a securities account and traded in options. In 3 months her account when from $4,000 to over $100,000 and then the account was closed. She had never had an account before or since. When asked about the account she said she had an appetite for risk and after making that money chose to exit the market. She was the wife of a governor of a state. To make profits in this way – the odds are over a trillion to one. To us it looks like a bribe.

The securities industry is ripe for using as a tool for money laundering. The industry participants are unaware of how they can be used for placement, but in particular layering. Mind you these are not bad people; they just are unfamiliar on how their financial services business can be misused.

It is a telling feature that at a recent conference of hedge fund managers, most said that their administrator was taking care of AML compliance. At the same conference the administrators said that few if any of the hedge fund manager have sought any help at all in AML compliance. With the wavering decision hanging over all of the heads in the Hedge Fund business – it might be very wise for Managers, Administrators, Custodians and Directors find out and establish who is in charge of AML compliance and to oversee the operations. Failure is just an invitation to fines, gruesome personal liability and possibly jail time.

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