Two years ago, a leaked FBI intelligence bulletin warned that a gap in U.S. rules aimed at fighting dirty money likely allows so-called “threat actors” to place funds with private investment firms. The FBI gave as an example of an unnamed New York-based private equity company that took in more than $100 million from a Russian business with alleged ties to organized crime.

This loophole has worried authorities for years because while banks and most securities brokers are required by law to identify the true owners behind investments and report any red flags, private equity firms, venture capital funds and hedge funds are not.

The result is a puzzling hole in the regulations designed to stop criminals and corrupt politicians from around the world from accessing the U.S. financial system - a situation that the private investment industry has repeatedly downplayed as it has successfully fended off reform attempts by Treasury officials and anti-corruption groups.

Now, this lack of insight into the $11 trillion U.S. private investment industry threatens to complicate the White House’s push to punish the financial elite close to President Vladimir Putin over Russia’s invasion of Ukraine.

“They’re hunting in the dark,” said Lakshmi Kumar, policy director for Global Financial Integrity, an anti-corruption think tank in Washington. “The way the rules are set up, there’s a black hole of information.”

President Joe Biden in his State of the Union address earlier this month issued a warning to oligarchs that his administration was “coming for your ill-begotten gains.” The Department of Justice announced the next day it had created a “Task Force KleptoCapture” to pursue sanctions against what it called “corrupt Russian oligarchs.”

But U.S. authorities lack a clear road map of the assets invested in private equity funds, venture capital funds or hedge funds.

Under current law, private equity firms and hedge firms do not need to verify their investors’ identities or how they made their money - requirements that U.S. banks have followed under the anti-money laundering Bank Secrecy Act, passed in 1970, and other anti-corruption laws. The rules are known as “Know Your Customer,” a due diligence process for assessing and monitoring a customer’s risk and verifying identity.

Anti-corruption groups and Treasury officials have pushed for private investments to act more like banks in rooting out money laundering.

These private investments are increasingly important players in financial markets. Each year for the past decade, more money has been raised in private markets than in public markets, such as on stock exchanges, according to the Securities and Exchange Commission. Private markets now hold about half as many assets as all U.S. commercial banks, which stand at about $22.5 trillion in deposits.

But little is known about where private funds get their money.

While megayachts, private jets and palatial mansions are obvious signs of potential oligarch wealth, untold fortunes can remain hidden in different private investments.

“Luxury residences - that’s what is visible. People can see that. But if you own stuff through an entity with a limited partnership in a private equity fund, no one does,” said Joshua Kirschenbaum, a former Treasury official who works on illicit finance as a senior fellow at the Alliance for Securing Democracy.

Occasionally, there are hints of the degree of potentially suspicious activity. The 2020 FBI intelligence memo - obtained by online hackers and published by the activist group Distributed Denial of Secrets - briefly described a plan by an official from a hedge fund based in New York and London to create a series of companies “to buy and sell prohibited items” from sanctioned countries.

Sen. Ron Wyden, D-Ore., who has proposed a bill to close the disclosure loophole, said in a statement he considers the massive U.S. private equity and hedge fund industry to represent “a much bigger problem” for hiding Russian oligarch assets than real estate.

The Treasury Department is concerned about the lack of anti-money laundering regulations for private investments and plans to continue pushing for change, said a senior Treasury official who requested anonymity to discuss agency deliberations. The goal is to have these funds following the lead of banks and setting up programs to verify client identities and the source of funds, as well as file “suspicious activity reports” if they believed there were problems.

The private equity industry leaders argued in interviews and comment letters that these kinds of transparency requirements are unnecessary because their sector is at low risk for money laundering because funds are often tied up for two to 10 years and oftentimes the client’s investment comes through a bank, which is already required to take steps to weed out dirty money.

Some private equity firms also already conduct their own due diligence, despite not being required to by the law, said Michael Gershberg, an attorney in Washington with Fried Frank, where he advises clients on anti-boycott and anti-money laundering rules.

“I’m not sure there would be a huge change if they were subject to (the anti-money laundering rules),” he said.

But anti-corruption advocacy groups said the gap in oversight is one reason the United States remains a popular place to secretively stash cash.

“If you’re a person who faces U.S. sanctions, then the best place to hide your assets is in the U.S.,” Kumar said, “and that’s a problem.”

It can be impossible to know if an investment belongs to a person facing sanctions because of the anonymity allowed under current law.

For example, a U.S. private equity firm can accept money from a limited liability company based overseas without knowing who owns the business or how they got their funding, according to anti-corruption experts.

In contrast, banks are required to verify their clients’ identities when they open an account. Banks also need to report to Treasury’s Financial Crimes Enforcement Network if they suspect money laundering or fraud.

Private equity firms in the European Union and the United Kingdom also follow similar guidelines.

U.S. private investments were supposed to be covered by the new “dirty money” laws that followed the Sept. 11, 2001, terrorist attacks and the sudden interest in rooting out terror financing. But Treasury officials gave a range of businesses, including investment firms and real estate, temporary exemptions so regulators could focus on other industries.

Those temporary exemptions are now two decades old.

Treasury has repeatedly proposed ending the carve-outs and requiring private equity firms and hedge funds to conduct due diligence on potential investors.

The agency last tried in 2015, where it was met with industry opposition.

The proposed regulation would have applied to most registered investment advisers who managed more than $100 million in assets.

Private equity firms and hedge funds would essentially need to start reporting like banks.

While some hedge funds appeared willing to accept new regulations, the private equity industry objected, lobbying and filing comment letters against the proposal.

One group of smaller private equity funds called the Small Business Investor Alliance argued in a comment letter that criminals were not attracted to its funds because they are “long-term, illiquid investments.”

The Association for Corporate Growth, a group that includes more than 1,000 private equity firms, said the rule “would impose significant costs upon advisers to private equity funds and other illiquid pooled investment vehicles but not prevent or deter money laundering in any meaningful way.”

And the Private Equity Growth Capital Council - a trade group that has since changed its name to the American Investment Council - wrote that their products “present negligible risks of money laundering.”

Today, the American Investment Council’s stance has not changed.

While it supports anti-money laundering regulations, “Congress and (Treasury’s Financial Crimes Enforcement Network) have consistently chosen not to impose new AML requirements on private equity because of the lower risk profile,” Emily Schillinger, a spokeswoman for the group, said in a statement.

Gary Kalman, U.S. director of the anti-corruption group Transparency International, is skeptical of these industry claims.

“It seems improbable to me that the U.S. private equity market is as pure as the driven snow,” Kalman said. “I think that’s the dirty little secret: We don’t know how much money is hidden away because no one has to report anything.”

The loophole for private equity looms even larger since the United States overhauled its corporate transparency laws last year.

Lawmakers passed a bill that will eventually require any company created or registered in the United States to report its owners’ identities to the Financial Crimes Enforcement Network, ending the anonymity once promised by shell companies - shields often wielded by wealthy investors or others trying to avoid exposure. While the reports are intended for law enforcement, they are not required to be made public.

Last fall, a small group of U.S. lawmakers proposed a bill to include art dealers, investment advisers and others under anti-money laundering rules. No action has been taken on their measure. In December, Treasury proposed new anti-money laundering rules for the real estate market, which would bring that sector in line with transparency requirements for other financial services. And the White House announced that same month a “strategy on countering corruption” that includes a plan to ask the Treasury Department to re-examine its 2015 proposal for anti-money laundering rules for private investments.

For now, private equity remains untouched.

As the United States and other countries impose sanctions on wealthy Russians, experts said the job is harder without transparency for a huge investment sector.

“We simply don’t know what’s out there,” said Kirschenbaum, the former Treasury official.