By Peter Whoriskey
Washington Post Staff Writer
Tuesday, November 4, 2008

The Bush administration's decision to drop proposed money-laundering rules for hedge funds is "inexplicable, ill-timed and unwise," Sen. Carl M. Levin (D-Mich.) said yesterday.

Hedge funds, private investment pools whose investors are often wealthy individuals, have drawn increased scrutiny during the financial crisis. But even before the market troubles, some legislators worried that the largely unregulated funds could serve as a vehicle for money laundering, perhaps for tax evaders or terrorists.

"Hedge funds are unregulated financial companies that can handle millions of dollars in offshore money without any legal obligation to check who is behind the funds or report suspicious activities," Levin said in a statement. "But instead of plugging the hedge fund regulatory gap by issuing a final rule, the Administration went the opposite way, withdrew its anti-money laundering proposal, and offered nothing in its place."

Seven years ago, the Patriot Act required every financial institution to establish a program to combat money laundering. A year later the administration advertised a proposed rule to implement the law. The rule was never finalized, however, and last week the Treasury withdrew it, saying the proposal was "dated."

Among the reasons given by past and present administration officials for the inaction were that there were no government examiners in place who could readily enforce the measures because the hedge fund industry is largely unregulated. Moreover, some regulators said the likelihood that a terrorist group would use a hedge fund is relatively small because hedge funds typically require large upfront investments and place limits on when investors can withdraw their money.

But some in Congress have been uneasy with the delay in implementing anti-money-laundering rules for hedge funds.

A bill sponsored by Levin last year would have required Treasury to finalize its rule. It was co-sponsored by Sens. Norm Coleman (R-Minn.), Barack Obama (D-Ill.), Ken Salazar (D-Colo.) and Sheldon Whitehouse (D-R.I.).

"The absence of anti-money-laundering controls on hedge funds is another regulatory gap that the Congress will have to tackle after the election," Levin said yesterday.