Regulators are increasingly turning their attention to private markets as a potential hotspot for financial crime, according to a new report from the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The joint review, published on [date], warns that the rapid growth of private equity, private credit, and other alternative assets is outpacing the compliance frameworks of many firms, leaving them vulnerable to money laundering, sanctions evasion, and other illicit activities.
Why Regulators Are Concerned
The FCA and PRA conducted a survey of more than 100 firms active in private markets, including asset managers, lenders, and advisors. They found that while most firms have basic AML controls in place, there are significant gaps in how they assess and mitigate financial crime risks specific to private transactions. For instance, many firms rely on outdated customer due diligence processes that fail to capture the complexity of private deals, where beneficial ownership can be obscured through layers of corporate structures.
One of the key triggers for the review was the surge in private credit, which has grown to over $1.5 trillion globally, according to industry data. Regulators worry that the opaque nature of these deals, combined with the speed at which they are executed, creates opportunities for criminals to launder proceeds or move funds to sanctioned entities. The report notes that in 2023 alone, the FCA fined firms a total of £45 million for AML failings, with a growing portion related to private markets.
Key Findings and Industry Response
The review highlights several specific weaknesses. First, many firms do not conduct enhanced due diligence on high-risk counterparties, such as those based in jurisdictions with weak AML regimes. Second, transaction monitoring systems are often not calibrated to detect unusual patterns in private market deals, which differ significantly from public market trades. Third, there is a lack of clarity around who is ultimately responsible for AML compliance in complex private fund structures, with roles often split between fund managers, administrators, and placement agents.
Industry bodies have responded cautiously. The Alternative Investment Management Association (AIMA) acknowledged the findings but stressed that private markets are not inherently riskier than public ones. In a statement, AIMA's head of regulation said, "The private markets industry is committed to upholding the highest standards of integrity. We will work with regulators to ensure that our members have the tools and guidance needed to address these concerns effectively."
Impact and Next Steps
The FCA and PRA have said they will conduct follow-up inspections of firms identified as having weaker controls, with the possibility of enforcement action if deficiencies are not remedied. They also plan to issue updated guidance later this year, focusing on best practices for AML in private markets. For firms, the message is clear: as private markets continue to expand, regulators expect compliance frameworks to evolve at the same pace.
In the short term, this scrutiny could lead to higher compliance costs for private market participants, as they invest in better data analytics and staff training. In the longer term, it may also prompt a consolidation of smaller firms that cannot keep up with regulatory demands. The report concludes that while private markets offer significant economic benefits, they must not become a conduit for financial crime, and regulators are determined to ensure that they do not.
