Lessons from South Africa’s FATF greylist efforts as the US rolls back AML law

By Bradley Elliot 

The United States Treasury Department has announced the immediate suspension of the  Corporate Transparency Act, which took effect on January 1, 2024, under the Joe Biden administration. This key piece of Anti-Money Laundering (AML) legislation required business owners to disclose corporate reports with information about Ultimate Beneficial Ownership (UBO).

The Trump administration has positioned this move as a step to reduce red tape for American taxpayers and businesses. It may be rooted in the misplaced perception that smaller entities are less likely to be used to move illicit funds. Many observers will be concerned that it is a setback for efforts to increase transparency and combat illicit financial flows.

Less UBO transparency will make it easier for corporate structures, networks, and advantageous stakeholders involved in moving funds to evade scrutiny from relevant authorities (in the US case, FinCEN). This could help hide the identities of criminals involved in organised crime, terrorist financing, human trafficking and more. Furthermore, it could hamper global cooperation in standardising UBO transparency and discouraging shell companies.

The development highlights how regulation can cause a backlash in the market, even though the US government has led AML efforts over the years. The Bank Secrecy Act (BSA), introduced in 1970, was one of the world’s first actions to address the role of US banks in detecting and preventing launderers from using foreign bank accounts. The Patriot Act, in the wake of the 9/11 terror attacks, stressed the need for robust AML reporting processes to verify customer or business relationships.

The CTA was first passed by the US Congress in 2021 under the National Defense Authorization Act (NDAA), alongside the AML Act of 2020 (AMLA) and the Combating Russian Money Laundering Act (CRMLA). The NDAA’s enactment drew criticism for its clauses on diversity, equity, and inclusion (DEI) efforts. Mixing AML compliance with other issues no doubt muddied the waters.

Given the US’s central role in the global financial system, gaps in its AML procedures could have geopolitical implications—these include increasing criminality in the US and countries that it does business with and negatively influencing attitudes toward concerted international efforts to fight financial crime. This could stymie efforts to produce more globally uniform AML structures to help stop financial criminals.

Consistency is key to fighting global money laundering. South Africa offers an example of how a positive change in compliance culture can support the global fight against financial crime. South Africa’s efforts to get removed from the Financial Action Task Force (FATF) greylist have helped to improve its economic reputation and close loopholes criminals were exploiting.

It has also, so far, forced better cooperative efforts between government bodies, financial institutions, regulators and prosecution authorities. Indeed, a better future for fortified AML compliance lies with transparent UBO registers, customer verification, and shared knowledge around fincrime risk identification methods. This shows why regulators worldwide should be careful when balancing ease of business against the need to stop money laundering in its tracks.

Modern RegTech solutions can help regulated companies ease the compliance burden while ensuring transparency. Advanced AML solutions enable financial institutions to identify high-risk behaviours and entities from the onboarding stage onwards faster, more effectively, and more scalable. As such, it is possible to comply with rigorous legislation without undue effort or inconvenience to customers.

BUSINESS REPORT