Treasury’s AML rollback could increase fraud risks for banks

In March, the U.S. Treasury Department announced it would no longer enforce the Corporate Transparency Act, the anti-money-laundering law that requires millions of businesses to disclose the identity of their real beneficial owners. The Treasury Department cited an undue burden on low-risk businesses, while other businesses had raised alarms about the CTA’s potential impact on privacy. As entities become larger, the reporting and regulatory burden can become more complex.

The CTA was a direct response to a fear that the U.S. was (or could be) an attractive place for money laundering or shell companies. But with the announcement, there are currently more questions than answers.

There are very real impacts that could be felt right away. Regulatory transparency is critical. With reduced oversight, it’s up to a trusted entity to respond, meaning someone needs to step up to the plate. Otherwise, fraud could flourish, which isn’t something most businesses want to hear as we’re seeing skyrocketing levels of identity fraud and cybercrime.

The Biden-administration era Corporate Transparency Act went into effect on Jan. 1, 2024, and required certain businesses to submit beneficial ownership information reports to the Financial Crimes Enforcement Network. Passed by Congress as part of the Anti-Money Laundering Act of 2020, the CTA was intended to strengthen existing AML regulations and increase transparency of the structures and ownership of businesses.

The CTA required all entities that do business in the U.S., whether they’re formed in the U.S. or elsewhere, to file a report that alerts the Financial Crimes Enforcement Network who the owners of the entity are. And amidst a potentially confusing landscape of LLCs, partnerships and more, identifying actual ownership could be tricky. The requested information included a name, identifying information that includes a birth date, home address and form of ID for the people who are the beneficial owners of the entity.

Anti-AML regulations, and CTA specifically, play a role in curbing financial crimes by preventing and detecting money laundering. Money laundering is also intimately tied to identity fraud. If accounts are taken over by bad actors, the use of those accounts has broader money-laundering implications.

Complying with AML regulations is also tied to robust customer due diligence and enhanced due diligence. Identity fraud is a serious threat to these processes: If fake or manipulated identities bypass these processes, there’s a greater risk of onboarding high-risk individuals and facilitating money laundering.

Bad actors are relentless in finding ways to circumvent any regulation, security protocol or identity verification platform. So, it’s worth asking just how much the rollback might impact already soaring rates of identity fraud across financial services and beyond.

The decision to reduce transparency around beneficial ownership exposes financial institutions to increased fraud, money laundering and identity theft risks. Without beneficial ownership disclosures, shell companies can more easily be used to hide illicit financial activity, including (more) money laundering, tax evasion and corruption.

There’s risk for global AML efforts too. Globally, numerous governments, regulatory bodies and financial institutions are trying to work together to deter criminal activities by protecting legitimate financial systems against being infiltrated by illicit funds. The U.S. could fall behind international AML standards. This lag could lead to increased scrutiny from global watchdogs like the Financial Action Task Force, potentially leading to reputational damage for U.S. businesses, in addition to the overall greater fraud risk.

Finally, reduced corporate transparency and accountability also poses fraud risks. Limited oversight makes it harder for law enforcement to trace illicit financial activities, potentially increasing fraudulent business practices.

Part of stopping fraud is truly knowing who you’re doing business with, and bad actors will take any opportunity to obscure their identities and activities. Uncertainty over AML enforcement and restrictions can make it more difficult for entities both to stay compliant and adjust to rising risks.

While the risk of fraud is undeniably higher, there are certainly trade-offs that led to this decision. A common complaint regarding the CTA comes from smaller businesses, who were scrambling to meet an already extended deadline. What’s more, bureaucratic red tape can hit small businesses harder than larger businesses. These entities, including startups, can now avoid the administrative and financial costs that are associated with this regulatory reporting. And privacy-concerned individuals and businesses may breathe a sigh of relief at not needing to share additional personal information with the federal government. In fact, the CTA had already been frequently challenged, with some civil liberties groups fearing governmental overreach.

There’s also a potential boost to business growth and foreign investment. By loosening disclosure requirements, the U.S. remains an attractive destination for businesses and foreign investors who prioritize privacy.

While the Treasury isn’t enforcing CTA now, Congress would need to act to repeal or modify the existing law. How or when that happens is to be determined. In the meantime, the CTA reversal prioritizes business freedom and privacy but does so at the cost of potential financial crime vulnerabilities and weakened AML enforcement. In the current climate of increased identity fraud and cybercrime, it’s crucial for a trusted entity to take ownership of industry oversight and watchdog services, especially in high-risk financial areas where crime, fraud and malicious activity can and has notoriously occurred.

Without government participation and accountable responsibility, this type of exposure paints the U.S. as an attractive environment for criminals. However, this also has the potential to motivate more private sector innovation and involvement in providing solutions that can thwart and defend against criminal activity within the AML space.