Remember To Do Your Laundry: The International Consequences of U.S.’s Noncompliance with FATF Recommendations

The United States prides itself on being a prominent leader in the global financial system, yet the gaps in their financial framework continue to be exploited by illicit actors. Through the use of shell companies and lack of beneficial ownership reporting, profits from illegal activities are laundered to appear legitimate. The lack of reporting transparency places the U.S. at risk of international scrutiny, indirect economic repercussions, and Grey listing by the global task force, Financial Action Task Force (FATF).

The U.S. Secretary Treasury, Janet Yellen stated that “the best place to hide and launder money ill-gotten gains is actually the United States…because we allow people to establish shell companies.” Shell companies are legal entities with no economic activity, primarily used to anonymously transfer and store illegal funds. Beneficial ownership refers to individual(s) who own and profit from shell companies. In the U.S., anti-money laundering regulation is delegated to the states with a lack of coherent legal standard nationwide. Thus, a fundamental gap remains in states reporting on legal entities, with most states not requiring the collection, or verification of beneficial ownership information.

Around two million corporations and LLCs are formed in states with no reporting requirements. This prompted Congress to pass The Corporate Transparency Act (CTA), effective January 1, 2024, requiring beneficial ownership reporting of all companies registered to do U.S. business. However, in March 2025, The U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced an interim final rule limiting “reporting companies” to only include foreign legal entities and not domestic ones formed under state jurisdiction. Foreign reporting entities are also not required to release information about U.S. beneficial owners. Furthermore, the CTA lists 23 filing exemptions which foreign legal entities may qualify for.

These loopholes will likely be viewed unfavorably during FATF’s upcoming decennial evaluation of the U.S.’s financial system. In FATF’s 2006 and 2016 U.S. reports, they have continuously found them to be noncompliant with Recommendation 24 (#33 in 2006 Report) which assesses “transparency and beneficial ownership of legal persons.” FATF’s 2016 comments suggest that this noncompliance stems from the lack of a state procedure in ensuring the accuracy of basic information regarding beneficial ownership.15 Given this precedent and the CTA’s reporting loopholes, the U.S. is risking being placed on FATF’s Grey list.

The Grey list formally indicates that a jurisdiction is “under increased monitoring,” and is actively working to correct their financial system’s deficiencies. It also signals that a nation is under high regulatory scrutiny, resulting in global reputational damages and indirect financial harm. This includes reduced foreign investment, trade disruptions, declining banking confidence, and higher borrowing costs. An IMF study found that a nation’s induction to the Grey list is associated with a decline in capital inflows equivalent to 7.6% of its gross domestic product. As a global leader, the U.S. placement on the Grey list will publicly mark their noncompliance with minimum standards, undermining their credibility in the international financial system.

Article Written by Dzana Borovic

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