Banking Payments Security

The AML conundrum solved?

The AML conundrum solved? Main image: Radachynskyi Serhii, Shutterstock.com
Written by Chris Skinner

Blockchain could be the transformative technology that solves the AML (anti-money-laundering) conundrum, says Chris Skinner.

I outlined last week the fact that 98% of money laundering goes unchecked, allowing $1.6tn a year to be used for terrorist funding, drug dealers, sex traffickers and possibly worse. This was prompted by a conversation about AML (anti-money-laundering) with the CEO and co-founder of Coinfirm, Pawel Kuskowski.

So what’s the solution? You may already have guessed, but if you haven’t, surprise, surprise … it’s blockchain. Yeah, it’s blockchain. There are a range of startups focused on solving AML issues using blockchain technologies, including @SkryTech, @Elliptic, @Coinfirm_io, @Scorechain, @IdentityMind and more. There’s also movement in the industry towards this solution.

The Wall Street Journal blogs about a proposal by Jude Scott, CEO of Cayman Finance – an organisation representing the sizeable financial sector in the tax haven of the Cayman Island – to create a consortium of key international bodies to use a shared ledger for AML. That consortium would include the Group of 20, financial centres such as the Caymans, the Financial Action Task Force, the International Monetary Fund, the World Bank and the Financial Stability Board. As the WSJ blog states:

Mr Scott points to widely varying interpretations of the international standards set by the FATF. Individual countries make their own rules based on those standards, but they diverge enormously. For example, Spain has by far the largest number of politically exposed persons – those singled out for higher risk controls by banks–because it uses an expansive definition of local officials. Financial institutions then apply their own interpretations of the rules in their compliance, which can also vary from peers.

In Mr Scott’s long-term vision, financial institutions would follow a global standard enshrined in the common ledger, while anyone transacting with an institution would be “certified and approved” according to that standard.

Ongoing transaction monitoring

How would the blockchain impact money laundering, and why? Well, here’s a key summary of the reasons why:

  • All transactions performed on a permissioned (private) blockchain could be distributed among banks and other financial institutions, and would create a secure, accessible ledger of all transactions.
  • All transactions could then be processed instantly across unlimited amounts on a permissioned blockchain, that would increase the efficiency and effectiveness of processing transactions far more easily, and in real-time, than using Swift.
  • All transactions would be registered on the blockchain with a timestamp, information about the recipient, the sender, the costs and the amounts involved.
  • The data registered on the blockchain is immutable, and can never be changed, making it fully auditable.
  • Privacy is protected because access to blockchain information is limited in terms of access, and only available to those permissioned to access that particular record.
  • Suspicious Activity Reports (SARs) and related sanctions monitoring could be automated, removing the overhead and obligation of the banks and other financial institutions to do this onerous activity.
  • Estimates believe that 60% or more of the costs of AML compliance could be removed through this process as a result.

In summary, using blockchain distributed ledger technology to create a shared database for transactions would limit the involvement of the banks in the ongoing transaction monitoring for AML, and avoiding sanction breaches through automated SAR reporting.

Add to this the use of blockchain for digital identities and Know Your Client (KYC), and you can see why this is potentially a really transformative technology. Going back to my friend Pawel, the AML and compliance expert, I asked him how transformative? He estimated that the 2% of money laundering traced today would increase to 90% or higher. Now there’s a good reason for investing in this technology … unless the banks and governments don’t care.

READ NEXT: What will happen to blockchain in 2017?

– This article is reproduced with kind permission. Some minor changes have been made to reflect BankNXT style considerations. Read more here.

About the author

Chris Skinner

Chris Skinner is an independent commentator on the financial markets through the Finanser, and chair of the European networking forum the Financial Services Club, which he founded in 2004. He is an author of numerous books covering everything from European regulations in banking through to the credit crisis, to the future of banking.

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