Kyle Phillips

Kyle Phillips

Associate - Business Crime and Regulatory

Joshua Page

Joshua Page

Paralegal - Business Crime and Regulatory

Global spending on anti-money laundering (AML) compliance is set to grow to more than $8 billion by 2017. It is, therefore, a costly but necessary obligation for companies, particularly as confronting the rising threat of terrorism and the increasingly sophisticated way in which it is financed is of such critical importance to the world’s governments. Distributed ledger technology (DLT) such as Blockchain is playing an increasingly prevalent role in combatting money laundering and this article will explore the commercial advantages for companies that incorporate such Fintech into their AML procedures. It will also examine the potential concerns from a client perspective and how these should be addressed before platforms such as Blockchain gain universal industry approval.

How can Blockchain benefit AML processes?

A blockchain is essentially a database that records transactions of companies/institutions. For example, all transactions made by Company A are grouped together into a ‘block’ and these are ordered chronologically to form a blockchain. This allows blockchains to be used like a ledger, which can be shared and corroborated by anyone with the appropriate permissions.Once the information contained in a Blockchain is verified it cannot be changed, only updated. It essentially provides users with a digital public record of Bitcoin transactions (the digital currency through which these transactions are conducted) that have been executed by a particular entity. It is inherently difficult for hackers to manipulate. Copies of the Blockchain are distributed across potentially thousands of participants in the database, meaning that the hackers would have to individually access and manipulate every single copy of the distributed Blockchain. The certainty this creates is hugely beneficial to regulators, banks or law enforcement agencies because they can instantaneously verify the credentials of parties involved in a transaction and identify any discrepancies in the information. Not only is this cost-effective, but it enables regulators to quickly target criminal activity.

“It essentially provides users with a digital public record of Bitcoin transactions (the digital currency through which these transactions are conducted) that have been executed by a particular entity. It is inherently difficult for hackers to manipulate”.

Once the information contained in a Blockchain is verified it cannot be changed, only updated. It essentially provides users with a digital public record of Bitcoin transactions (the digital currency through which these transactions are conducted) that have been executed by a particular entity. It is inherently difficult for hackers to manipulate. Copies of the Blockchain are distributed across potentially thousands of participants in the database, meaning that the hackers would have to individually access and manipulate every single copy of the distributed Blockchain. The certainty this creates is hugely beneficial to regulators, banks or law enforcement agencies because they can instantaneously verify the credentials of parties involved in a transaction and identify any discrepancies in the information. Not only is this cost-effective, but it enables regulators to quickly target criminal activity. Fintech’s role in preventing money laundering is also interesting from a commercial perspective. Failing to adequately maintain AML procedures can be hugely costly businesses, for example, Deutsche Bank was recently fined £163m for such non-compliance. But maintaining AML processes are also incredibly expensive for companies and the checks required are often lengthy (Know Your Customer requests can often take up to fifty days to complete to a satisfactory level). The speed and ease that Blockchain allows participants to obtain information

Fintech’s role in preventing money laundering is also interesting from a commercial perspective. Failing to adequately maintain AML procedures can be hugely costly businesses, for example, Deutsche Bank was recently fined £163m for such non-compliance. But maintaining AML processes are also incredibly expensive for companies and the checks required are often lengthy (Know Your Customer requests can often take up to fifty days to complete to a satisfactory level). The speed and ease that Blockchain allows participants to obtain information has the potential to reduce costs and delays (e.g. to transactions) and, given the wide distribution of the data, diminishes the likelihood of banks duplicating their efforts to track and verify information.

Blocks to progress?

A key obstacle for Blockchain will be persuading participants of its trustworthiness. Blockchain’s efficiency and accessibility are largely derived from its absence of a centralised regulatory entity. This will undoubtedly deter some companies, as trust is pivotal to financial transactions and a lack of understanding of the complex mathematics involved in the system may exacerbate this trepidation.Resolving concerns over privacy will also be tantamount to Blockchain’s acceptance by the industry. Despite the encryption of the data, parties may wish to restrict access to certain financial information, particularly to those whom they do not have a relationship with.

“A key obstacle for Blockchain will be persuading participants of its trustworthiness”.

Resolving concerns over privacy will also be tantamount to Blockchain’s acceptance by the industry. Despite the encryption of the data, parties may wish to restrict access to certain financial information, particularly to those whom they do not have a relationship with.However, DLT start-ups such as Corda allow the company to control who can view certain information. This is interesting from an AML perspective because it is precisely Blockchain’s wide distribution and transparency that makes it such an effective weapon in combatting money laundering. Should similarly restrictive DLT platforms rise in popularity, legislative intervention to require regulatory bodies to be partied to every transaction within their jurisdiction could be an option.

However, DLT start-ups such as Corda allow the company to control who can view certain information. This is interesting from an AML perspective because it is precisely Blockchain’s wide distribution and transparency that makes it such an effective weapon in combatting money laundering. Should similarly restrictive DLT platforms rise in popularity, legislative intervention to require regulatory bodies to be partied to every transaction within their jurisdiction could be an option.

Conclusion

It is evident that in an increasingly digital commercial landscape, the role that platforms such as Blockchain will play in facilitating AML procedures is an inevitability rather than a possibility. The efficiency and transparency with which discrepancies concerning client data can be detected should be commended. The recent alleged involvement of major UK banks such as HSBC, RBS and Barclays in a Russian scam concerning the movement of approximately £65m highlights that any Fintech developments that can help to expose other crimes of a similar nature should be endorsed. However convincing more cautious companies to engage with this technology in the knowledge that their sensitive transactional information is distributed so openly is a major challenge. Finally, whilst there are hundreds of different Blockchain networks, protocols and cryptocurrencies available, the benefits of Blockchain are partially undermined until standardisation can be achieved, as different networks will not be able to communicate with each other simultaneously. Though perhaps idealistic, achieving standardisation and resolving privacy concerns will be key to Blockchain’s long term success.

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