Money laundering is the process by which financial transactions are conducted in a way that obscures the link between the funds and their origins. Annually, money laundering makes up 2 to 5% of the global GDP—about $2 trillion. Money laundering has huge implications for the global economy. It helps criminals and terrorist fund their illicit activities, dampens global economies and threatens global security. With so much at stake, blockchain is being explored as a fraud and risk compliance solution that addresses some of the most critical problems with current anti-money laundering (AML) procedures. There is clearly a need to create innovative anti-money laundering solutions that are scalable, affordable and comprehensive.
Current Challenges for Anti-Money Laundering Solutions
The anti-money laundering solutions most banks and other financial institutions use are outdated and inadequate to meet today’s business needs, let alone tomorrow’s business needs. Current systems for transaction monitoring are unable to keep up with the pace and volume of transactions today in the digital age.
Digital financial transactions are fast, typically encrypted for greater security and often anonymous. Most of the time they do not require financial institutions as intermediaries. Because of this, current AML solutions are unable to investigate these types of transactions, leaving them vulnerable to abuse by cybercriminals. A good example is cryptocurrencies, which is used for money laundering activities by criminals because it remains mostly unregulated at this time.
Another important factor that complicates AML efforts is that currently they are highly individualistic in nature. Financial institutions all have their own processes in place to prevent money laundering. Countries also vary in their regulations against money laundering. A need for standardization is there in order to clarify the AML process, make it more efficient and ultimately automate it. Blockchain would create a framework that allows for top-level monitoring of whole transactions.
What is Blockchain
Blockchain is a distributed ledger framework that cryptographically stores data on an open or private network. Blockchain is a technology that aims to transform the backend systems that most businesses run on. It aims to become a lower cost, more efficient way to share information and data between open and private networks.
Blockchain is useful as a tool in new anti-money laundering solutions for fraud and risk departments across financial institutions. This is because the data that is stored on the framework is immutable. Within a blockchain system, data entries cannot be edited or modified.. Instead, they can only be appended after entering the system. This is particularly useful in AML transaction monitoring because it prevents criminals from trying to mask their transactions to prevent detection. The transactions will always be on the blockchain, no matter what a criminal does to attempt to modify them.
This will help banks save money in the long run. For example, Deutsche bank recently was fined over $700 million in 2017 because of accusations that it helped launder money out of Russia. Earlier this month, USB was fined over $5 billion by French regulators for money laundering and tax evasion. With blockchain technology in place, it would be more difficult for associates to evade the AML process and cause damage to a financial institution’s overall reputation.
Blockchain for AML Compliance
An anti-money laundering solution built on the blockchain could leverage the inherent qualities of the blockchain in order to identify and prevent illicit transactions. If the software used to monitor transactions is an AI with machine learning functionality, it could effectively run through strings of data to determine if money laundering activity is occurring. The reason this would work is that AI will be able to detect patterns in large volumes of data while adapting to changes in criminal activity over time with its machine learning capabilities.
These tools would automate the transaction monitoring process and make it much more efficient and effective than current processes are today. Plus, if suspicious activity is detected, it could be highlighted, flagged and stopped for further investigation. All this activity would be immutably stored on the blockchain as well.
Implications for AML Regulators
Blockchain technology and its distributed ledger should be incorporated into new fraud and risk compliance solutions for financial institutions across the globe. It creates opportunities for more transparency between financial institutions and regulators in the long run. By using the shared and immutable ledger blockchain offers, financial institutions would have an easier time reporting suspicious activity with regulators all over the world. This transparency would create new opportunities for financial institutions and regulators to work together. By pushing for standardization with the use of blockchain technology, they could simplify the creation of anti-money laundering solutions that truly work. Together, they could make a difference in limiting money laundering in the global economy.
