The AML conundrum solved?

Chris Skinner, Chief Executive Officer at The Finanser Ltd

30.01.2017 09:15 am

AML conundrum

I outlined yesterday the fact that 98% of money laundering goes unchecked, allowing $1.6 trillion a year to be used for terrorist funding, drug dealers, sex traffickers and possibly worse1. This was prompted by a conversation about AML (Anti-Money Laundering) with the CEO and Co-Founder of I met Coinfirm, Pawel Kuskowski.

So what’s the solution, is how I finished yesterday. You may already have guessed but, if you haven’t, surprise, surprise …

“It’s Blockchain

Yea, it’s blockchain. There are a range of start-ups 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 sizable 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 theWSJ 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.

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 as 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; and

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 on 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.