The Blockchain's Impact on AML

So for those that have no clue why AML is important in the daily movement of life, perhaps this will shed a light. AML means Anti-Money Laundering and the law frowns on such things, although there is also a tendency for the law to be murky in this regard. According to some scribing I recently perused from the pwc company, global money laundering transactions are estimated at 2 to 5% of global GDP, or which leads to an a rough approximation of U.S. $1-2 trillion per annum (Pricewaterhousecoopers, 2016).

Surprisingly, if one would use that term, the United Nations Office on Drugs and Crime (UNODC) highlights that less than 1% of global illicit financial flows are currently seized by authorities. Now, the question is begged, is this as a result of the difficulties that arise during the process or just willful ignorance that is based on some Machiavellian tendencies? A bit of both, actually, in my humble opinion.

We continue to see the nascent transparency of worldly geopolitics in regard to issues such as terrorist attacks, money laundering and terrorist financing, which are escalating as priority issues for governments across the globe. Especially here in Kenya, where we are dealing with our own terrorist problem, going by the recent Al-Shabaab attacks on our armed forces in Somalia. Choking the financing of such organizations is a no-brainer. For instance, over the last few years, in the U.S. alone, nearly a dozen global financial institutions have been assessed fines in the hundreds of millions to billions of dollars for money laundering and/or sanctions violations. There are strong indications that other countries will follow suit in formulating in substantive regulation and enforcement.

This is not restricted to financial institutions only. Any organization that facilitates financial transactions – including non-bank money service businesses such as life insurers, digital/mobile payment services,and retailers, to name a few – is also coming within the scope of anti-money laundering (AML) legislation worldwide (In Kenya, we had a particular case where the leading Telco, Safaricom and a Bitcoin Exchange clashed as to the proper compliance model requisite for AML/KYC. Alarmingly, but not surprisingly, many of these new participants are not yet up to speed on the requirements they must meet or on the compliance programs they will need.

Nonetheless, regulation continues to grow in terms of complexity and scope, the cost of compliance continues to skyrocket. Based on new figures from WealthInsight, global spending on AML compliance is set to grow to more than $8 billion by 2017 (a compounded annual growth rate of almost 9%). This would cause constipation in many a CFO and would cringe at increasing compliance spend – notwithstanding the cost of enforcement actions and large-scale penalties resulting from compliance failures.

So what’s the solution, I ask?. You may already have divined but, if you haven’t, then I have failed as a writer to make obvious an elusive fact. Why would the blockchain impact money laundering? Well here’s a key summary of the reasons why:

-Suspicious Activity Reports (SARs) and related sanctions monitoring could end up being automated, removing the overhead and obligation of the banks and other financial institutions to do this abhorrent activity; and there are estimates that state that 60% or more of the costs of AML compliance could be removed through this process as a consequence.

-Comprehensive transactions would be registered on the blockchain with a timestamp, information about the recipient, the sender, the costs and the amounts involved;

-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;

-The complete number of all transactions could then be processed instantly across unlimited amounts on a private blockchain, that would increase the efficiency and effectiveness of processing transactions far more easily and in real-time than using SWIFT; the data registered on the blockchain is immutable, and can never be changed, making it fully auditable;

-The concerned for privacy is protected because access to blockchain information is limited in terms of access, and only available to those granted access that to specific record.

According to a recent article by Wall Street Journal (Elliot, 2017), the CEO of Cayman Finance estimates that with Blockchain, the 1-2% seized AML assets could level up to 90%. Now, if that is not fine incentive for whole governments and financial institution to adopt Blockchain, then I am at a loss.

I am sure a lot can be said in regards to this topic, the devil is in the details, but so is God. But I will surmise, utilizing blockchain distributed ledger technology to formulate 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. Not to mention applications such as Digital Identities, concepts in Know Your Customer activities, the impacts are enormous.

Elliott, N. (2017) How Fintech could cause a revolution in compliance. Available at: http://blogs.wsj.com/riskandcompliance/2017/01/26/how-fintech-could-cause-a-revolution-in-compliance/ (Accessed: 9 February 2017).

PricewaterhouseCoopers (2016) Anti-money laundering. Available at: http://www.pwc.com/gx/en/services/advisory/forensics/economic-crime-survey/anti-money-laundering.html (Accessed: 9 February 2017).