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Blockchain helps reduce unauthorised transactions and money laundering - Digital Transformation News | The Financial Express


Blockchain could be a potent disruptor for AML compliance

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By Ravi Chamria

The Anti-Money Laundering (“AML”) landscape is witnessing a period of considerable change as financial institutions explore systems to increase efficiency in analyzing massive amounts of financial data. Blockchain could be a potent disruptor for AML compliance, addressing procedural challenges and enhancing the efficiency of AML laws.

In today’s digital age, we struggle to prevent money laundering with costly and outdated technologies 

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We’re deep in the digital age, surrounded by a surge of transactions whizzing past us every second. This digital transformation, however, has brought along increased sophistication in illicit activities and unauthorized transactions, a challenge that many traditional AML systems struggle to keep pace with. The stark reality is that an alarming $2 trillion is laundered annually through our global banking system. Current AML solutions, which are largely reactive, detect suspicious activities only after they have taken place rather than preventing them in the first place.

Blockchain presents a compelling solution. Its decentralized, distributed and cryptographically secure design offers a fresh lens to AML processes. The immutable structure ensures that a transaction remains unaltered once it finds its place on the ledger. Add in smart contracts, which are like automated decision-makers. With set conditions, they act immediately. Imagine a situation where a hefty transaction, possibly linked to a high-risk zone, gets initiated. Before you know it, the smart contract has already flagged it, giving alerts for further review.

Beyond this immediate response, there’s a more systemic advantage. A distributed blockchain-based system, fortified with these smart contracts and their built-in algorithms, offers financial institutions (FIs) the capacity to securely parse data through an AML engine on the blockchain itself. This enhanced automation not only boosts efficiency but also reduces operational frictions.Moreover, the architecture of blockchain aligns well with data sovereignty laws. It enhances and complements legacy AML systems, bringing in an added layer of visibility and scrutiny. The heightened transparency of blockchain can also serve as a shield against potential reputational damage for FIs. With a clear, accountable audit trail for each transaction, FIs can show regulators and customers their proactive measures against money laundering and associated offenses. It’s a real opportunity for blockchain not only to drive efficiencies but also to identify new ways to tackle financial crimes

In the world of banking, when a new client walks through the door, layers of due diligence activate. These processes require banks to gather vast amounts of data, a task that often spans weeks. The use of consortium blockchains or bank-specific blockchains with interoperability could solve that. Once a customer undergoes a KYC process with one bank, their details are recorded. When this customer approaches a different FI, the latter can access the pre-verified data, eliminating redundancy and speeding up the onboarding process. 

Many startups are building blockchain-based AML/KYC systems, digital identity tools that banks and regulators could use to make compliance more efficient. Apart from handling KYCs, these tools assess transaction patterns, automatically assigning risk scores to each customer. For instance, a customer with consistent, low-volume transactions might receive a low-risk score and require checks every few years. On the contrary, a customer with erratic, high-volume transactions with suspicious patterns might be flagged as high-risk, necessitating weekly monitoring.

If an anomaly is detected in a customer’s transaction at one bank, instant alerts can be sent to other banks where the customer holds accounts. Having more eyes on the system at any given time increases the probability of detecting illegal activities.This reduces ‘noise’ to focus on real high-risk cases, decreasing operational costs due to the smaller number of customers in high-risk segments, a better capture rate of bad customers, enhanced efficiency of AML processes, and ultimately, improved customer experience.

To make a larger dent in the trillion laundered every year, we need to combine technologies

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A blockchain-based anti-money laundering solution, coupled with AI, ML, and advanced data analysis, is essential to enhance AML efficiency and detection capabilities. Which combination might work better, we don’t know, but for sure, blockchain has a chance to massively reduce a criminal activity that has been around for millennia.

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