While trust issues remain between UK businesses and Blockchain, the open source database’s ability to track cryptocurrency makes it the best tool in anti-money laundering efforts, writes Kyle Phillips
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 combating money laundering.
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 permission to do so.
Once the information contained in a Blockchain is verified it cannot be changed, only updated. It is the only digital public record of Bitcoin transactions (the digital crypto-currency through which these transactions are conducted) and is inherently difficult for hackers to manipulate as this would involve data copied and sent across to thousands of participants. The certainty this creates is hugely beneficial to CEOs, regulators, banks and/or law enforcement agencies because they can instantaneously verify the credentials of the 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 a costly business. For example, Deutsche Bank was recently fined £163 million for non-compliance. But maintaining AML processes is 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). 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, reduces the likelihood of banks duplicating their efforts to track and verify information.
There is a caveat, however. A key obstacle for Blockchain will be persuading corporates 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 a lack of understanding of the complex mathematics involved in the system may make it harder to trust. Privacy is a concern too, despite the encryption of the data, as parties may wish to restrict access to certain financial information to parties they do not currently have a relationship with.
But DLT start-ups such as Corda can help allay these trust and privacy concerns, by allowing 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 combating money-laundering. Should similarly restrictive DLT platforms rise in popularity, legislative intervention could be considered to require regulatory bodies to be party to every transaction.
With the commercial landscape going increasingly digital the role of platforms such as Blockchain in AML efforts will be inevitable. This is good news, as the efficiency and transparency with which discrepancies in client data can be tackled is commendable. And it is timely too, with corruption watchdog Transparency International’s recent report which showed approximately £48 million (2 per cent of UK GDP) laundered into the UK each year. Furthermore, the recent alleged involvement of major UK banks including HSBC, RBS and Barclays in a Russian scam concerning the movement of approximately £65 million highlights that any fintech tools that can help to expose similar crimes 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 likely to be a major obstacle. While there are hundreds of different Blockchain networks, protocols and cryptocurrencies available, the benefits of Blockchain are partially undermined, as different networks will not be able to communicate with each other.
Kyle Phillips is an associate at the business crime and regulatory department at Howard Kennedy