International Banker notes the many advantages blockchain lends itself to the AML compliance space. Specifically, the article outlines some ways in which traditional financial institutions are starting to apply blockchain concepts to money laundering prevention and detection.
Interestingly, many of the criticisms of cryptocurrencies (i.e. Bitcoin) focus on the same exact challenges faced by traditional banking: transaction monitoring, transaction recording and customer data.
The irony of those critiques lies in the failure to recognize the advantages that blockchain gives cryptocurrency platforms including:
- Traceable transactions through multiple sources (hops) and identifying sources of risk (i.e. Dark Web purchases)
- Identifiable connections between entities on the blockchain
- Keyword monitoring to help understand the nature of transactions and potential illicit activity in near real time
- Immutable customer information processes (changes to customer information)
- Efficient sanctions screening capability
- Integration of investigative findings into customer risk profiles
Licensed, regulated Bitcoin platforms are already incorporating these advantages into effective AML compliance programs. One could argue that creating a robust customer profile based on verified information and transaction behaviors is easier using cryptocurrency than for traditional financial institutions. The mainstream incorporation of blockchain into AML solutions is a reinforcement of that idea.
An anti-money laundering system built on the blockchain can leverage the cryptographically secure, decentralized and immutable nature of the technology to identify and stop suspicious transactions effectively. Each financial institution which would be part of this system would serve as a node within the private permissioned blockchain network, and would use the network directory and smart contracts to record transactions on the blockchain. Since relevant information would be stored in the blockchain and be made available to each node, suspicious activity can be detected and highlighted to all related participants. Alerts can then be issued to stakeholders and the transaction can automatically be flagged and stopped for further investigation. The blockchain network is immediately updated with the record of such an alert in an immutable and tamper-proof manner.