3 Reasons The Blockchain May Be The Future Of Anti Money Laundering (AML)
Anti money laundering (AML) refers to a set of procedures, regulations, and laws that are intended to prevent the “cleaning” of money generated from illegal activities, such as the sale of illegal drugs.
For example, one common AML regulation is to implement Know Your Customer (KYC) policies, to ensure that customers are properly identified when depositing money, and to monitor their banking and financial behavior.
But as the digital world grows, AML faces a number of problems. Widespread identity theft and the dark web have made it harder to verify the identity of customers — and digital banks make it easier for criminals to launder money without setting foot in a bank.
So, what’s the solution? It could be the blockchain — for a number of reasons.
1. Blockchain Transactions Are Anonymous — But Traceable
Blockchain transactions cannot be deleted. A blockchain is a decentralized, publicly viewable distributed ledger — and once a transaction has been encoded, it’s copied to millions of blockchains, and stored permanently.
This could make it easier for AML investigators to track the activity of a given user — especially if they are given the power to identify individuals users. Backtracking and looking at previous suspicious activity would be very easy, compared to current systems.
2. Blockchain Is Cheap To Use And Requires Little Development
There are a number of open-source blockchain platforms that are already available to the general public, including Ethereum, MultiChain, and OpenChain.
This means these platforms are inexpensive, and because they’re open-source, anyone can view, audit, and fix their security flaws — leading to a better overall level of security and data protection.
3. Blockchain Would Allow For Easier Inter-Institutional Flagging And Detection
One of the main issues facing AML policies at banks and other financial institutions is the “siloing” of data. Each individual institution has their own set of AML procedures, and their own system for flagging suspicious transactions and customers.
This means that, by utilizing dozens of banks and exploiting loopholes, money laundering is still quite common. However, a centralized AML blockchain may change this.
A single AML blockchain would make it easy for different financial institutions to collaborate. Their records of suspicious transactions will automatically be uploaded — and AML investigators can compare the transactions of each institution, allowing them to track down potentially illicit behavior by a particular customer.
Because the blockchain would be shared — but each individual bank’s AML policies wouldn’t be — this would also allow each financial institution to remain in control of their own data, while still sharing any suspiciously-flagged transactions with other banks and AML investigators.
Blockchain — The Future Of AML?
For these three reasons — and many more — we believe that blockchain-powered tools may become the best tool in the fight against money laundering.
It remains to be seen if AML investigators will adopt the blockchain — but financial institutions and AML investigators would be making a mistake if they overlook the blockchain, and its powerful applications for fraud detection, identity verification, and AML/KYC.
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