How Blockchain helps in AML Compliance

Money Laundering is an omnipresent crime and is defined as the process of transferring illegal money, hiding its origin, and moving it into the legal system. Criminals try to do so with innovative ways so that they don’t attract the attention of the authorities. As per a recent UN report, approximately $2 trillion is laundered annually, 2% to 5 % of the total GDP. Money laundering is a serious crime, and governments implement AML – Anti-Money Laundering laws to prevent dirty money from entering the economy. This money is used to fund criminal activities such as kidnapping, extortion, human trafficking, drug smuggling and to support terrorist activities. So, it’s a massive threat to a country’s socio-economic fabric and is dangerous to society. Countries are adopting various measures to identify suspicious financial activities that might be the source of illicit money. Blockchain is being used for AML compliance to combat the AML procedures’ challenges and implement the AML laws with greater efficiency. Exploring Blockchain is a step towards keeping pace with the fast-evolving technological world and using innovative methods to prevent money laundering.

What is Blockchain?

Blockchain is a technology that streamlines the backend systems, which is an inherent part of every business- it’s the foundation on which the system runs. The technology helps to make the AML process more efficient and cost-effective. The Blockchain framework is immutable as the data entries cannot be edited but can be appended within the system only. AML laws require monitoring of transactions, and this process can be strictly followed as the transactions cannot be masked and cannot avoid detection. Financial institutions can use Blockchain effectively and protect their reputation by detecting financial frauds early in the screening process.

AML software, when used in conjunction with Machine Learning, can immediately identify patterns in money laundering in the data. It can identify any suspicious activities in large volumes of data and be ahead of the innovative methods used by the criminals to launder their dirty money.

Blockchain is a new system that records information, making it almost impossible to hack and change the system. It consists of a chain of records or blocks used to record transactions and track assets in a computer network. Each block in the technology contains different transactions, and new transactions are added to the digital Ledger. This digital Ledger of the transaction can be duplicated or distributed across the network on the Blockchain.
Banks and other financial institutions can effectively use the data structure of Blockchain technology to ensure transparency and security of financial transactions. Government authorities are making tremendous efforts and implementing AML- Anti-Money Laundering policies. With the help of Blockchain, financial institutions can comply with AML policies. The characteristics of Blockchain, which make it an immutable platform for recording transactions, prove to be highly useful for detecting fraudulent transactions. Let us discuss how the technology is highly competent to deal with the financial crime of money laundering.
Complete Ledger available: The Blockchain is a decentralized network that is highly secure as each user has to validate the transactions to make any changes. The entire record of the complete Ledger is available, and the user can easily compare the modifications and identify any unauthorized changes. Blockchain removes the changes, and therefore it helps keep the authorities ahead of the criminals.
Evokes trust: Since the Blockchain platform is immutable, it creates trust among the users. They trust every transaction- every block of the chain of records. Moreover, banks can track the trail of transactions quickly and monitor financial transactions easily.
Automation: Blockchain automates the process of fraud detection with the help of built-in algorithms. The transactions are continuously monitored, and alerts for any suspicious activities are created, and therefore, financial institutions can stop such transactions, which might lead to money laundering. So, no suspicious transactions are missed, and the culprits can be identified immediately.

Blockchain-enabled KYC

KYC is an inherent part of the AML compliance process- and with Blockchain, the financial institutions can strengthen this process and get better monitoring results. KYC deals with establishing the customer’s identity and verifying if the prospective customer poses any threat to the financial structure of the organization and the country at large. When information is recorded on Blockchain, a decentralized ledger, the data cannot be altered. This technology characteristic proves to be highly useful in being KYC compliant. It is a strong deterrent to the criminals as FIs will catch them in the screening process.
There are several steps involved in the AML/ KYC Blockchain-enabled processes.

Profile Creation: First, the user creates a profile- the users will register and make a digital profile on the Blockchain-enabled AML software. The users’ information and the proof of identity will have to be entered into the system.

KYC Documents: The user uploads KYC documents: the KYC data entries are verified using APIs after uploading the information. The data is encrypted in the Blockchain and cannot be manipulated. The data is stored on the FI server and not the Ledger.

KYC verification via KPIs After confirmation by the financial institutions, the information with a hash is uploaded to the server. Any changes made in the KYC will be reflected in the hash, and the platform will create the alerts. The technology will notify the change via alerts, and the authority will immediately get notifications.

AML checks: Regular checks monitor the customers’ financial activities, including the transactions – the amount being transacted, the frequency of the transactions, the source of money, any taxes or penalties levied, etc.

KYC monitoring: After the AML analysis, the system generates a risk score which analyses the risk level of the customer’s profile. The KYC monitoring process is also carried out accordingly. The frequency of the monitoring level is increased or decreased as per the risk score generated. When a bank or a financial institution has to verify the information provided by the customer, the user will provide access to the AML document. The bank will then compare the data with the hash associated with the particular records and know whether the data has been modified. It can ensure that it receives the same data validated by a financial institution earlier.

Conclusion About How Blockchain helps in AML Compliance

Blockchain streamlines the process of KYC, which is an integral part of the AML compliance process. AML UAE has an expert team to assist you in AML/ KYC compliance. Get in touch with us today and know how to use the latest technologies to improve the KYC process and comply with the AML rules and regulations.

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FAQs

The blockchain process enables companies to detect financial fraud in the screening process. Since blockchain records information, it is difficult to change the records by hacking the system. Companies can use this feature of blockchain to secure their financial transactions from the possible risks of money laundering.  

About the Author

Pathik Shah

CISA, FCA, CS, DISA (ICAI), FAFP (ICAI)

Pathik is a multi-disciplinary professional with more than 22 years of experience in compliance, risk management, accounting, system audits, IT consultancy, and digital marketing. He has extensive knowledge of Anti-Money Laundering rules and regulations, and he helps companies comply with legal requirements. Pathik also helps companies generate value from their IT investments.