The proliferation of new payment methods, e-wallets, and blockchain cryptocurrencies has allowed cheap and rapid payments for everything from holiday cash to business to business transfers. However, this boon is part and parcel of the new ‘trust economy’ and it is not risk-free. Businesses will have to intelligently respond to the increased hazards posed by the potential for money laundering in the coming age of digital transactions whilst continuing to build trust in their reputations.

Money laundering is a serious crime which is undermining the financial well-being of many businesses and the wider economy. Vast amounts of money are laundered through banks and other regulated businesses, and this includes money from international criminal activity and corruption.

Digitalisation provides greater opportunities for crime syndicates to withhold money from the financial system and transfer assets from ostensibly legitimate businesses and individuals to criminal enterprises. While many businesses are vigilant of the costs posed by this threat, they must apply extensive measures to mitigate the risk of money laundering or face the wrath of your regulatory or supervisory authority.

A 2015 report for the British Bankers’ Association (BBA) noted four trends springing from the payment revolution that business and, specifically, the financial sector should acknowledge:

  • Growth in the regulatory burden of anti-money laundering and other crime regulation
  • Increased liabilities for compliance failures, including jail sentences for senior management
  • Move towards greater collaboration between banks, regulators and the law
  • Rapid pace of change in technology, product innovation and criminal practices
  • These trends will affect those inside and outside the financial sector and the UK’s regulatory regime is working overtime to keep up with the criminal groups that seek to exploit the new, cashless economy.

The UK’s FCA has created The Office for Professional Body AML Supervision that aims to improve standards and ensure greater collaboration between supervisors and law enforcement. This new body demonstrates the FCA’s commitment to greater regulatory cohesion and private sector involvement.

While extra regulation may seem burdensome, it is entirely necessary for all types of business to undergo their due diligence to tackle actively criminal activity or face equally onerous consequences. On the one hand, regulation provides crucial protection. On the other, breaching these laws can ruin businesses through significant financial penalties and damage their reputations.

Anti-money laundering (AML) is not a box ticking exercise and due diligence must be taken seriously – businesses should go above and beyond the necessary requirements to protect themselves and inspire trust in their practices and industries. Above all else, your policies should reflect the risks that are unique to your sector, product and/or customer base.

AML compliance requires strong ‘know your client’ (KYC) processes to be applied and, with further digitalisation of the economy, businesses must employ enhanced due diligence methodologies to tackle criminal syndicates that are poised to exploit technologies.

Risks and Opportunities: Due Diligence in the Era of Digitalisation

It is not all doom and gloom in the new digitalisation era – digital cash and blockchains will offer businesses and the financial sector new avenues to scrutinise clients, comply with regulations and safeguard their reputations. The open and transparent potential of blockchains and distributed ledger technologies enable greater transparency and opportunities to apply KYC protocols.

Blockchains are distributed-ledger based systems that operate as database and verification systems for financial transactions. This type of technology uses a public ledger to note and track transactions, such as payments. Parties are provided with a cryptographic key and transactions must be approved by all participants in the network. Credentials are verified before the transaction can be completed and an encrypted block is created. While this block is inserted into the public ledger, the cryptographic keys provided serve to conceal the transaction information of the block.

Blockchain networks allow various actors, including criminal syndicates, to transact directly with each other with no financial oversight, regulatory or law enforcement involvement. Nevertheless, the creators of blockchains can set these networks to open (public) or closed (private), providing businesses and the financial sector with the means to tackle money laundering activity through greater oversight of identity/transaction data or by preselecting a group of known participants.

Blockchain technology offers enhanced data transparency and robust KYC protocols. The openness of shared blockchain ledgers means that the data recorded is readily available and can be simply monitored, providing a direct link between regulators and risk officers so that compliance failures can be rapidly reported. Information within a blockchain ledger is difficult to alter and any changes will be tracked to prevent criminal activity. Due to the openness of blockchain ledgers, KYC processes can be supervised across businesses and sectors. Information about client activity, identities and end-to-end transactions can be easily scrutinised and communicated between enterprises and regulators.

While blockchains can be used for criminal purposes, the inherently open and immutable nature of this technology offers businesses and regulators improved and unique opportunities to monitor, collaborate and report on criminal activity.

If businesses, regulators and the financial sector invest in centralising and producing this technology for their own purposes, they can stay ahead of the trends noted by the BBA’s 2015 report and ruinous compliance violations could be a thing of the past.

Measures to put in place

I would encourage businesses to carry out best practice and to protect themselves sufficiently. There are a number of measures that can be put in place relatively quickly, these include:

  • Train all your staff as they are your first line of defence to ensure fraudulent activity does not take place
  • Apply the three W’s: why are they coming to you, Who are you acting for and What are you being asked to do. If these produce an unusual result, elevate to a supervisor or you’re your money laundering reporting officer (MLRO)
  • Review your customer base and types of transactions and evolve what you do. What type of customers do you have and where are they coming from
  • Monitor riskier clients closely
  • Register with HMRC (or FCA, SRA etc depending on your supervisory authority)( and the National Crime Agency – if you have a suspicion be sure to file it and tell those that have the powers to enforce action
  • Think about where the risks are to your business
  • Seek advice if you are unsure about any of the above
  • Businesses should not shy away from asking customers questions as to the source of their funding as part of the AML process. They need to take a risk based approach and consider the characteristics of the customer, the product and its distribution, the jurisdictions involved in determining the lengths that they have to now go to in terms of conducting due diligence on their clients.

Putting ‘Trust’ into Digitalisation

Companies operating in regulated sectors, have to get to grips with both the digitalisation of cash and the risks this poses from money laundering. The consequences for failing to be compliant and falling foul of the AML regime could be a hefty financial penalty which could be unlimited, or worse still, involve a prison sentence for failing to recognise fraudulent activity.

Digitalisation will require those in the credit profession to instil trust and educate others in technologies. Once companies engage they will find there is much that can be easily and painlessly done to make a difference to a company’s AML compliance. Credit professionals can make the difference in the fight against money launderers in the age of blockchain and digital cash and protect businesses from breaching their regulatory commitments.

Alex Ktorides, Partner, Gordon Dadds


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